ON THE LINE DEMERARA BANK AND CITIZENS BANK
Today we put the spotlight on the financial statements of these two
locally-owned and managed banks which now share a common year end of
September 30. Readers may recall the announcement in the 2000 Annual Report
of Citizens Bank Limited that following the acquisition of control by Banks
DIH, that company would be changing its accounting year end to September 30,
to coincide with the Banks' Group year end. This point should be borne in
mind as comparisons are made between the DBL and CBL. While the financial
statements being reviewed are both for a full-year, Citizens' comparatives
are for a nine-month period.
Demerara Bank Limited
Demerara Bank was started in the mid-nineties with an interesting mix of
shareholders with none owning more than 4.9% of the issued share capital.
DDL, Capital Securities which is owned by one of DDL's directors, the
Kissoon family, PBS Investment Ltd and Mr. Yesu Persaud are the principal
local shareholders while 34.98% of the shares are held by various overseas
trusts and individuals. Shareholder rights advocate Winston Tyrell, who is a
director of GBTI, is among the smaller shareholders in the Bank. The last
return on file at the Deeds Registry is for March 1997 and there may have
been subsequent changes to the shareholding.
The Board of the Bank includes DDL's Chairman Yesu Persaud CCH and DDL's
Director Mr. Komal Samaroo AA. Other directors include Dr.Leslie Chin, Mrs.
Sheila George, Mr. Hemraj Kissoon and Mr. Oliver Valz, S.C.
While dividends are lower this year than last year, shareholders still
receive an 8% return on the issued share capital, with a total payout of
$36Mn. representing 40.9% of the distributable profits for the year. Since
the Bank is a private company, the market value of the investment cannot be
determined and it is therefore not possible to determine the real returns to
The year ended September 2001 was particularly bad year for the Bank with
all the income indicators being the lowest in five years even before taking
inflation into account. Pre- and -post tax profits were $201Mn. and $107Mn
respectively compared with $232Mn. and $117Mn. respectively in 1997.
Chairman Yesu Persaud described the results as satisfactory " in spite
of the protracted, difficult and unstable political environment and sluggish
Interest income for the year was $1,064Mn representing an increase of
4.2% over the preceding year. Interest income on loans and advances averaged
13.88 % (2000 - 16.63%) while income from investments averaged 9.58%. The
fall in the average interest received on loans and advances may be due not
to the charging of lower rates of interest to customers but the operations
of the Financial Institutions Act (FIA) which impose strict rules on
recognition of income on non-accrual loans. Interest expenses amounted to
$709.9Mn. or 8.28% on average total deposits. While the net interest spread
has fallen slightly, it still is too wide particularly given sharply
declining rates of inflation.
Staff costs increased by 3.2% to $121.8Mn.while other costs which include
premises and administrative expenses increased by 3.6% $299.8Mn. The
provision for loan losses increased during the year by $179.7Mn. The loan
portfolio of this Bank must be a cause of concern to the directors as the
non-accrual portion has increased from 1% of its total loan portfolio in
1999 to 31% in 2001! Even if one makes an allowance for the possibility of a
mistake in the 1999 financial statements, and that some competitor banks are
experiencing similar difficulties, the deterioration must be a cause of
concern for an institution that achieved impressive results in its first few
years of operations. The loan provision made for the year was $180Mn. with
no write-off during the year. As a result, the cumulative provision as a
percentage of total loans and advances has increased from 5% in 2000 to 7%
The Report reflects an extremely liquid Bank which in practice means that
it can meet its liabilities as they fall due. Deposits with the Bank of
Guyana and cash and bank balances were in excess of $2.1Bn. while the Bank
held in excess of $1.5Bn. in Treasury Bills, all maturing within one year.
The loans to deposit ratio, a measure of liquidity, while still high at
70.6%, was lower than the previous year. Any rumours of the Bank being in
trouble would therefore seem totally unfounded.
Last year BP commented that it was unclear from the Report whether the
Bank follows FIA guidelines on provisioning in respect of specific
provisions since the Report set out that specific provisions ….. reflect
an amount which in management's judgement provides adequately for potential
losses" There is no management over-ride under FIA except that
management may choose to make higher provisions as it sees fit.
Last year BP was also critical of the inadequate disclosure of Related
Party Transactions (professional term for those who can exercise significant
influence or control or over whom you have control or significant influence
over and dealings with) but instead of improving in this area by expanding
on the note, it has been excised completely this year! One of the features
of the DDL Group is the pervasiveness of common directors in a number of
entities and there is no doubt that the Bank benefits from substantial
business with them, on occasions incurring risks with financial consequences
as in the case of GA 2000. Neither the Chairman nor the CEO referred to the
implications of the GA collapse on the Bank, information that would surely
have been helpful to readers.
This Bank is now part of the Banks DIH group following their 51%
acquisition of the shares in the company which had been established in
Guyana by Jamaica Citizens Bank. The other principal shareholders are Hand
in Hand, Continental Agencies and the National Insurance Scheme. Like
Demerara Bank, Citizens also seems be in breach of the requirement for
filing annual returns as required by law.
In an almost mirror image of Demerara Bank, the Board of Citizens is
headed by Mr. Clifford Reis CCH and includes Mr. Azam A.Khan, Mr.Richard
Fields S.C. and Mr. Joseph Vieira A.A. of the Banks DIH Board.
Citizens Bank had an excellent year, with deposits growing by some 20%
and loans and advances 16%. It was by far their best year ever, with after
tax profit amounting to G$111.1Mn, representing a 37.6% increase on an
annualised basis over the previous period( nine months).
Despite the significant increase in after tax profits dividend payments
amounted to G$29.7Mn, which is less on an annualised basis over theperiod
and represents 31.5% of the distributable profits for the year. Like
Demerara Bank, Citizens is also a private company, hence the market value of
the shares cannot be determined and it is therefore not possible to evaluate
the real returns to shareholders.
Interest income for the year was $784.4Mn representing an annualised
increase of 18.3% over the comparative period. Interest income on average
loans and advances was 16.7% (2000 -16.3%) while income from investments
averaged 12.9% compared with the annualised previous year of 13.9%. Interest
expenses amounted to $420Mn or 7.0% of average total deposits. These figures
indicate that in the context of the falling rate of inflation, the real cost
to borrowers is actually increasing, a matter which has serious implications
for their capacity to service their debts.
Non-accrual loans represent a mere 7.7% of loans and advances, the lowest
among the principal banks in Guyana. As noted above, the % is 31% for
Demerara Bank, 39% for GBTI and 23% for NBIC. Loan loss provision relative
to the total portfolio is also the lowest in the industry at 3.4% compared
with NBIC 5.2% and GBTI of 12%. Clearly Citizens Bank's loan portfolio
appears unaffected by the prevailing economic condition which is indeed
surprising and which has drawn comments from industry sources.
Citizens Bank has always invested heavily in Jamaica, where inflation and
interest rates are still high by Caribbean standards and but which also
carry some exchange risk for the Bank and foreign exchange implications for
the country. Such investments also offer attractive tax prospects and help
to explain why the Bank had such a significant tax credit in its accounts.
Citizens too appears very liquid with G$1.5Bn in cash resources and close
to G$2Bn in investments of which approximately 45% matures within one year.
The loans to deposit ratio was 55.5%, which is similar to NBIC, slightly
higher than GBTI 51%, but considerably less than Demerara Bank.
This Bank's Annual Report has a very comprehensive note on related
parties as well as risk management policies, but like Demerara Bank it can
certainly be clearer in its policy on provisioning.
It appears that the Central Bank places considerable reliance on the
financial institutions and their auditors in respect of compliance with the
general body of laws and accounting policies, practices and disclosure. The
inconsistency of reporting, which can stem from an innocent
misunderstanding, is not good for the accounting profession or the banking
sector as comparisons are rendered meaningless. Bank regulators have an
obligation to be robust in their supervisory functions particularly in the
absence of deposit insurance. Enron will have taught us that the accounting
profession is far from what its practitioners and their clients would like
the public to believe.
The Bank of Guyana must be aware that the accounting profession in Guyana
is extremely weak and the BoG must question the extent to which the
profession can be relied on to ensure compliance by financial institutions
with the law. Its inspectors need to ensure that the standards are uniformly
applied and that anomalies are properly investigated. They need to monitor
the policies and procedures applied by licensed financial institutions and
to pay careful attention to some clearly misleading publications by some
financial institutions which appear in the press from time to time.