Business Page – April 28th, 2002

Introduction

This week's Business Page examines the Annual Report of Guyana Bank for Trade and Industry Limited (GBTI) for the year ended December 31, 2001 presented at the Annual General Meeting of the Bank on April 15, 2002. Information reaching Business Page indicates that the meeting lasted for a mere twenty minutes with few questions emanating from the floor, not an unusual situation in public companies with a strong controlling shareholder. For purposes of this article we have made references to the published financial reports of the National bank of Industry & Commerce, Demerara Bank and Citizens Bank. 

 It was the first full accounting year since the announcement by the Bank of a restructuring plan on November 23, 2000, which identified as its focus a comprehensive review and strengthening of the Bank’s systems and procedures to improve operational efficiency. As part of that plan the Bank committed itself to broadening and deepening the financial markets to enable the sector to contribute more meaningfully to economic growth and for the Bank to meet the changing needs of the domestic economy.

 Business Page last year suggested that the Bank needed to convince the marketplace that the restructuring was more than just a new logo and that the commitment made so boldly at the launching would result in improved service and better value for customers, attractive rates for depositors and adequate returns for shareholders. There was no reference to the plan in the current year Chairman’s Report and only a brief comment in an otherwise very comprehensive report by the Chief Executive Officer.

Financial Highlights 

 Profitability and Revenues:

 Against the background of heightened political activity, slow economic growth led by “decline in output of the major production sectors of rice sugar and bauxite”, increased default by borrowers and soft demand for credit, excessive liquidity in the banking system and a widening foreign trade deficit in 2001, the Bank reported improved performance and profitability which was perhaps the best response to rumours earlier this year that the it was experiencing difficulties which had caused a brief run by some of the Bank’s depositors. This was despite the fact that GBTI has the largest share capital of all the locally incorporated banks operating in Guyana and a larger than required capital adequacy ratio. While the Financial Institutions Act requires a minimum paid up capital of G$250Mn, GBTI has a paid up capital of G$800Mn. compared with G$300Mn. for NBIC and G$250Mn. at Citizens Bank and Demerara Bank.

 Total interest income fell approximately 7% while interest expense fell by 12% with the result that net interest income was about the same as last year. Profit before taxation increased by 46% to G$298Mn. while after-tax profit increased by a more modest 17% to G$159Mn.

 The Bank earned interest averaging 17.3% on its performing loan portfolio, slightly less than Citizens (17.5%) but higher than NBIC (16.4%) and Demerara Bank (14.2%). In the 2000 Annual Report the Chairman had announced that owing to the Bank’s exposure to the rice industry equaling 33% of its loan portfolio, interest recognition on some $3Bn. had to be postponed and assured shareholders that the Bank had “implemented measures to address this matter.”  While the Bank understandably laments the excess liquidity in the banking system generally and acknowledges the stability of the exchange rate, lower rates of inflation and the declining rates on Treasury Bills, it continues to charge high rates on lending raising the bar which borrowers must clear to make prospective investments worthwhile.

 The average rate of interest earned on investments was 9.2%, the lowest among the other banks referred to in this paragraph. Perhaps it is no co-incidence that the two banks with the highest returns on investments both have investments abroad, a tendency that is likely to increase in the current economic climate with potential negative impact on the rest of the economy. The average interest paid on depositors’ funds was 5.7%, the lowest among the comparator banks due in part to GBTI having the highest percentage of non-interest bearing deposits to total deposits. The ratio of Other Income to Net Interest Income was 51% compared with Demerara Bank (76%), NBIC (56.4%) and Citizens Bank (35.7%).

 Total non-interest expenses fell slightly with a significant reduction in “salaries and other staff costs”. The Income Statement has a figure of $478.9Mn. for Other Expenses without any indication of how this is made up although it seems to include the provision for loan losses. The net charge for bad and doubtful debts was $276Mn. compared with a net charge of $298Mn. in 2000. It is interesting to note that at the recent meeting of the New Building Society a director of GBTI was very critical of the NBS whose own accounts also included a large Other Expenses. It should be noted that GBTI does not provide any breakdown of its other income as well, a situation similar to the other banks.

  Shareholders received dividend of $1.50 but with little activity in the market for the company’s shares it is as difficult to calculate the current return to shareholders as it is to compute the price earnings ratio for the shares. It is worth noting however that the total dividend payment is only 50% of its level two years ago. 

The Bank’s return on assets was 0.7% compared with 0.2% for NBIC, 1% for Demerara Bank and 1.5% for Citizens’.

 Balance Sheet 

 The bank’s balance sheet reflects the situation in the banking system generally which according to the Chairman “enjoyed” a surplus of $11Bn of liquid assets throughout 2001.The total deposits of the commercial banks grew by $4.3Bn.or 4.7% in 2001 while loans and advances fell by 4% to $52.4Bn, representing 55% of deposits. In 2000, total deposits in the banking system had risen by 15% while loans and advances had risen by 1.4%.

 In comparison, GBTI’s loans and advances portfolio (net of loan loss provision) showed a marginal increase against 2000 of 0.1% to $10.048Bn.while total deposits grew by 1.3%. The Report states that its loan portfolio was distributed 32% to the agriculture sector, 32% to the services industry and 23% to the manufacturing industry. However, one has to be careful in this kind of portfolio analysis since rice milling is treated as manufacturing and not agriculture. The entire agriculture sector is indebted to the Bank for $3.2Bn. which in 2000 was the same level of indebtedness to the Bank by the rice sector. The Bank’s exposure to agriculture and mining has decreased from $4.2Bn to $3.6Bn while services, manufacturing and household have declined. Note 8 to the financial statements indicates that there was a write-off of some debts against which there were provisions in earlier periods but there is no indication of the amount of the write-off.

 Deposits increased from $19.4Bn to $19.6Bn, an increase of 1.3%, well below industry average. Of the four banks, GBTI has the highest level of non-interest bearing demand deposits to total deposits (20.6%) which serves to reduce the cost of funds. As a result, the average interest paid on deposits is 5.7% compared with 7.3% for the other banks.

 Among the four commercial banks considered in this article, GBTI has the lowest investment of its total assets in loans at 41.5% compared with 46.3% for NBIC, 57.5% for Demerara Bank and 45.5% for Citizens. Loans to Deposits, one measure of the deployment of funds declined from 51.8% at December 2000 to 51.1% at December 31, 2001. The percentage in the other banks are: NBIC 54.2%, Demerara Bank 70.6% and Citizens Bank 55.6%. GBTI also has the highest rate of non-accrual loans as a percentage of gross loans (39.1%) compared with 23.3% for NBIC, 31% for Demerara Bank and a surprising 7.7% for Citizens Bank. In line with this level of non-accrual loans, GBTI also has the highest level of provisioning relative to its non-accrual portfolio (36.3%) compared with a simple average of 25.6% among the other banks. In his report, the CEO noted however that “our non-performing loans are adequately collateralised by underlying assets, which secure the bank’s position in the liquidation process”. The continuing poor performance of major sectors of the economy, the inefficient legal process and the dramatic fall in property prices may make such an assessment a bit over-optimistic.

Governance

 Apart from its statement on internal controls which refers to an Audit Committee the composition of which is not identified, the report offers no information on governance including the process for appointment to the Board. In a financial group such as the Beharry Group, the existence of the Chinese Wall to avoid conflicts of interest is very important and it helps investors’ confidence to know that adequate systems are in place. During the past two years there has been a change in the Chairmanship of the Bank and the “appointment” of Messrs Winston Tyrell and George Jardim as directors. As a result there is now no female director while the top two executive positions are also held by men.

 Conclusion

 The Chairman and the CEO in their reports offer very helpful information on the external environment within which the Bank operates. The report has a number of graphs meant to offer a better understanding of the numbers in the financial statements. There may be a case however for a review of those graphs and tables which are not so easily understood by the average shareholder. Annual Reports are increasingly seen as marketing tools and characterised by optimism. While shareholders would be pleased with the higher reported profits, they may not universally endorse the Chairman’s assessment that the Bank has risen to the challenges “once again in an outstanding manner” Last year shareholders were assured that the Bank’s “rescheduling and restructuring of over $3Bn lent to the rice sector had resulted in the postponement of the recognition of income of approximately $600Mn. for the year 2000 to a future period.” The results do not indicate that that policy has had any effect on the 2001 results.

 The environment in 2001 was not encouraging and but for the stability in the exchange rate, the situation would have been worse. With below average growth in deposits and a static loan portfolio, the Bank is in danger of losing market share and its directors must devise strategies and policies aimed at the very least, to maintaining its existing share of the market in the short-term. It has to move away from the pack and to use its substantial asset base to change the culture in the industry. The banking sector can play a major role in the economic revival of the country but this will require at least one bank to demonstrate the vision and plans which the restructuring plan envisaged. Will GBTI be that Bank?