Business Page – April 25, 2004

On the line: GBTI Annual Report 2003

Introduction

Business Page today reviews the Annual Report of the Guyana Bank for Trade and Industry (GBTI) for the year ended December 31, 2003. This report will be presented to the shareholders at the bank's 16th Annual General Meeting to be held on April 28, 2004, for which the bank gave twenty-seven clear days notice.

Both the Chairman and the CEO presented very informative if not entirely accurate discussions on the global and national economies, the banking sector and the operations of the bank. The Chairman described the performance as "sterling" - any reference to the appreciation of the currency by that name relative to the US dollar? - and the CEO in his report noted that despite the "difficult conditions that characterised the year, GBTI was able to surmount the challenges of its operating environment and return improved financial results for the year."

Page 20 of the report gives a summary of the financial highlights of the bank for the five years 1999-2003. Growth has been mainly in the total assets and total deposits which have grown by 30.86% and 32.4% respectively. On the other hand, and no doubt as a result of the poor performance of the economy, the sectors in which the bank has invested heavily, the closing of the tax loophole relating to bonds which have now virtually disappeared in the banking industry, and the effects of the Financial Institutions Act 1995, income even in nominal terms has declined with the result that return on assets and return on equity have also fallen. Perhaps the most significant statistic is the fall in loans and advances which have fallen from $10.3B in 1999 to $7.7B in 2003, or 25% since 1999, although this has been partly compensated for by an increase in investments of $4.6B, from $3.6B to $8.2B.

Turning to the current year, the reader notes increases in Profit Before and After Tax of 11.8% and 18.5% respectively, despite a fall in Gross Income of 3.5 per cent, reflected in improvement in the profitability indicators. The balance sheet (which shows the assets and liabilities of the bank at year end) also reflects growth in total assets and liabilities, while loans and advances have remained flat but investments have declined by a whopping $1.8B, or close to 19 per cent.

The following table represents the bank's highlights for the year:

Balance sheet

Page 21 of the report sets out the year's highlights in absolute numbers, percentages and charts which have been compromised by a careless error in the percentages of the distribution of assets, where last year's percentages are repeated. This is of particular significance given that the bank is finding it increasingly difficult to invest its large holding of cash which has almost doubled from 18.9% of total assets to 34.7 per cent. Included in cash holdings is $6.3B (up from $3.6B in 2002) with the Bank of Guyana (BoG), which is almost $3.7B or 240% more than is required as the statutory reserve with the BoG. This is an extremely serious situation with implications for monetary and fiscal policy far beyond the bank, but which appears to receive only passing reference in the CEO's report.

Of course, financial houses are quietly pursuing their own strategy to overcome the excess liquidity and what they refer to as lack of investment opportunities in the system. Citizens Bank was probably the first to invest heavily in foreign investments, but this practice is becoming quite common as the financial statements of NBIC and now GBTI show.

As the Chairman explained, Loans and Advances have declined mainly because of a large write-off of $804M, as a result of which the provision for doubtful debts has decreased by $328M to $1,467M at the year end, representing 16.1% of the loans outstanding. The quantum of the write-off suggests that a significant write-off was long overdue. The effect is that the portfolio has improved significantly with non-performing loans now accounting for 36% of the total outstanding, compared with 49% in 2002. By comparison NBIC's non-performing portfolio represents 20.6% of its total loans and advances.

GBTI's deposits which inexplicably do not include customer foreign currency accounts, have increased by 6.4% to $21.8B, which means that the bank has maintained its share of deposits in the banking sector. The large demand deposit base on which the bank pays no interest has actually increased even further in 2003 from 20.4% of total deposit to 23.2 per cent, a very fortunate position indeed. This reduces the bank's cost of funds but this is not sufficiently reflected in the rates charged to borrowing customers.

Income statement

Net interest income (NII) i.e. the excess of interest income over interest expenses remained flat, although the net interest margin which measures the NII by reference to the average total assets was 3.0% down from 3.2% in 2002 and 3.6% in 2001. Other income as a percentage of net interest income has risen quite dramatically from 50.7% in 2001, 66.2% in 2002 to 82.8% in 2003! It is therefore surprising that there is no breakdown of this item which may even constitute inadequate accounting disclosure. Non-interest expenses have increased by 8.6% in 2003 compared with 2.8% in 2002, with "Other" ($598M), details of which are not given, alone increasing by 16 per cent.

Net profit before tax reported is $288M, an increase of 12 per cent, but because of the significant increase in non-taxable interest, the Corporation Tax charge, (the nominal rate of which is 45%) is a mere 20.4 per cent, almost half of the effective rate paid in 2001. As this column noted last year, this disparity between the nominal and the effective rates reflects investment in more tax-efficient activities, as the bank seeks to increase returns to its shareholders.

Dividends of $2.00 per share is an increase of 33 1/3% over last year, and represents a payout ratio of 39.6 per cent, compared with a payout ratio of 31.1% in 2002. As a percentage of retained earnings, however, dividends continue to represent only a fraction of what is legally available for distribution. If the bank continues to experience difficulties in finding opportunities for investment, it may want to consider that the retained earnings would be better utilised by shareholders, many of whom would be able to obtain better returns than those reported by the bank.

With the shares trading at approximately $30, the return on investment is 6.67% tax-free, which is quite good in the current environment. Indeed, the return suggests that the share price of $30 is quite attractive, and depositors will find it more beneficial to put some of their deposits into investments in the company. Support for this view is reflected in the market capitalization of the company, the market value of which is a mere $1.2B compared with a balance sheet value of $2.9B, a clear case of gross under/overvaluation.

Governance

The bank has a number of positive governance features, including the separation of the key positions of Chairman and CEO, and its annual report by Guyana standards would be considered one of the better ones. The annual report is silent, however, on the Guidance on Corporate Governance published by the Securities Council as best practice for companies registered under the Securities Industry Act, neither does it include any reference to corporate governance.

There is no reference to a number of the committees recommended by the Securities Council, including Audit, Governance, Nomination and Remuneration. Some of these may, of course, be considered superfluous, but should the bank not at least combine some of them based on functionality? Contrary to the recommendations, but certainly reflecting Guyana practice, new directors, it appears, are selected by the controlling shareholder and rubber-stamped at the AGM.

One of the key issues of Corporate Governance is the authority for and disclosure of related party issues. It does not appear that Note 17 or the Directors' Report under the Securities Industry Act meet the disclosure requirements of IAS 24. The directors appear confused over the difference between related party transactions and related party balances.

On March 17, the directors amended the bank's by-laws and in keeping with the requirements of the Companies Act, shareholders will be voting to confirm the amendments. This is indeed a very positive step, but could the bank not avoid the error in the very first item in the by-laws which would have been immensely more useful had it contained an index, and had the company's articles been included to make it one single set of a corporate constitution.

Conclusion

The bank's directors and shareholders need to remember that in 2000 the bank launched a new logo, mission statement and "corporate philosophy together with outlining a broad restructuring plan that would solidify the bank's leadership position." It might be time for this quite laudable but ambitious plan be assessed and communicated.

Once again, Chairman Robin Stoby, Senior Counsel, deals mainly with economic matters, some of which are again dated and in terms of the performance of the world economy, not quite correct. The CEO too, incorrectly reports on growth in the Guyana economy despite his report having been written after the Minister of Finance had reported a decline in his Budget presentation. In the light of the new corporate governance guidelines which place direct responsibility on the Chairman for such issues, the Chairman should certainly devote a greater part of his report to such matters.

This column believes that the government needs to pay far more attention than it appears to have done to the concerns and developments in the banking sector, including that expressed by the CEO last year about the failure of the present legal system, which inhibits credit creation and ultimately economic development. There are other issues, however, which individual banks may not wish to highlight, but which have serious implications for fiscal and monetary policy. To analyse those matters is the responsibility of the government, but this column is not very optimistic.

We ended this review last year by stating that "the call for a commercial court is not new and the government must begin to show it understands banking economics and financial matters as they affect the commercial sector. We cannot afford any further inertia and delay." Was anyone listening?

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