the line: GBTI Annual Report 2003
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:
Net Income before taxes
Net Income after taxes
Loans and Advances
Returns on Average Assets %
Return on Average Equity %
Earnings per share $
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.
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.
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.
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
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.
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
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.
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.
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.
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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