Business Page – On the line - Citizen Bank Guyana Inc. - Annual Report

Sunday, January 16th, 2005

Business Page today looks at the financial statements and annual report of Citizens Bank Guyana Inc. a subsidiary of Banks DIH Limited, a company which yesterday held its Annual General Meeting (AGM) amidst some of the most intense media attention ever to have been cast on any public company in this country. Citizens is itself a public company and its own AGM is due to be held later this month to consider the Report of the Directors and the financial statements for the year ended September 30, 2004.

Once again the Bank has had another exceptionally good year with strong underlying factors including the lowest lending rates among the commercial banking sector which contradicts the apologists and defenders of the high rates among many of its competitors. In almost every measure the Bank with the significant exception of loan growth, has outperformed its competitors and its significant increase in net income must be a source of satisfaction to its management and shareholders including Continental Agency Limited with 15.5% and the Hand-in-Hand Group and Pension Scheme which have a total of 15.9%. At the previous year end, the HIH Group held 16.5% and appears to have sold part of its holding to its Pension Scheme and 0.6% to third parties.

Financial Highlights

* Total assets exclude acceptances, guarantees and letter of credit, deferred taxation and taxation recoverable.

Commentary

The Bank had an excellent year despite the sluggish performance of the economy which grew only marginally in 2004. Customer deposits increased during the year by 15.7% (although much of this increase came from major shareholders), loans and advances by 1.9% and net profit after taxation by 44%. The good performance of the Bank is also reflected in increases in return on assets of 26.7%, return on equity of 21.9%, profit margin of 31.5% and earnings per share of 43.8%. Despite the $84Mn. or 44% increase in current year profits available for distribution, the directors are only recommending a dividend increase of $0.1 per share using up less than $6Mn. of the increase. While Citizens' profits cover its dividends 5.4 times, Banks DIH covers its dividends a mere 2.0 times.

Net interest income for the year was $596Mn, an increase of $44Mn or 8% from the previous year while interest expenses decreased by $12Mn or 5% despite the $1.3Bn. increase in deposits, reflecting lower deposit rates as well. Such lower rates in turn reflect the excessive liquidity in the economy and the principle that the greater the supply - of funds in this case - the lower the price. It may be an elementary point of pricing but it is worth noting in a market perpetually and inefficiently distorted by irrational pricing and the often expressed fear that unless interest rates on deposits are kept high, there will be an outflow of money from the system. Has Citizens proved anything or is this an aberration?

The Bank continues to have one of the lowest percentage (2.8%) of loan loss provision to total loans ranking number two behind the National Bank of Industry and Commerce, both of which are well below industry average for Guyana. An examination of its credit risk shows that the Bank has continued to stay clear of the agricultural sector with net exposure in 2004 marginally decreasing. Its portfolio of loans to the manufacturing sector has increased by 88% but its total exposure to the sector is still less than 6% of its portfolio. Two years ago, household loans accounted for 33% of total loans but this has fallen significantly to only 15% and in absolute terms from $1,572Mn.in 2002 to $816Mn. in 2004. Services, and real estate mortgages which are usually very well secured, account for more than 59% of the total loan portfolio.

Market share

The Bank has not succeeded in making any significant inroads into the market and its share of both deposits and lending is still rather small particularly since it is part of a major group and its principal shareholders are drawn from the business community. It accounts for less than 10% of the deposits and loans of its main domestic competitors but the percentage of its deposits which are lent is almost 50% which compares quite favourably with the industry average. The Bank's Annual Report describes the Bank as the country's fifth largest based on total assets and fourth based on branch network. The bank's computerised network allows it to have an average of sixteen employees per branch and its staff costs and administrative expenses have grown by less than 4% per annum since 2002.

There is no indication that the Bank proposes any further expansion of its branch network which has proved very expensive for some of its competitors. A better strategy is to target corporate customers such as the pension schemes and insurance companies with inducements that recognise the lower average cost of their business. Another potential source of substantial business is the Guyanese diaspora particularly those in the US and UK where interests rates are negligible.

The Bank should also be loudly promoting its very favourable interest rates on lending which has fallen from 17.2% in 2000, 15.1% in 2001, 13.5% in 2002, 12.0% in 2003 to 11.7% in 2004. At this rate, the Bank should be enticing customers of its competitors and increasing not only the absolute value of its loans but its market share as well. Of course it will have to stay within the lending limits set by the Financial Institutions Act and it will require a comprehensive strategy to achieve all-round growth.

Risks

The Bank has increased its holdings of US Dollar investments and other assets by 79% or $1.7Bn while its US Dollar liabilities increased by 16% or $101Mn. The Bank's foreign currency strategy has been to keep as much of its overseas assets denominated in United States Dollars which has however depreciated substantially against the other major world currencies. As a result the Bank has not been able to profit from those favourable movements although it has not incurred any actual losses since the Guyana Dollar is effectively linked to the US Dollar.

Taxes

The corporate taxes payable by the Bank in respect of the year was $64.7Mn, 19% net profits before taxes mainly because tax-exempt investment income makes up a significant portion of total profits. Of the $342Mn. of profit before tax, some $111Mn is not subject to tax.

The effective tax rate compares extremely favourably with those of the Bank's main competitors.

Governance

Apart from Banks DIH which has a controlling interest that allows it to be dominant on Citizens' Board of Directors, the other principal shareholders are Hand in Hand and Continental Agencies all of which are represented on the Board of Directors. Banks DIH nominees to Citizens' Board of Directors include Messrs. Clifford Reis, Azam Khan, Joseph Vieira and Attorney at Law Richard Fields SC who is Chairman of Demerara Life, one of Banks DIH's largest single shareholders. Alan Parris, the only executive director, is the Bank's CEO, a position that is commendably separate from that of Chairman.

This column remains convinced that good results stem from good corporate governance and has previously drawn attention to the fact that the Bank's corporate governance structure is superior to that of its parent. The Bank's governance structure includes a predominance of non-executive directors - of the seven directors only one, the CEO is an executive director; a separation of the roles of Chairman (held by Banks DIH Chairman Clifford Reis) and Chief Executive; the existence of an Audit and Finance Committee comprising three non-executive directors and the Executive director and a Human Resource & Emoluments Committee responsible for "formalising" the remuneration policy of employees, including that of the Managing Director and senior management. It would seem that the organisational culture of Banks DIH is stifling the introduction of new and improved corporate governance practices in that entity but should the operations of its subsidiary not be an example worthy of emulation?

How can it justify one set of standards for its subsidiary and a lower set for itself in which incidentally there are thousands of shareholders which would therefore demand higher not lower standards?

While Citizens' Statement of Corporate Governance asserts that its Board 'remains committed to making complete disclosure of all related party transactions' there are some unfortunate lapses. That is a pity and an unnecessary blot on an otherwise commendable structure.

Christopher Ram is an advisor to Ansa McAl, a company which has expressed an interest in Citizens' parent company, Banks DIH Limited.