Business Page – On the Line- Guyana Bank for Trade  and Industry

Sunday, March 19th, 2006

Introduction:

In view of the delicate discussions on the controversial issue of the preparation of the list of electors, Business Page this week will not address the topic of the Business of Elections as indicated last week. Instead we will look at the 2005 Annual Report of the Guyana Bank for Trade & Industry Limited, one of the public companies controlled by the Beharry Group, and which will be holding its 18th Annual General Meeting tomorrow March 20 at Le Meridien Pegasus. Again Business Page commends the bank on the timeliness of its AGM which is well within the deadline allowed by the Securities Industry Act, 1998 which regulates public companies in Guyana. It is however unfortunate that several of the shortcomings identified in the column on the 2004 Annual Report have not been addressed or have simply been ignored.

The bank has once again had another successful year and according to Chairman Robin Stoby S.C. has surpassed the Board's expectation, recording after-tax profits of $332 mn., an increase of 26%, following a similar increase in 2004. That the banking sector reflects the state of the economy is one of those conventional wisdoms that seem not to apply to Guyana which recorded negative growth in 2005, the year of the flood and one that, based on a survey, many entities considered bad for their business. Despite this, the banks continue to resist any significant reduction of interest rates, one of the perennial complaints of the business community which had been for some time the annual refrain of the Minister of Finance in his budget presentations. With the strict provisioning requirements of the Financial Institutions Act, 1995 creating some level of undisclosed reserves, the banks are now stronger than they have been for the past ten years or so and even better for the shareholders seem to be getting better as the state bears the cost through the tax system of some of the restructuring of the rice sector and of the low income housing financing.

The flooding experienced by more than half the country's population does not seem to have had any impact on the bank with both loan write-offs and provisioning for 2005 being lower than in 2004. Such insulation can at best only be partly explained by the high levels of write offs experienced by the bank in earlier years and the continuing decline in loans to the agricultural sector which has fallen from $3.7 billion in 2000 to $436 million in 2005. With such poor support of the agricultural sector which is mainly rice, that sub-sector will find it increasingly difficult to recover from the sustained problems it has been experiencing, affecting tens of thousands in the rural communities. Note 16 of the audited financial statements indicates that agricultural loans are $436 mn. after provisioning while the report of the Chief Executive Officer gives the lending to the rice sub-sector alone at $1.5 bn. the difference perhaps being due to a significant loan loss provision.

Once again the Report by both the Chairman and the CEO discusses the performance of the economy for the half-year ended June 30 and all the information is drawn from the 2004 Half-year Report of the Bank of Guyana, even though the full-year performance was announced more than three weeks before the date of the notice of the Annual General Meeting! Quite what purpose such information serves is hard to guess and this column finds it necessary once again to suggest to the Chairman and the CEO that it would be preferable to devote more of their extensive report to issues of governance, performance of the economy, forward-looking statements and the risks and threats facing the economy. Last year, while noting that success tends to breed over-confidence and perhaps an insensitivity to any criticism, this column expressed the hope that at some stage the bank would find it useful to revisit those gaps.

One would have hoped that the appointment to the bank's board of Messrs. Winston Tyrell and Ovid Holder, long known for their advocacy of good governance, would have led to enhanced disclosure on such an important issue. Their obvious failure to make their mark in this regard is more than disappointing.

Additionally, there are once again several deficiencies in the financial statements and the extent to which the bank has applied accounting standards. Some fifteen new and revised accounting standards came into effect from January 1, 2005 and there is a requirement that these be addressed and reflected in some detail in the financial statements. Some of the requirements have not been met and the bank has not acknowledged the new standards as a result of which the reader can only speculate on its compliance. The financial statements also fail to disclose certain required particulars of related party transactions including insurance policies, rental agreements and professional fees. Similarly there is no disclosure of the estimated effect of contingent liabilities or the tax effect arising from the revaluation of fixed assets.

More practically, the bank's habit of restating prior year figures without indicating this fact on the financial statements misleads the reader and causes additional work for the analyst in trying to draw comparisons with prior periods.

Deposits grew by approximately 9.73 % to reach $26.9Bn. despite a more than 50% decrease in deposits by the parent company Secure International Finance Company Limited, a wholly owned subsidiary of Edward Beharry & Company Limited. On the other side of the balance sheet, Loans and Advances rose from $6.6Bn. to $6.9Bn. or 5.56%, compared with an 12.95% increase in the entire commercial banking sector. The loan loss reserve to loans increased from 14.3% to 16.2%, lower than it has been for several years. The bank continues to treat foreign currency deposits as other liabilities which does not help sectoral comparisons, while including taxation payable as other liabilities is not consistent with other similar entities.

Highlights:

The following highlights are drawn from the bank's Annual Report and are discussed below.

2005 2004 Inc./ (Dec) 2003 Inc./ (Dec)

G$M G$M % G$M %

Net Income before taxes 418 357 17,09 288 23,96

Net Income After taxes 332 264 25,76 202 30.69

Total Assets 31,818 29,134 9.21 27,328 6.61

Total Deposits 26,929 24,541 9.73 21,717 13.00

Loans & Advances 6,988 6,619 5.57 7,675 (13.76)

Return on Average Assets % 1.09 0.93 17.20 0.77 20.78

Return on Average Equity % 10,35 8.69 19.10 7.05 23.26

Earnings per share $ 8.29 6.59 25.84 5.06 30.24

Balance Sheet

Only 22% of the bank's assets is invested in loans and advances - one of the lowest in the banking sector. More startlingly 27% is held in cash resources, including the statutory non-interest bearing Bank of Guyana deposit which has been significantly exceeded. 42% is held in investments, the bulk of which is in Treasury bills. The loans portfolio no doubt reflects the bankable applications which the bank receives but this must also be a function of the interest rates charged on loans which have remained stubbornly high. The government's efforts to promote lending is having only marginal success and appears to be undermined by its own borrowings via the issue of risk-free Treasury Bills, which our risk-averse banking sector grab with eager hands. The bank's investment in TB's has increased from $5.9 bn. in 2000 to $12.4 bn. in 2005 while loans net of provisions have declined from $10 bn. in 2000 to $7bn in 2005.

With write-offs of more than $2bn. in the past three years, non-performing loans now account for 23% of the portfolio, down from 49% in 2002, 36% in 2003 and 29% in 2004.

Income Statement:

Profit before tax of $418 Mn. was some 17% higher than the $357Mn. in 2004 but with taxation actually declining partly as a result of a write-back of deferred taxation and a favourable prior year adjustment, the profit after tax increased by 25% over 2004. The average interest rate earned on loans increased slightly to 16% while the average interest earned on investments was 4.7%, reflecting the lower risk on the investments.

On the other hand, the average interest paid on deposits was largely unchanged at 2.8% with close to 25% of the average deposits being interest-free demand deposits.

On an average basis, GBTI earns the highest rates of interest on its loans and advances while its average interest paid to depositors is the lowest in the industry although the high proportion of demand deposits is a contributing factor. This is how the bank's average interest earned on loans and paid appears on a graph.

While the nominal Corporation Tax rate payable by commercial banks is 45%, few of them pay a rate anywhere close to 45%. The bank's effective Corp. Tax for the current year is 21% while for 2004 it was 26%. On the other hand any individual earning more than $250,000 per month pays average taxes of 30%. Is something not wrong with such a tax system?

Other issues:

The shareholders are benefiting from the continuing improved performance with dividends for the year 2005 of $3.25 per share, amounting in total to $130 million or 39% of after-tax income.

Despite this being one of the highest rates of payout of public companies in Guyana the bank still has some $1.8 bn. in distributable reserves.

Perhaps because of the very dominant influence of the controlling shareholder there is very little trading of the company's shares on the Stock Exchange but the price of the shares moved from $32 to $75 during the year. With a market price of $75 per share, and an earnings per share of $8.29 the price earnings (P/E) ratio is a healthy 9, compared with the 5.1 ratio at December 31, 2004 which this column described as 'seductively low'. However even if the current rate of dividend is maintained by the bank, it would take some 23 years to recover the investment based on the last trade price on the Stock Exchange, the equivalent of a dividend yield of 4.3% free of tax.

Perhaps conscious of the public's displeasure of directors buying or selling shares in their companies, there has been negligible movement of directors' interest in shares with associates of Ovid Holder acquiring 25,000 shares and Paul Cheong acquiring 44,429 shares beneficially. The Securities Industry Act requires that the directors state separately those shares of the directors and their associates which are held beneficially and non-beneficially but this requirement is not complied with.

The future:

The bank is clearly upbeat about the future and has acquired a site for a new head office but appears to ignore some of the greater challenges facing the country, not least the issue of money laundering which has received scant attention from the banking sector.

With very credible reports of narco-trading and money laundering underwriting the economy, the banking sector should be pressing the government to bring the Money Laundering Prevention Act into full being and to guard against them being used to channel tax-avoided money.

Each tax dollar avoided gives rise to a significant contingent tax liability but bankers seem unwilling to question the quality and content of the financial statements which are submitted to them and on the basis of which they risk depositors' funds. The problem as seen by some bankers is that if they ask too many questions, these 'prestigious' customers will take their business elsewhere!

Given the crime and security situation facing the country, commercial banks may have to share their focus on the bottom line which might be good for their shareholders with the danger of the economy being flooded with drug and other illegal funds which will consume the entire country. In this connection some of the privacy conventions might just have to be relaxed.