Financial highlights
* Total assets excludes acceptances, guarantees and letter of credit, deferred taxation and taxation recoverable.

Commentary
The Bank had an excellent year under difficult economic conditions with increases in deposits of 21 per cent, loans and advances of 23% and net profit after taxation of 37 per cent.

The good performance of the Bank is also reflected in increases in return on assets of 28.75 per cent, return on equity of 18.3 per cnet, profit margin of 24.6% and earnings per share of 37 per cnet.

Net interest income for the year was $816M, an increase of $32M or 4% from the previous year while interest expenses decreased by $67M or 16% although deposits grew by $1.4B which is reflective of falling interest rates.

Under difficult conditions the Bank has achieved the best portfolio in terms of provision as a percentage of gross loans and advances in the industry. Citizens has stayed away from agriculture and manufacturing, sectors which have suffered badly in the recent economic climate. The Bank’s lending is concentrated in household and real estate loans.

The percentage of provision to gross loans of 2.54% is considerably lower than GBTIÆs 18.94 per cent, NBIC’s 5.19% and Demerara Bank’s 7% (2001). This comparison may, however, not be entirely accurate since the commercial banks seem to apply the FIA differently, particularly when it comes to writing off loans classified as a loss.

By way of example the NBIC has written off over $1.5Bn in the past two years while Citizens wrote off none in 2001 and $49.9M in 2002. Provisioning is a key factor in the determination of profits and is also reflected in the Bank’s loans and advances provision as a percentage of non-accrual loans and advances which at 40.41% was the highest in the industry when compared to GBTI’s 38.42 per cent, NBIC’s 22.29% and Demerara Bank’s 23.28% (2001).

Next week we will continue our analysis of the financial statements and compare the arrangements in the Bank with those of its majority shareholder Banks DIH Limited.

Market share

The Bank remains a relatively small player in the commercial banking sector but during the current year managed to acquire an additional 2.3% of the total loans and advances market without significantly increasing its deposit base. Citizens Bank reported $7,963M or 7.74% of total deposits and $4,592M or 9.43% of total loans and advances of the commercial banking sector. In the prior year the Bank had 7.1% of both deposits loans and advances.

The growth in loans and advances may, however, be at the expense of higher interest income as the Bank's average interest rate on loans and advances was 15.4 per cent, 1.4 percentage points lower than the prior year and 1.88 percentage points lower than the weighted average prime lending rate reported by the Bank of Guyana. Business Page has always been on the side of those who have argued for lower lending rates and it is apparent that Citizens is listening. However in order to achieve this the Bank has stayed away from the agriculture and manufacturing sectors and moving significantly into the real estate and household sectors.

One of the factors for the low market share may probably be the lack of as large a branch network when compared to the National Bank of Industry and Commerce (Head office plus eight branches and the recently acquired GNCB network) and the Guyana Bank for Trade and Industry (six branches). The Bank's Annual Report states that it has four full service branches but this appears to include the ATM service located at Thirst Park.

Surprisingly the Bank notes that it has the second largest ATM network when based on the market share held by NBIC and GBTI; one would expect that these two would place first and second respectively.

Risks
The Bank has increased its holdings of US Dollar investments and other assets by 211% or $1B, while its US Dollar liabilities increased by 45% or $147M. With the continued strengthening of the US dollar relative to the Guyana dollar the strategy of parking funds in the US dollar would seem to be a prudent one.

Interest rates worldwide and in Guyana are falling but commercial banks in Guyana maintain a very high interest spread. Seventy-four per cent of the Bank's assets are interest bearing while the Bank has to pay interest on 89% of its liabilities. This should not trouble the Bank, however, because of its interest spread of 12.2 per cent. While the Bank disclosed average effective interest rates on its monetary financial instruments, it did not disclose those rates as they relate to each period of maturity i.e. up to 1 year, 1 to 5 years, etc.

The Bank has non-interest bearing funds of $1.4B which is an industry problem arising from the high statutory deposit requirements of the Bank of Guyana and decreased lending opportunities. The absence of opportunities has caused the Bank to invest heavily abroad - a situation not dissimilar to other commercial banks where net foreign currency holdings have increased.

Taxes
The corporate taxes payable by the Bank in respect of the year was $16M, a mere 9.7% of net profits before taxes mainly because tax exempt investment income makes up a significant portion of total profits. Income not subject to tax amounted to $198.6M compared to total profits of $166.1M. It is known as well that the Bank invests in low-income housing which the government had announced would have tax benefits, but the Annual Report is silent about this segment of the portfolio.

Withholding taxes are shown at $18.5M, representing approximately 9.3% of income not subject to tax or 11.1% of total profits. Total corporate and withholding taxes were therefore 20.8% when compared to the statutory rate of 45 per cent.

The Bank has made a tax provision at the rate of 2% on its turnover under the minimum corporation tax rules. Such amounts are recoverable in future years where tax at the rate of 45% of taxable profits exceeds 2% of turnover. This is treated in the financial statements as taxes recoverable instead of as deferred tax assets as is done by some other entities.

It seems necessary for the Institute of Chartered Accountants of Guyana to make a pronouncement on the application of these principles so that different companies would account for such taxes in a consistent manner.

Governance
Apart from Banks DIH which has a controlling interest manifested by its dominance on the Bank's Board of Directors, the other principal shareholders are Hand in Hand, Continental Agencies and the National Insurance Scheme. Among the Banks DIH nominees to Citizens' Board of Directors are Attorney at Law Richard Fields SC who is Chairman of Demerara Life, one of Banks DIH's largest single shareholders. Alan Parris and Chartered Accountant Paul Chan-A-Sue are directors of Hand in Hand. While this may all sound confusing, it emphasises the small pool from which corporate directors are drawn and the high risk of conflicts of interest posed by such close relationships.

The Bank is extremely proud of its corporate governance structure which includes several arrangements that its parent has so far avoided. 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 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.

While perhaps because of the length of the terms of reference of the various committees it may not have been practicable to reproduce them in the Report, the paraphrasing has led to some ambiguity as, for example, with respect to the functions of the Audit Committee. This is stated as "responsible for reviewing and developing operational policies and procedures" which is only one of the roles of an Audit Committee. Similarly with respect to the HR Committee it is not clear whether its mandate extend to the actual setting of the level of the remuneration.

When compared to Banks DIH however, Citizens is way ahead in its governance structure. Banks DIH while indicating the name of the Board's Committee chairpersons, fails to give any details of the composition or the functions of those Committees or any indication of how active and effective they have been. The directors of Banks DIH must understand that shareholders of that company most of whom are ordinary folks deserve no less quality of governance than the shareholders of Citizens, the overwhelming part of which comes from corporate Guyana.

Related parties
The Bank, like most other public companies, fails to follow the disclosure requirements of IAS 24 - Related Party Disclosures. The IAS requires, amongst other things, disclosure of related party relationships. The Bank has common directors with other public and private entities in Guyana but fails to disclose those relationships. This requirement of the Standard specifies that the disclosure should be made regardless of whether there were transactions between the parties.

It is the case that the IAS does not specifically require it to identify the name of the related parties. However, it is difficult to see how the disclosure of related party relationships could be achieved without disclosing the names of some of those parties unless one takes the absolute minimalist approach to disclosure.

One of the Bank's major related parties is Banks DIH Limited which owns 51% of the Bank's stated capital and which is required to issue consolidated financial statements, eliminating transactions with Citizens Bank Limited to show the performance of the group as a whole.

Note 14 to the financial statements of Banks DIH Limited shows total borrowings of $279M while the consolidated group borrowings are $143M, a difference of $136M. This difference, therefore, represents inter group borrowings. Closer examination of the note shows that the inter-group borrowings were granted at average interest rates of 15.5% and 12.5% on $42M and $94M respectively.

Note 25 of the financial statements of Banks DIH Limited also showed loans by the Group (not Banks DIH itself so it is assumed to be Citizens Bank) of $128M to directors, an increase of 1,262% over the prior period amount of $9M.

The financial statements of the Bank reflected a significantly higher level of related party loans - $407M compared to $315M in the prior year, a 29% increase. Given that loans to directors amounted to $128M, and loans to group companies amounted to $136M, the difference of $143M should have been disclosed in the consolidated statements of Banks DIH Limited. This highlights the inconsistency of the disclosures between the two entities.

No detailed movements in these accounts were presented so it is difficult to reconcile the increase of $92M in the statements of Citizens Bank Limited with the increase of $128M in the statements of Banks DIH Limited.

The Bank fails to disclose "the elements of these loans necessary for an understanding of the transactions" including interest rates, repayment periods and security held.

The Bank did not disclose all transactions with key management personnel such as the remuneration paid to executive directors, which, sad to say, is a requirement of IAS 24 that most of our public companies fail to comply with.