On the Line: GBTI Annual Report 2002

On the Line: GBTI Annual Report 2002
Stabroek News
April 20, 2003

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Business Page today reviews the Annual Report of the Guyana Bank of Trade and Industry for the year ended December 31, 2002. This Report will be presented to the shareholders at the Bank’s 15th Annual General Meeting to be held on April 28, 2003, for which the Bank gave full twenty-seven clear days’ notice.

The Directors’ Report is one of the first to attempt to comply with the requirements of the Securities Industry Act (SIA), the most significant piece of legislation to have come into effect since the last financial statements. A Securities Council has been set up and several pieces of subsidiary legislation published under that Act. It is clear that the larger companies are beginning to take compliance seriously, a good omen for the Stock Exchange when it is eventually established. One of the requirements of the SIA is the disclosure of interests of each director and chief executive and their associates in the shares of the company. The Directors’ Report shows that only four have any shares in the Company, while the Chairman, Senior Counsel Robin Stoby and Mr John Tracey, the Bank’s No.2 have none.

The following table represents the Bank’s highlights for the year:

2002 2001 $M $M Net Income before taxes 258 274 Net Income after taxes 146 171 Total Assets 23,282 23,817 Total Deposits 20,412 19,648 Loans and Advances 7,685 10,048 Returns on Average Assets % 0.69 0.68 Return on Average Equity % 6.29 5.60 Earnings per share $ 4.27 3.65

The decline in the profit before tax of almost 6% was due to a significant decline in revenue from loans and advances and investment income, in both cases by 26 per cent, not sufficiently compensated for by the increase in other income by 39 per cent. The CEO attributes the fall in interest to the Bank’s reduced lending rates without any specifics, and its stringent application of the FIA, suggesting that this is a new development which is not consistent with the assertions in its 2001 financial statements. Average interest on investments fell from 7.82% to 6.41% in 2002, a decline which is likely to continue in 2003 as the 182 days Treasury Bill rate plunged from 7.31% to 4.12% and the 364 days Treasury Bill rate from 8.17% to 3.91% during the year.

The average interest earned on loans and advances fell from 12.12% to 10.08% but this would only partially reflect lower rates, which is also a function of the incidence of non-accrual loans which have gone up from 39.1% of the Bank’s loan portfolio at December 31, 2001 to 49.3% at December 31, 2002.

Other income in 2002 remains a major contribution to the Bank accounting for 66.2% of net interest income compared with 50.7% in 2001. Non-interest expenses have increased 2.8% with reduction of staff costs from $368M to $354M while expenses on premises and equipment and “other” have increased.

Income after taxes has, however, increased by 17% due to a reduction of the effective charge for Corporation Tax from 39.2% to 23.6 per cent, compared with the nominal rate of 45% or 2% of turnover applicable to commercial banks. 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.

Total assets grew by 2.3% mainly in cash and cash resources 18.8 per cent, investments 24.9% and other assets by 12.7 per cent. The combined increase in these categories amounted to $2,891.7M but this was offset by a reduction of $2,363M in the Loans and Advances. It is a measure of the uninformed nature of the public that a Bank which is clearly flush with cash and in great need of opportunities to invest its excessive liquid resources could have been the subject of a rumour of a run only one year ago.

The increase of $764M or 3.9% in deposits has to be considered negligible given that interest of $817M would have been credited to the various deposit accounts in the Bank. The Report notes that the Bank has maintained market share of 20 per cent. In fact with deposits of all commercial banks increasing by 10.6 per cent, the Bank’s share of deposits fell from 20.62% to 19.38 per cent. The Bank must be disappointed that its expanding branch network has not delivered any significant growth in market share for deposits which in 2000 was 21.3 per cent.

The Report explains the decline in term deposits as part of the Bank’s “deliberate policy of attracting stable funds,” but does not explain why its demand deposits which is the least stable form of deposits actually increased by 2.7 per cent. Since this class of deposits representing some 20.3% of total deposits attracts no interest it is a very profitable source of funds and the Bank should welcome more, not less demand deposits. The high level of demand deposits explains why the Bank’s average cost of deposit funds is relatively low.

Loans and advances

There was a 19.0% decrease in gross loans and advances which after provision for doubtful debts now represents only 32.3% of total assets, maintaining a trend which began since 1998 when the percentage of loans and advances to total assets was 52.2 per cent. The largest decline in the net portfolio was in the agriculture and services sub-sectors which fell by 64% and 20% respectively. Loans to the manufacturing sector increased by 25.65% from $2.3B to $2.9B. The proportion of the loan portfolio which is non-accrual is a staggering 49.3 per cent, up from 39.1% in 2001. Among the other commercial banks the proportion of portfolio which is non-accrual is NBIC 28 per cent, Demerara Bank 26% and Citizens Bank 9 per cent.

Dividends

The directors are proposing to pay a dividend of $1.50 per share, the same as 2001. Total dividends represent 41% of after tax profits compared with 44% in 2001. Total retained earnings at 31.12.02 was $1.4B and net worth of $2,777M, slightly less than the $2,804M of NBIC.

Banking Act

The notes to the financial statements indicate that the Bank is licensed under the Banking Act Cap 85:01 which has been long repealed and replaced by the Financial Institutions Act. The CEO’s Report also notes that the Bank has adopted “several new accounting standards” without identifying any of them. As far as we are aware there were only two new IAS’s which came into effect in 2002 while there was a minor amendment to an existing standard.

Auditor’s Report

The auditors did not in their opinion report on compliance with International Accounting Standards which are mandatory in Guyana. The auditors may be relying on the inference which can be drawn from their assertion that the Companies Act on which compliance is reported requires compliance with IAS’s, but this would be asking too much of readers not familiar with the technical issues of the accounting profession.

The CEO’s Report also highlights the “Bank’s strong asset base, together with our large capital and other reserves,” a clear case of double counting. The information in the Director’s Report regarding the Associate Company, Guyana Americas Merchant Bank Inc, that GBTI’s contribution to its operating profit was $38.5M seems inaccurate when one notes that the profit of the associated company could only have been $6.4M. Similarly, the Directors’ Report on share capital is not consistent with the financial statements.

Conclusion

Chairman Robin Stoby, Senior Counsel, dealt mainly with economic matters much of which were drawn mainly from the Bank of Guyana Annual Report for the half year to June 2002. Consequently much of the information is dated and only partially relevant. The Chairman also emphasised the Bank’s conformance to accepted rules of (rather than best practices of) corporate governance.

The Report which is professionally prepared seems to reflect a high marketing concept, but seems far too inward looking. Like with all other companies in Guyana pictures of the Chairman, CEO and senior staff are very prominent. Why can our companies not focus a little bit more on their customers and the industries and business they support?

GBTI remains a major player in the industry and with the support of its controlling shareholder, the Beharry Group, will continue to play a key role in the economy.

The Government needs to take note of the CEO’s concerns of the failure of the present legal system which inhibits credit creation and ultimately economic development which push up the cost of borrowing. 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.