On the Line - Guyana Bank for Trade and Industry
By Christopher Ram
March 20, 2005
The Guyana Bank for Trade and Industry, the # 2 Guyana bank ranked by assets and deposits will be holding its 17th Annual General Meeting tomorrow March 21 at the Le Meridien Pegasus. This is by far the earliest date on which the bank has held its AGM for at least five years and along with the National Bank of Industry and Commerce seems to be setting the stage for timely shareholders' meetings. Unfortunately timeliness has come at the expense of quality with far too many errors in just about every section of the Annual Report which could have been avoided with a little more attention to details and careful editing.
The Report devotes a considerable amount of space to economic information drawn mainly from the 2004 Half-year Report of the Bank of Guyana. Much of that information would have become dated when the Minister of Finance presented his 2005 Budget Speech in the National Assembly and in any case the usefulness of such detail is quite questionable. It is indeed unfortunate that in a 54 page Report there was no space for any discussion or report on the bank's corporate governance arrangements or the policy considerations which give rise to the type of interest structure reflected in the Income Statement and asset distribution in the Balance Sheet. Even more surprisingly, other than the Chairman's reference to the floods in juxtaposition to the Asian tsunami, the bank gives the impression that the worst disaster to have befallen Guyana will have no impact on the bank's operations.
The CEO describes the bank's performance as excellent with net profits after taxes increasing by $56M or 27% over 2003 with positive effect on major indicators such as Return on Average Assets, Return on Average Equity and Earnings per Share.
Deposits grew by approximately 13 % to reach $24.5B suggesting an increasing share of the deposit market but conversely Loans and Advances fell from $7.7B to $6.6B or 14%, compared with an 8% decrease in the entire commercial banking sector. Once again, bucking the practice in the sector, the bank continues to treat foreign currency deposits as other liabilities which does not help sectoral comparisons.
The following highlights are drawn from the bank's Annual Report and are discussed below.
Perhaps the most striking feature of the balance sheet is how the resources of the bank are deployed. At December 31, 2004, only 22.6% of the assets is invested in loans and advances. This is half of what it was five years ago when in absolute dollar terms loans had topped the $10B Now it is $6.6B and falling which would be worse if inflation is taken into account. Part of the reduction is due to the write-off as bad debts of some $1,761M over the past two years.
Put another way, only 2731% of the deposits of the bank is invested in loans which the CEO attributes to the 'socio-political environment'. He calls on the Government to address the challenges of improving the investment climate and help 'small and medium scale entrepreneurs to create new ventures and more jobs'. Many would say that in so far as the second task is concerned, that is a major function of the banking system and some of the players in fact show they take this responsibility seriously. Citizens' Bank lends as much as 50% of its customers' deposits and Demerara Bank 45%. There are many who would argue that the Government should be criticised for encouraging the easy route for the bankers with its insatiable appetite for issuing increasing sums of risk-free Treasury Bills. The liberal and permissive nature of the country's tax and exchange rate policies is also the cause of more and more of the banking sector's resources being invested abroad.
Following write-offs of $804M in 2003 and $956M in 2004, non-performing loans now account for 29% of the portfolio, down from 49% in 2002 and 36% in 2003. This is still well above industry average and there remains the potential for further write-offs in succeeding years. With their larger capital base, the bigger banks are permitted to make very large loans which can have disastrous consequences when they fail. Perhaps the time has come when the banks should consider syndicating large loans thereby sharing the risks.
Profit before tax of $351M was some 221% higher than the $288M in 2003. Interestingly while the average of loans and advances has declined by 7%, interest paid by the borrowers increased by $217M or 25% for reasons which are not apparent. On the other hand, while average deposits grew by $2.1B or 9.8%, the interest paid on those deposits decreased by 5%.
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. This is how the bank's average interest earned on loans and paid appears on a graph.
Regrettably, only one of the Income Statement items is supported by any meaningful notes and it is left to the reader to discover that Loan Loss expenses is included in Other (expenses) or that a break-down of other income can be found in Note 12, both of which would be considered poor disclosure and unhelpful accounting.
While the nominal Corporation Tax rate payable by commercial banks is 45%, few of them pay a rate anywhere close to 45%. Because of several categories of tax free income (low cost housing loans, some restructured rice loans, investments in government securities issued by Caricom member states). The bank's effective corporation tax for the current year is 19.8% while for 2003 it was 20.4%. While this may be good for the entities and their shareholders, it has serious implications for the revenues of the country and helps to explain why individuals now pay more taxes than companies.
Dividends to shareholders have increased from $1.50 per share in 2001 to $2.50 per share in 2004, a very healthy increase of 67% over the period. Shareholders would also have seen the value of their shares increase particularly since the establishment of the Stock Exchange when it was trading at $25. With an Earnings per Share of $6.44 and a market price of $33, the bank's P/E ratio of 5.1 is seductively low. A dividend yield of 7.6% free of tax is an extremely attractive reward and depositors would be well advised to convert their deposits which are now earning about 2.5% net of taxes into shares in the bank.
Even after allowing for the fact that only a minority of the shares is available for trading (the Beharry Group owns 61%), there is no economic reason for the absence of activity in sales changing hands on the Stock Exchange.
The bank's proud boast of being 'guided by the objective to maintain goal congruence between the organisation and its employees' is at least compromised by the fact that it substantially reduced the benefits available to its employees when it converted its Pension plan from a Defined Benefit to a Defined Contribution, a fact cleverly disguised by the CEO but disclosed in the financial statements. This column has lamented the way rights and benefits earned by workers over the decades are being eroded by employers without even a whisper. For GBTI to do this when it is recording such excellent financial results is a sign of how the pendulum has swung.
There has only been one change in the holdings of shares in the company by directors and their associates with a director acquiring 64,500 shares in the company - which seems to be in breach of section 114 of the Securities Industry Act, 1998. That section provides that a director or officer of a company may not participate in any transaction related to acquisition or disposal of shares. While 5.119 provides some qualifications it does not appear to cover this case. Financial institutions should have clear guidelines on matters pertaining to regulatory requirements so that such a transaction is only undertaken with full knowledge of all the implications and to avoid any incorrect disclosure as took place with respect to at least one of the other directors.
Last year, this column pointed out several gaps in accounting and governance disclosure and had called on the Chairman to devote more of his extensive report to governance issues rather than re-stating dated information from the Bank of Guyana. Shareholders who want that type of information can easily find it elsewhere and would much prefer that the bank use the Report to disclose and discuss more bank-specific information. Hopefully at some stage the bank will find it useful to revisit those gaps.
Success tends to breed over-confidence and perhaps an insensitivity to any criticism. But success should be measured not by how much one earns but rather by how much one should have earned. Even after writing-off $1.8B over the past two years, the bank still has another $2.2B in loans outstanding from which it derives no interest. That is not good news either for other borrowers, depositors or shareholders, nor is it good for the revenues of the country.
It is instructive to note that despite their better risk-management resources, the larger banks are the ones which have suffered the worst losses, partly because of their larger capital base which sets the limit on the loans they may expend to any one borrower or group of borrowers. Perhaps the time has come for them to learn from the insurance industry and start syndicating their larger loans thus spreading the risk of any devastating failures.
In our Conclusion on the 2003 Annual Report of the bank, we suggested that "the Government needs to pay far more attention than it appears to have done to the concerns and developments in the banking sector (and that)… There are other issues however which individual banks may not wish to highlight but which have serious implications for fiscal and monetary policy".
I cannot recall any occasion in the six years since the current holder has been the Finance Minister of his having expressed a firm view on the financial institutions and more particularly the commercial banks outside of his Budget speeches without effect or conviction about the spreads in interest rates. It is mind-boggling that he would not see as one of his most important functions the setting of policies and periodic exchanges with the commercial banks.