On the Line: New Building Society Limited Annual Report 2008

– $200M exchange loss

Introduction
Forgive the rather misleading heading which is the standard for the review of annual reports in this column. It is misleading because at the time of writing the annual report of the Society, including the report of the directors and the financial statements, has not yet been made available to its members. Compelled by its own law that the AGM must be held before April 30, the directors have chosen for the venue of the meeting the Cotton Tree Primary School, West Coast, Berbice on Saturday April 25 with the first item on the agenda “to receive the financial statements and the Reports of the Directors for 2008.”
The financial statements of the Society audited by long serving and proposed-to-be-replaced Jack A Alli, Sons and Company show growth in deposits by just over 5% from $28.9B to $30.5B. This is the smallest percentage increase in deposits since 2002 and represents a recent trend of declining annual percentage increases. More significantly, however, is the decline of more than $103M in profits for the year. This is the second successive decline but is the highest decline recorded by the Society in recent history. Readers will recall that the 2007 profits were charged with the sum of $74M resulting from the fraud on an account holder.

It really has not been two good years for the Society under new Chairman Dr Nanda Gopaul, who signed the 2008 financial statements along with Mr Floyd McDonald, Deputy Chairman and former Commissioner of Police now on contract with the government, and Mr A Khan, Director/Secretary.

Commentary
The major reason for the decline in 2008 is an exchange loss of $200M, arising almost entirely on UK Government Treasury Bills which are denominated in pounds sterling, the exchange rate of which declined to the Guyana dollar by more than 20% between December 31, 2007 and December 31, 2008. While the Society had an exchange gain of $67M in 2007 it may be time for the directors to consider whether in the light of the volatility of international currencies it should liquidate those investments and repatriate the proceeds or invest in a currency to which the Guyana dollar is more aligned.

Loan assets have increased by 12.1 % from $16.99B to $19.1B almost a third more than GBTI, the performance of which was reviewed in a guest column last week and which has deposits of considerably more than the NBS. NBS, a creature of legislation, is restricted to how much it may lend and the nature of the security it has to have. On the other hand its income is tax-exempt and it can afford to and does pay the highest rates of interest on deposit accounts and charges the lowest rates on lending.

Despite the fall in income, reserves have increased from $4.5B to $4.79B or 6.4%. The Society is cash strong with some $4.2B in cash resources, almost all being held in interest-bearing fixed deposits. As discussed later in this column, that position would change significantly in 2009. The average interest earned on those resources was 5.6% compared with 4.2% earned in 2007. Investments which with the exception of the bridge bonds are liquid, amount to $11.3B, down from $13.55B. They earned an average return of 4.3% in 2008 compared with 4.5% in 2007.

Governance, the bridge and Clico
Perhaps the most controversial issue arising out of the financial statements is its investment in the Berbice Bridge. When financing for the bridge was first sought, the Society was approached by Mr Winston Brassington for a $3B investment. Independent consultant Raymond Gaskin questioned both the lawfulness and the viability of the investment and it is understood that on a split-decision the board, with Mr Moen McDoom as Chairman, accepted the advice and rejected the approach but went for $350M, a sum it was “prepared to lose.” Just over one year later the board with Dr Gopaul as Chairman reversed itself, and according to the financial statements bought bridge bonds with a face value of $1.5B. Regrettably the financial statements do not disclose the price paid for those bonds, but it is believed that they were bought at face value. More controversially, not only did the board reverse itself, but from all reports it did so by way of round-robin, ie without a physical meeting of the directors.

The composition of the board has changed significantly since its rejection of the $3B overture. Of the four who voted against the investment Mr McDoom has been replaced by Dr Nanda Gopaul, Director Secretary Mr Maurice Arjoon’s services have been terminated and directors Leon Rockliffe and Steve Bovell were voted off the board. As a result of the changes, the board with one exception is now made up of persons close to the government or the ruling party, some of whom are in receipt of compensation from the public purse. Mr Clement DeNobrega, a professionally qualified accountant who was elected as a director in April 2008 resigned some five months later, apparently dissatisfied with the way the board conducts the business of the Society. Once again there is no accountant on the board nor, as far as I am aware, is there any governance committee in the Society. Mr Kenneth Joseph, Head of NAACIE and the pro-government breakaway trade union organisation FITUG, was appointed by the board to fill the vacancy left by Mr DeNobrega’s resignation. His appointment is to be confirmed at the AGM.

Another possible reason for the reversal of the decision to invest in the Bonds may have to do with note 23 to the financial statements: Events After the Balance Sheet Date. This reports ambiguously that the Society’s retirement benefit plan held at December 31, 2008 a flexible annuity policy with Clico amounting to $110.9M. Note 12 to the financial statements devotes a full two pages to the plan, but did not refer to note 23. The directors should not by their silence encourage speculation that the Society may have undertaken the purchase of the bonds from Clico on the understanding that it could deduct the value of the policy from the purchase price of the bonds. That is a possibility fraught with serious legal implications and requires an unambiguous statement from the board which despite the public furore over the matter has so far not even publicly acknowledged the purchase.

Governance and risk
With the recent purchase significantly altering the composition of the Society’s assets and liquidity position, the Society is betting more than 40% of its accumulated profits on the Berbice Bridge Company meeting its annual interest obligations of about $800M. The financial projections were considered “overly optimistic” by the independent consultant. If the Bridge Company is unable to do so, then the Society could find itself along with other bondholders having to mark down the investment in its accounts. A proper analysis would have to wait on the release of financial statements of the Berbice Bridge Company.

The liquidity situation of the Society will be further eroded as it engages on the construction of a new, near billion-dollar head office in Georgetown. Consulting work in connection with that building is now the subject of a court action, but the investment itself is hardly the type of investment any risk-conscious entity would undertake in an uncertain financial environment.

Governance and the Bank of Guyana
One concern that has been vociferously expressed recently is the non-supervision of the Society by the financial regulator, the Bank of Guyana (BoG). The bank does not dispute that the Society carries on financial business as defined by the Financial Institutions Act which requires it to have a licence issued by the BoG. Yet it has inexplicably failed to enforce this provision. Such laxity by the regulator can have serious implications for any financial institution, let alone one that is subject to the control of persons with strong political affiliations and no private sector experience.

Without such a licence the Society does not operate within the FIA, which among other things provides for single borrowers limits to minimise the impact of a failure of a single loan or investment. Even if the Bridge Company investment was lawful, had the FIA applied to the Society then it would have been prevented from investing more than approximately $1.2B in the Bridge Company. The Society would also have been subject to the reserve requirement and its directors to the “fit and proper test.” It is hardly likely that such a loaded board could collectively be considered “fit and proper” to direct the operations of the third largest financial institution in the country.

Governance and members
The decision by the Society to hold its first ever meeting outside of Georgetown in 2008 followed a contentious meeting in September 2007 requisitioned by members who questioned the board about a fraud, the existence and implications of which it had stoutly denied. Those members were vindicated when the Society was left to make good the fraud to the tune of $73M. This time the dissatisfaction is about the adequacy and contents of the notice of Saturday’s meeting. By law, notice must be given 21 (clear) days prior to the meeting which does not appear to have been the case. Item 8 on the agenda seeks to increase the lending limit from $10M to $12M and beyond, even as the quality of the assets to secure lending has been diluted both by practice and the Berbice Bridge Company Act 2006. The implications are huge – higher lending and lower security will lead to higher provisioning and loan losses.

Governance and the auditors
By a notice in Friday’s newspapers the Society is proposing to replace long-serving auditors Jack A Alli, Sons & Co “in accordance with Rule No. 16 of the Act.” Apart from the statutory rules governing change of auditors there is also professional guidance under which any auditor proposed for nomination should seek professional clearance from the outgoing auditors. My understanding is that this has not been done. This could lead to an absurdity if it had to wait until after the meeting. In any case the outgoing auditors would be represented at the meeting to answer any questions, should these arise.

The proposed new auditors are Solomon, Parmessar & Co, headed by Mr Maurice Solomon, a director of the National Insurance Scheme. At a minimum this late change which appears to have taken the outgoing auditors by surprise must be regarded with considerable concern, since a change in auditors is done only for very good reasons.

Conclusion
Despite the mounting concerns the Bank of Guyana seems unwilling to act in a timely manner. It failed to do so with Globe Trust. It failed to act with Clico in connection with its deposit-taking. It should not fail the members of the Society. A group calling itself the Concerned Members of the NBS (including the writer) will be meeting Tuesday coming to decide on its participation at the AGM.

Recent developments involving Clico, the NIS, the NBS and Hand-in-Hand Trust show how contagion plays out in the financial and credit markets. The role of regulations is to prevent, detect and minimise such contagion. But effective regulations require as well independence and will. The NBS offers the Bank of Guyana another opportunity to show that it is on the ball.

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