Commercial Banks – Quarterly Reports to June 30, 2013

Introduction
PLAINLY BUSINESS today looks at the recent reports published by the commercial banks under Supervision Guideline No. 10 – Public Disclosure of Information issued by the Bank of Guyana. Readers of the financial columns of the local media will recall that a predecessor Guideline which took effect on June 18, 2010 was revoked and replaced by a revised Guideline taking effect from the beginning of the second quarter of 2013. The new Guideline requires that quarterly calendar statements should be released within thirty days from the end of the quarter and forwarded to the Bank of Guyana. The Bank of Guyana resisted the protestations of the commercial banks that thirty days is too short a period to complete and publish reasonably accurate financial statements. Indeed, the fact that both Citizens’ Bank and Demerara Bank appear to have been unable to meet the deadline suggests that the concerns by the commercial banks may have had some merit. A consequence of this for purposes of this column is that a comparative analysis of all the commercial banks will have to wait on a later column.

Another issue on which the regulator and the regulated differed is the insistence by the Bank of Guyana that for each calendar quarter (March/June/September/December) the income statement should reflect the performance both for the quarter and cumulatively. This means that for the last quarter of any financial institution that entity will have to publish the Guideline 10 report within 30 days and then 110 days later it has to publish audited financial statements. For any institution whose year-end is not a calendar quarter – perhaps an October year-end – it will have to publish both September (calendar quarter) and October (year-end) financials. Since the average user of financial information may not be a seasoned specialist, such surfeit might cause confusion rather than provide meaningful information which is the objective of Guideline No 10.
Continue reading Commercial Banks – Quarterly Reports to June 30, 2013

On the Line: Guyana Bank for Trade and Industry Limited Annual Report 2012

Introduction
Describing its 2012 performance as riding on the back of a growing economy, the Guyana Bank for Trade and Industry Limited (GBTI) will be holding its Annual General Meeting for 2012 at its Kingston Office on Monday June 10 at 6 pm. Most of the numbers continue a very favourable trend and shareholders would no doubt be happy with the 25th anniversary report although this event has not earned any mention in the 90-page report.

Total assets increased by 17% in 2012 over 2011 while total loans and advances for the year increased by 47%. On the other side of the balance sheet, total shareholders’ funds increased by 20% while deposits increased by 16%. Net income before taxes increased over 2011 by 22% while after tax income has increased by 31%. The comparable percentage for 2011 over 2010 was 15% in each case.

Continue reading On the Line: Guyana Bank for Trade and Industry Limited Annual Report 2012

Annual reports 2011: Guyana Bank of Trade and Industry and Sterling Products Limited

Introduction
Business Page today continues its review of the annual reports of companies for the year 2011 by covering two of the public companies in the Beharry Group – the Guyana Bank for Trade and Industry and Sterling Products Limited. GBTI held its 24th Annual General Meeting on April 3, while Sterling held its AGM on April 18. Secure International Finance Company Incorporated (Secure) owns 61% of the outstanding shares in the Bank and 58.1% of the shares in Sterling. In turn, Secure is 100% owned by Edward B. Beharry & Company Limited, a private company. The reports show that the Bank recorded a 15% increase in profits after tax while Sterling’s profits after tax increased by 20%.

GBTI Highlights

The Bank has nine branches including one at Lethem, making it the first and only banking service outside of the cities and towns of Guyana. Over the past five years, GBTI has witnessed truly impressive growth winning the favours of the government in a number of foreign and locally financed lending schemes, some of which come with tax breaks. In 2006 it was awarded a contract “to carry out the implementation of a Financial Facility to improve the competitiveness of the Rice Sector in Guyana,” and in 2011 it entered into a contract with the Ministry of Finance in respect of “loans to non-traditional agricultural exports, aquaculture, fruits and vegetables and livestock.” Financing for this comes from the IDB and the interest on the loans is exempt from corporation tax. Taking advantage of a number of tax shelters the Bank’s effective tax rate is less than 30%, compared with the nominal rate of 40% on the profits earned by commercial banks.

Asset structure
The Bank’s total assets at the end of 2010 were $75B, reflecting a growth of $12.4B (20%) over 2010 and accounting for 23% of Total Commercial Bank Assets in Guyana. The Bank’s assets as a percentage of commercial bank assets grew by 2 percentage points over 2010. Of the Bank’s assets, some $8.3 billion, or more than 10% was held overseas “so as to benefit from more attractive returns from yet safe instruments.”

At December 31, 2011 loans and advances amounted to $24,051 million, a 24% increase over 2010. The report states that loans to all sectors of the economy increased in 2011and that lending to individual customers increased by $3.1 billion while lending to business enterprises increased by $13.6 billion, which in total exceeds the $4.7 billion increase in total loans and advances. There is a similar discrepancy in the information on loans in the Agriculture Sector which in one case is shown as increasing by $2.8 billion and in another by $1.1 billion. In yet another table, loans and advances to the Agriculture Sector are shown as $2.342 billion while in a narrative they are stated as $9.7 billion.

Income statement
Neither the Chairman nor the CEO discusses lending and deposit rates in the absence of which only very rough calculations can be computed. These show that the average rate paid on savings accounts was 2.03% and on term deposits 1.91%. Taking all deposits into account the average interest paid by the Bank is about 1.5%, compared with the average rate on lending of close to 12%.

GBTI has always earned significant commissions and foreign exchange gains and in 2011 the amounts earned exceeded the Bank’s entire salaries bill. As a consequence of the operating performance, earnings per share (EPS) rose by 5.3% to $34.59, encouraging the directors to increase dividends per share from $4.50 to $6.00 giving a payout ratio of 19.53%.

GBTI continues to be one of the country’s strongest banks and has several committees designed to enhance better governance and better results. Its high quality annual report is upbeat and positive, justified by the results it has been delivering. There are however some technical areas for improvement in meeting IFRS and other regulatory requirements.

Sterling – Highlights

Statement of Income

For the first time in the company’s history, turnover topped the G$3.0 billion mark, although this has come with a reduction of G$9.7 million in after-tax profit, down 5.6% to $162.1 million from $171.9 million in 2010. Chairman Dr Leslie Chin attempts to explain this as “due to sales and marketing expenditure directly associated with enhancing distribution of our products. With additional spending in the area of marketing and distribution the company saw the relative return on investment as a total business expanded,” which must have confused the shareholders in attendance.

The Chairman also reports that export sales grew by 5.5% or by G$9.9M over year 2010 sales without stating the level of export sales, which too is not shown in the financial statements. From note 22 dealing with credit exposure it is apparent that the company does business with Grenada and Trinidad and Tobago, with two of the top balances being with customers from those countries.

He does however report that the company has seen “growth in some Caribbean Countries, whilst others present problems with respect to competitiveness.” Sterling is potentially one of Guyana’s manufacturing exporters and for years it has sought to “explore ways and means to have our products on the shelves of businesses in the Caribbean.”

Gross margin has declined from 25.3% to 22.6% while other income has also fallen, from $34.9 million to $22.3 million even as distributing and marketing expenses have increased by $25 million. Once again the company incurs finance costs from an overdraft, even as it holds more than two hundred million dollars in fixed deposits.

With the reduction in the tax rate from 35% to 30% the company’s tax charge has declined by $29 million, of which a significant portion is due to the tax effect of depreciation. Basic earnings per share increased from $6.18 to $7.42 while dividend per share has increased from $3.30 to $3.50. The increase is not reflected in the table above as dividends are only recognised in the financial statements when paid.

The balance sheet of this company is strong with both adequate working capital and healthy liquidity. One of the commendable features of this company is that it has maintained its defined benefit schemes for its employees while so many others are switching from defined benefit to defined contribution scheme. Hopefully, it keeps it that way.

On the Line: 2010 Annual Report of the Guyana Bank for Trade and Industry Limited

Introduction
Last year when the Guyana Bank for Trade and Industry published its annual report for 2009 Business Page interrupted its series on the state-owned Guyana Sugar Corporation. GBTI’s 2010 annual report similarly interrupts a series of articles on the 2011 budget for the principal ministries of the government.

Another similarity this year is the remarkable growth of the Bank particularly in terms of after-tax income which in 2010 increased by a substantial 21.6%, easily surpassing the 5.3% growth in after tax income in 2009 over 2008.

The satisfaction with the results was writ large on the face of Chairman Mr Robin Stoby and in his enthusiastic and lofty prediction of the bank’s future as “luminous in the vein as our head office” and the realisation of the Bank becoming “the leading bank, not only in Guyana but also further afield.”

While there may be some over-enthusiasm in the Chairman’s predictions, they are understandable with net income before taxes increasing by 17.8% in 2010, 25.8% in 2009, 14.8% in 2008 and 23.9% in 2007, making for a cumulative increase since 2006 of 110.6%. Because of the tax effect, after-tax profits have increased cumulatively over the same period by 138.1%.

Highlights

Performance
Earnings per share for the year were $30.1 in 2010, a significant increase from $24.8 in 2009. With the last trade in the company’s shares happening on January 31 at $163, the P/E ratio would be 5.4 compared to 5.6 just under a year before. No offers to sell the Bank’s shares were reported by the local stock market last Monday while the best bid price was $180, theoretically giving a P/E ratio of 5.98.

Given that per-tax income actually grew at a slower rate (17.8%) than in 2009 (25.8%), the enhanced after-tax performance has to be attributed to the lower effective rate of corporation tax which in 2010 was 24.5% compared with 26.2% in 2009.

This of course compares with the nominal rate of corporation tax of 45% up to last year. No doubt the shareholders would have been happy with the announcement that the nominal rate of corporation tax on banks, commercial and telecommunication companies other than telephone companies is being reduced from 45% to 40% effective January 1, 2011.

Commercial banks also enjoy several shelters including on investment income arising in countries with which Guyana has double taxation treaties and certain categories of loans made by the bank.

The interest earned on the average of net loan balances declined from 13.1% to 12.2% while the average interest paid on deposits was 2.1%, compared with 2.2% in 2009. The bank also consistently enjoys a high level of non-interest bearing demand deposits which averaged more than $12 billion during the year. Exchange Trading Gains fell from $733 million or 19.1% of total income in 2009 to $639M or 14.6% of total income in 2010, which took such gains below the 2008 level.

Loans and deposits
Deposits grew by $7.5B from $45.8B to $53.7B, an increase of 17%. Major sectors with increases were State Entities ($3.1B) and Personal ($4.6B), Deposits by the Commercial sector showed no increase while those by non-residents actually declined by 11% to $2.4B. The bank’s deposits increased slightly ahead of growth in deposits of all commercial banks, thus allowing it to increase its market share by 0.29 percentage points to 21.66%. Its market share of loans however could not be reliably determined as the total loans and advances figure published by the Bank of Guyana at December 31, 2010 excludes Real Estate Mortgage Loans.

The strong net increase in loans and advances came mainly in the Services ($2.8B) and Household ($2.6B) sectors. Since Household is wider than housing, it is not possible to ascertain from the financials the extent of mortgage lending from this categorisation.

Once a very strong player in the agriculture sector, the Bank’s loan portfolio suggests that this sector in no longer being emphasised and its growth in 2010 was a mere $73 million.

The Bank’s financial condition remains very strong and shareholders’ funds have increased from $5.7 billion to $6.5 billion.

In addition to providing several tax shelters, government support also comes in the form of treasury bills issued by the government that is prepared to spend billions to mop up liquidity. The bank’s stock of such bills is now $19.2 billion, while its loan portfolio has risen from $13.1 billion to $19.4 billion, an increase of 48%. Empirical evidence is that a substantial share of this is in the form of mortgages but strangely, the financial statements do not show this figure.

Related party transactions
Loans and advances to group companies totalled $660 million compared to $507 million at the end of 2009. Interest income was however recorded at $33 million on these facilities, an average interest rate of 5.69%. With a much higher average earned from the loans and advances portfolio (12.2%), it is difficult to see how the “rates of interest and charges have been similar to transactions involving third parties in the normal course of business” as stated by the Bank. On the other side, deposits by group companies were relatively stable at $1.1billion and interest paid averaged 2.46%, compared to the average on the total portfolio of 2.1%.

Insurance policies placed with a group company more than doubled from $2.1 billion to $5.0 billion.

Another related party is the law firm of Hughes, Fields & Stoby of which the Bank’s chairman is a partner. As with so many financial houses in Guyana, the Bank seems to place much of its customers’ borrowing business with a single firm rather than give the customers the expressed option of independent legal counsel.

Share price
Only 1000 GBTI shares have traded since November 15, 2010 – a single trade on January 31, 2011. 251,500 traded between January 1, 2010 and November 15, 2010, more than half (140,000) of which traded on April 26, 2010 which is the week after the AGM. Share prices on January 11, 2010, April 26, 2010 and January 31, 2011 were $135, $160 and $163 respectively. The highest price for the year was $180 on April 12, 2010.

At $9.0 per share, total dividends in 2010 will represent 29.9% of the year’s distributable profits, compared with 30.3% in 2009.

Conclusion
The Bank is clearly on a growth mode and is so far the only bank approved under the small business amendment to the Income Tax Act; is the centre of the Women of Worth Scheme; and has started construction in Lethem, which will likely make it the first bank to open in that area. The Bank has also taken up an additional 10% shareholding in associate Guyana Americas Merchant Bank Inc. These are significant developments.

On the negative side, the Bank could be more forthcoming with information on its overseas investments and the various loan schemes it operates.

On the Line: 2009 Annual Reports of the Guyana Bank for Trade and Industry and the New Building Society

Introduction
Business Page today interrupts its series on the state-owned Guyana Sugar Corporation to present an overview of the annual reports and accounts of two of the country’s financial institutions which will soon be holding their annual members’ general meetings at which the presentation of the annual reports is a major agenda item. One of these is the commercial bank, the Guyana Bank of Trade and Industry which is a licensed financial institution regulated by the Bank of Guyana under the Financial Institutions Act. The other is the New Building Society Limited, which carries on a financial business but which the Bank of Guyana claims does not fall within the act and which, despite several commitments by the Bank of Guyana and the government, remains unregulated. As a result, the bank is subject to the Single Borrowers Limit and other “strong financial regulations,” as described by no less than the Minster of Finance himself, while the NBS is not.

This is not the only note of contrast. One has to look no further than the Chairman’s reports by Mr Robin Stoby SC and Dr Nanda Gopaul of the two institutions respectively to see how they reflect the backgrounds, styles and personalities of the individuals. Both of them had good reason to be satisfied about the results of their entities. But while Mr Stoby was professional and measured, even enthusiastic at times, Dr Gopaul showed how difficult it is for him to adjust his political style to dealing with the commercial world.

He had no qualms about castigating members of the NBS as an “uninformed little group of mischief makers and pseudo intellectuals”; or about praising Housing Minister Irfaan Alli who now risks sanction by the Privileges Committee of the National Assembly for misleading the National Assembly; or making claims about the economy that are at best questionable. While Dr Gopaul claims that the Guyana currency has appreciated during the year, the GBTI Annual Report – and you would expect the bank to know – reported that the Guyana dollar market exchange rate was $202.75 compared with $201.75 during 2008. He also said that the fiscal deficit was at its lowest in 10 years. Perhaps he has been wrongly advised by his Finance Committee comprising former Commissioner of Police Mr Floyd McDonald and trade unionist Mr Kenneth Joseph.

It also goes beyond the two chairmen. The directors of GBTI are all experienced, private sector persons, while those of the NBS with one exception are all connected, directly or indirectly with the ruling party. This necessarily flows through to the quality of governance which has been a major and continuing issue at the NBS, particularly in relation to proxy voting, pensions for directors, and a modern code of corporate governance.

GBTI
The annual report of the GBTI which will be holding its meeting on Monday, April 19, 2010 shows the bank continuing a remarkable run in which since 2006, net income before taxes has increased by 25.8% in 2009, 14.8% in 2008 and 23.9% in 2007, making for a cumulative increase since 2006 of 78.8%. Because of the tax effect, after-tax profits have increased cumulatively over the same period by 95.9%.

The Beharry family holds a 61% controlling interest with the remainder of the shares spread among hundreds of members, but the actual number and any other significant concentrations are not disclosed in the annual report.

Earnings per share for the year were 24.8% in 2009, marginally up from the 23.5% in 2008. With the company’s shares trading at $140, the P/E ratio, a popular investment measure, has improved slightly, to 5.6, making the security one of the most attractive in the domestic market. One area of significance is the increase in the effective rate of taxation which for 2009 is 29.7%, compared with an effective rate of 16.0% in 2008. The corporation tax charge for the year is 26.2%, compared with 13.6% in 2008. Readers are aware that the nominal rate of corporation tax on banks, commercial and telecommunication companies is 45%. As a result of the higher effective rate of tax, the Return on Average Assets and Average Equity have both declined, albeit marginally.

The interest earned on the average of net loan balances declined from 13.4% to 13.1% while the average interest paid on deposits was 2.2%, compared with 2.6% in 2008. This apparently low interest rate is in some significant measure due to the high level of non-interest bearing demand deposits which averaged more than $10 billion during the year. The bank continues to earn significant amounts from foreign exchange transactions with Exchange Trading Gains increasing from $664M or 18.4% of total income in 2008 to $733 million or 19.1% in 2009. As this column noted last year, the gains on foreign exchange alone cover the total staff costs of $612.6 million, which is a decrease from the previous year.

The continuing good run allows Chairman Robin Stoby to announce for yet another year, “the highest dividend payout in absolute terms in the bank’s long history.” At $7.5 per share, total dividends in 2009 will represent 30.3% of the year’s distributable profits, compared with 25.5% in 2008 and 25.1% in 2007. By comparison, the dividend payout ratio of Republic Bank Guyana Limited for 2009 was 41.2%.

Highlights

The bank’s deposits increased in line with the growth in deposits of the financial sector, thus allowing it to retain a 21% market share of deposits. Its market share of loans however declined from 22% to 20.3%. The bank’s financial condition remains very strong and shareholders’ funds have increased from $4.7 billion to $5.7 billion.

Mainly due to what is described as capital work-in-progress of $4.1 billion, the value of property, plant and equipment has increased from $3.8 billion to $5.6 billion. In addition to the new head office, the bank is also building a new branch at Diamond on the East Bank of Demerara. At the sod-turning in 2008 the bank had announced the cost of the new head office building at $2.6 billion. Unless there are some other capital developments that have not been announced, it seems that there has been a significant cost overrun on the head office. The financial statements also reveal that the bank had actually exceeded the Single Borrower Limit by its investment in Government of Trinidad and Tobago Sovereign Bonds, although it fails to disclose the amount of the excess.

As they receive the report of the continued successful performance of the bank, shareholders are likely to overlook these matters, as well as the sudden departure of the bank’s CEO in October 2009. The meeting should be quite a quiet affair.

The New Building Society
After a break of two years when the directors took the annual meeting to Berbice, the annual general meeting of the NBS will return to the Pegasus Hotel next Saturday at 1.30 pm. The directors will report a profit of $588 million, describing it as an increase of 97% following a write-off in 2008 of a $200 million exchange loss on its sterling investment. According to the audited Statement of Income the profit for the preceding year was $487 million, so that the increase in profit for the current year is 9.6%.

Highlights

As is evident, the increase in net income before exchange difference was 9.63% but after taking account of an exchange gain in 2009 compared with an exchange loss in 2008, the change in net income is 97.2%. Just for the benefit of the financially minded, the accounting treatment of the gain is not in accordance with the rules of accounting.

Total assets of the NBS increased by 6.6% compared with 9.3% of the GBTI while its investors’ balances – largely equivalent to depositors’ balances – increased by 5.8%, compared with GBTI 11.9%. Despite this, and due to its tax exempt status, no reserve requirement and more discretionary provisioning rules, the NBS pays higher rates of interest on deposits and yet charges lower rates on its loans.

There is no doubt that the investments in the Berbice Bridge Company Inc are attractive, even for a tax-exempt entity. The issue has been concentration. Having acquired $1,520,000 of such investments from CLICO in 2009, the total of $1,870,000 represents 34.9% of the reserves at the end of the year. As a prudential rule, the Financial Institutions Act limits any single investment by financial institutions to 25% of their capital base.

The Society’s pension fund recorded unfunded obligations of $21.8M compared to a surplus of $21.5M, a significant turnaround of over 200%. No mention is made of the cause of this decline. Accounting rules have allowed a significant larger obligation to be presented in the financial statements.

The last time the NBS had a meeting at the Pegasus, there was quite a furore. It is unlikely that history will repeat itself.