By Rawle Lucas
(Rawle Lucas is a Guyanese-born Certified Public Accountant and Assistant Vice President of the Lending Services Division.
Mr. Lucas has agreed to serve as a columnist with the Stabroek Business and will be contributing articles on economic, financial and development matters.)
Size Matters
The change of name to that of Republic Bank gave the National Bank for Industry and Commerce (NBIC) a new identity and ownership. Even as customers were getting used to the new name and evolving leadership team, the bank continued to assert itself in the banking arena of Guyana. Fully recognizable or not by its new stock market acronym RBL, the Republic Bank remains the most dominant bank in the banking industry in Guyana when measured by number of customers, number of service facilities, share of assets, share of deposits and market value. This industry giant, the majority of whose shares are now held by the Republic Bank Limited, owned 38 percent of the assets held by all banks operating in Guyana in 2007.
With control of over one-third of the assets of the industry and a customer base that exceeds 143,000 accounts, the Republic Bank outpaces all the locally owned banks in nearly every area that matters. Its nearest locally owned rival, the Guyana Bank for Trade and Industry (GBTI), accounted for 22 percent of the assets in the banking industry in 2007. Citizen’s and Demerara Bank accounted for about 10 percent each.
With 39 percent of deposits under its control in 11 branches, a similar picture of dominance emerges in comparing its share of deposits with those of the three locally owned banks. As in the control of assets, Citizen’s Bank and Demerara Bank each account for about 10 percent of customer deposits. GBTI, on the other hand, accounts for 22 percent of deposits giving Republic Bank a commanding lead over its nearest locally owned rival in another important component of the banking portfolio.
The vastness of Republic Bank becomes clearer when one realizes that it would require a merger of all three of the locally owned banks, GBTI, Demerara Bank and Citizen’s Bank, to match or surpass the total assets and deposits of this long-standing icon of the financial landscape of Guyana.
The market power inherent in its customer base, asset size, share of deposits and network of facilities was reflected in a market value of G$6.6 billion dollars at the beginning of 2007, twice that of GBTI and nearly four times the market value of Citizen’s and Demerara Banks combined. By achieving a surprising 100 percent increase in the market price of its stock during 2007, Republic Bank was able to double its market value to G$13.2 billion or almost three times that of all the locally owned banks put together.
This type of profile undoubtedly gives customers a feeling of confidence and makes employees and shareholders glow in this glittering image of the bank.
Impact of Corporate Strategy
Republic Bank positioned itself well to command this industry leadership by pursuing a corporate strategy that included growth through acquisition. It set the stage for its current supremacy by buying the Guyana National Cooperative Bank (GNCB) in 2003. The successful integration of the operations of the GNCB aided the growth in size and strength of the Republic Bank. For example, the acquisition of GNCB pushed the share of assets of Republic Bank from 26 percent in 2002 to 40 percent in 2003.
The corporate merger strategy also helped to boost deposits from 29 percent in 2002 to 43 percent in 2003. The growth strategy also resulted in the successful expansion of a critical income-generating asset, loans and advances, from 26 percent to 32 percent and made it harder for any one of the locally owned banks to challenge it for supremacy.
Two years after the merger, Republic Bank, despite a slight decline in its share of assets and deposits, continued to maintain its distance from its rivals in the local banking industry. By 2005, Republic Bank owned 41 percent of deposits and 33 percent of loans and advances, a stark contrast to its nearest locally owned rival, GBTI, which owned 19 and 15 percent respectively. The remaining two smaller locally owned banks, Demerara and Citizen’s, held a combined 20 and 25 percent of deposits and income-generating assets between them at that time.
Conservative Posture
With its front-runner status, Republic Bank made a promise in 2004 “to play a catalytic role in the development of Guyana”. The expectation from a promise of that nature was to see a greater share of customer deposits in the form of loans and advances that were working on behalf of Guyanese and the Guyana economy. That was the case prior to the purchase of GNCB when the precursor entity (NBIC) had an average of 54 percent of customer deposits in the form of loans and advances.
More recently, the Republic Bank’s portfolio has taken on a different appearance. By 2007, a much smaller share of customer deposits (26%) was in the form of loans and advances while the bulk of it (57%) was in other types of investments. This realignment of its income-generating portfolio reflects prudent risk management. But, it also reflects, in my opinion, a sensitivity and uncertainty about the tenuous political, economic and security situation in Guyana that the leadership of Republic Bank could not overlook in its effort to protect the deposits of its customers and the interests of its shareholders. It also explains, in my view, why, in diversifying its portfolio, a majority of the bank’s investments ended up as risk free assets, namely Treasury Bills.
The substitution of Treasury Bills for loans and advances left Republic Bank at the end of last year with the lowest share of deposits being used to finance economic activity in Guyana. Only 32 percent (down from 41 percent in 2005 and 35 percent in 2006) of its income-generating assets were in the form of loans and advances. The distribution of its loan portfolio also shows a reluctance to lend to the agriculture, manufacturing and mining sectors and a fondness for the services, household and preferential construction sector. With loans to the household sector accounting for 46 percent of outstanding balances, Republic Bank appears more consumer focused rather than producer or investment focused.
As a leader in the industry with substantial economic clout, the behaviour of Republic Bank can influence the direction and size of credit offered to the private sector. There is evidence that all three locally owned banks have reacted and have included more risk free assets in their portfolio. None went as far as Republic Bank in altering the mix of income-generating assets. The Citizen’s Bank, for example, had 59 percent of income-generating assets in the form of loans and advances while GBTI, the largest of the locally owned banks, had 43 percent of its income-generating portfolio in loans and advances. Both of these figures showed increases over the previous year though they were not as high as they were at the time of the merger of NBIC and GNCB.
Financial Flexibility
The business strategy pursued by Republic Bank did not produce impressive results in 2007 over 2006. Even though the banking Goliath keeps a watchful eye on its shareholders’ money, return on equity declined by about seven percent in 2007 compared to 2006. In addition, it may be experiencing trouble managing its assets very well compared to the other banks. Republic Bank reported a return on assets of 1.61 percent in 2007 compared to 2 percent for GBTI and 1.48 percent for Citizen’s Bank even though the latter was still dealing with the fallout from dishonoured government bonds. Further, the dividend yield or rate of return on each share was 3.9% compared to 5.5% a year earlier. Thus, it was something of a surprise to see the stock price of Republic Bank gain a full 100 percent in 2007 on the price of the previous year.
But Republic Bank has nothing to fear just yet. It has the financial flexibility to increase its income-generating assets. Unlike those banks with small wiggle room, Republic Bank can tap into the large amount of unused customer deposits at its disposal. This means that Republic Bank is in a position to withstand a mild decline in customer deposits without damaging its income-generating ability. The availability of customer deposits is predicated on the assumption that the required reserves will remain unchanged at 12 percent, even though this should not matter since the reserve requirement constrains all banks equally. Moreover, Republic Bank can always turn to its parent for help.
