Today we publish a guest business column by Robert V McRae, CPA
Come Tuesday afternoon the Guyana Bank for Trade and Industry (GBTI) will be holding its 21st Annual General Meeting at the Pegasus Hotel, a stone’s throw from where it is constructing a new multi-storey head office. The results of the bank for the year continue a trend of excellent performance by the banking sector during 2008 with GBTI’s profit before tax topping the billion dollar mark, increasing by 14% to $1.1B and profit after tax by 18% to $941M. The satisfaction in the results is reflected in the glowing reports by the Chairman Mr Robin Stoby SC, and Mr RK Sharma, CEO, as well as in the self-congratulatory Statement on Corporate Governance about the technical competence, time, communications skill and integrity of the directors.
The Annual Report is once again well laid out with lots of pictures, charts and tables, although unfortunately some of the charts are unlabelled or the descriptions are incomplete; in one case the text has been partially over-written by a photograph while an important paragraph was cut midway in the Chairman’s report.
In his report for the year Chairman Stoby wrote about the second half of 2008 in the future tense while Chief Executive Officer Mr Sharma offers banking statistics that are several months out of date. Up-to-date information would have been so much more relevant and meaningful.
Highlights
2007 2008 Change
G$ M G$ M G$ M %
Net Income before taxes 976 1,120 144 14.75
Net Income after taxes 796 941 145 18.22
Total Assets 42,981 49,311 6,330 1 4.73
Total Deposits 37,408 40,987 3,579 9.57
Loans & Advances 9,745 12,833 3,088 31.69
Return on Average Assets % 2.02 2.04
Return on Average Equity % 20.01 21.01
Earnings per share $ 19.89 23.52 4.63 18.25
Dividend per share 5.00 6.00 1.00 20.00
Payout ratio 25.13 25.51
As Chairman Stoby points out the dividend of $6 per share proposed by the directors is the highest in the bank’s history. Yet this represents a mere 25.51% of the year’s distributable profits compared with 25.13% in 2007. Earnings per share grew by 18.25% over 2007 and a whopping 256.9% over 2004. With the company’s shares trading at $130, the P/E ratio, a popular investment measure, is an attractive 5.5. With increased profits, other measures such as Return on Average Assets and Average Equity have also improved over the year and the past four years.
Measured in terms of share price at the beginning of the year, shareholders receive a return of 41.7% in dividends and capital appreciation, while depositors of interest bearing accounts earned 3.5% (same as 2007) and the average interest earned by all depositors remained constant at 2.6%. With official inflation for 2008 running at 6.4%, the purchasing power of depositors’ funds was actually less than at the beginning of the year.
The interest earned on average loans held declined from 12.4% and 11.7% (15.1% to 13.4% if calculated on balance sheet values) and because the rate of interest paid remained constant, net interest cover declined slightly from 1.75 to 1.65. Once again a major source of income is Foreign Exchange Trading Gains which amounted to $663M or 25% of interest income, up slightly over the previous year. With an increasing share of its assets invested abroad interest earned on foreign bank deposits was $412M, up from $336M in 2007.
Distribution of assets
Of the total of $49.3B of assets, cash and cash resources accounted for 52%; loans and advances 26%; investments 12%; and the remaining 10% held in the form of fixed and other assets. The major borrowing sectors were trade and distribution (41%); agriculture (21%); household (15%); manufacturing (17%); and mining and quarrying (6%). The bias in the lending portfolio reflects the bank’s lending strategy based, as it states, on Quality Lifestyle and Commercial Loans. In fact the lending to the agriculture sector would have been less than half had it not been for a $1.8B facility from the European Union to improve the rice sector. In 2007, agriculture accounted for a mere 7.6% of the bank’s loan portfolio, down from the 9% in 2006.
Cash resources ($12B) are made up principally of deposits with other banks and investments ($11.5B). For what appears to be tax reasons, the cash resources are invested almost entirely outside of Guyana while the investments are mainly in Government of Guyana Treasury Bills.
The logic that dictates that insurance companies invest the bulk of their funds in Guyana while commercial banks are free to do otherwise should interest the country’s policymakers having regard to the new Caricom Single Market and Economy rules.
Effective tax rate
Two years ago the bank’s effective corporation tax rate was 33.1% but this fell to 16.6% in 2007. It has now fallen further to 13.6% in 2008. The reader would be forgiven for being surprised by the disparity between the nominal corporation tax rate of 45% and the 13% rate paid by the bank. The explanation lies in the opportunities offered by the tax laws, including the Caricom Double Taxation Treaty, to exclude from or significantly reduce the rate of tax on certain income. That treaty provides that the interest earned in any of the Caricom states by a resident of Guyana is exempt from tax in Guyana. The interest income which can be earned in the region ranges from zero per cent to no more than 20% so that the treaty made in 1994 and reinforced by the Revised Treaty of Chaguaramas actually rewards banks for taking Guyanese depositors’ funds and investing them overseas.
If Guyana would pay any interest to tax policy it would see how dysfunctional our tax system is. Not only does it reward such practices but adds to them by allowing additional types of interest earned by banks to be exempt from taxation − low income housing and rescheduled debts being the more common examples. Yet the law allows, without limitation, all the expenses incurred in earning tax-free interest to be deductible against the remaining taxable income.
In addition, dividends are tax-free because of a popular assumption that the income out of which dividends are paid has already been taxed. Not only does such a misconception ignore the fundamental concept of source to taxation, but GBTI is one example of the extent to which practice can vitiate logic. Even if we assume that the company is a proxy for the shareholder then the shareholders of the bank would be enjoying an effective tax rate of 13% in 2008 while employees are taxed at 33.33% and a further 5.2% (subject to a ceiling) for NIS, and depositors pay a final withholding tax of 20% on interest earned. Unfortunately this and similar information are entirely missing from the sporadic debate on tax reform which is often shallow and easily dismissed by the government.
Governance
During 2007 the company appointed two new directors, Messrs Michael Cummings and Carlton James, about whom nothing is stated in the Annual Report, bringing the total to ten. The full-page Statement on Corporate Governance speaks of the bank’s sound exercise of corporate governance and identifies only a single committee considered necessary for this. This is the Audit Committee about whose operation during the year little is said. Of a board of ten there are only two executive directors, but only five of the directors are independent. In the case of the Chairman, his law firm is retained to do a range of legal work for the bank and its customers. It is time for this approach to legal work to be discontinued and borrowers be allowed to retain counsel of their choice using standard forms agreed by lenders and the legal profession.
The blog and the BoG
In late February a post on a blog alleged that the bank had applied for a billion-dollar bail-out. The Bank of Guyana reacted swiftly and “categorically denied” that it had been approached by the GBTI for liquidity support. In fact, the Annual Report states at page 55 that GBTI had overnight borrowing of $1.5B from the Bank of Guyana. Surely this could not have been done without an approach and makes the categorical denial by the BoG at best misleading.
In addition, the report shows that GBTI failed to meet its reserve requirement with the Bank of Guyana at consecutive year ends. A shortfall (described as a negative excess in the accounts) of $2.431B at 31.12.07 increased to over $4.078B at 31.12.08. This is a clear breach of the law, represents an unauthorised advance to GBTI by the BoG, is probably interest free and of course constitutes unfair competition. The reserve requirement is a form of insurance for depositors and its “negative excess” constitutes an arbitrary and unauthorised reduction by the bank which the BoG should not tolerate. It should have long instructed the bank to come into line, enforcing such penalties and interest as appropriate.