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.
By Rawle Lucas
Well Protected
By any measure, Republic Bank (Guyana) remains the largest and most powerful commercial banking institution in Guyana. Despite stiff competition from its nearest locally owned rival, Guyana Bank for Trade and Industry (GBTI), Republic Bank is in firm control of the banking arena in the country. In a family relationship, Republic Bank (Guyana) would be the grown-up grandchild of CL Financial and an adult child of Republic Bank, both institutions of Trinidad and Tobago and of Clico fame. The well-protected subsidiary reached this position of strength through a corporate strategy of business acquisition and a business strategy that favors investments over loans and advances. It continued to use this business strategy in 2008 to solidify its position in the Guyana banking industry and to stave off formidable challenges from its rivals, especially GBTI.
Epicenter
Comparing the behaviour of its stock price to that of GBTI, it is hard to believe that Republic Bank successfully expanded its customer base last year. It was able to increase its customer base by 12 percent and now has over 160,000 accounts, an amount equivalent to more than half of the active labour force of Guyana. The size and strength of this company is of such that it is likely that one in every two working Guyanese has a relationship with it. With such a large number of accounts, Republic Bank stands at the epicenter of the financial lives of Guyanese and controls as much as 48 percent of all the money that they deposit in the banks. Its nearest rival, GBTI, controls about 26 percent of the deposits while Demerara Bank Limited and Citizens control about 14 and 12 percent respectively.
The dominance of Republic Bank does not stop there. It claims 47 percent of the assets held by the four local banks. At a distant second is GBTI with 27 percent of the assets. Rounding off the remaining two spots are Demerara with 14 percent control and Citizens with 13 percent control. With that amount of control, Republic Bank ensures that no merger or combination of any two banks can easily surpass its income generating potential. As a further reflection of its power, Republic Bank is responsible for about 42 percent of the loans outstanding and 56 percent of the investments under the control of the four banks. These are all signs that, barring any self-inflicted catastrophe, Republic Bank will remain the preeminent commercial banking institution in Guyana for a long time.
Business Strategy
Despite having similar attributes, each bank pursues a different strategy as it competes for the business of Guyanese customers. Citizens, for example, use 87 percent of its deposits to create income-generating assets. It is the smallest of the four banks and has shown a tendency to put more emphasis on making loans and advances as against investing the money in public and private securities. In its attempt to maximize it profits, Republic Bank, on the other hand, utilizes over 82 percent of customer deposits to create income-generating assets. In contrast to the other banks, Republic Bank places greater emphasis on its investment interests than on loans and advances to its customers. It holds over 50 percent of its deposits in investment assets while using only about 30 percent of deposits for loans and advances.
This business strategy is at odds with Republic Bank’s corporate value system of showing confidence in “customers, suppliers … the general public” and its intent to support the Guyana economy as expressed in its annual report. Despite the market power inherent in its customer base, deposit size and asset portfolio, the business strategy of Republic Bank might be of little value to the borrowing public. With its money tied up in investments and foreign currency trading, Guyanese consumers and businesses are left with the short end of the stick. This misalignment of its portfolio shows up in its bottom line and in the Guyana stock market.
In many important market indicators, Republic Bank lags behind its rivals. For example, its stock price is lower than that of GBTI. In addition, its earnings-per-share (EPS) is lower than that of GBTI and Citizens. There is no doubt from its performance in 2008 that Republic Bank has begun to turn things around and is strengthening its ability to use its assets more efficiently. Return on assets is on the upswing and is no longer falling. Similarly, return on equity has taken a turn for the better.
Right Balance
Investors of the Republic Bank must feel good about the positive turn of events. Two things may have helped to alter the fortunes of the bank. It is clear from its annual report that Republic Bank increased its loan to deposit ratio. The impact of this shift in emphasis still requires full investigation. Early assessments show that Republic Bank earned 17 percent return on every dollar used on loans as against 9 percent from every dollar invested outside the loan portfolio. In addition, the marginal revenue earned from loans and advances averaged about 22 percent per year for the last five years compared to 9 percent for investments. These comparative yields demonstrate the importance of getting the balance right in the portfolio mix in order to achieve improved performance. There is no doubt that the bank has got to be careful with depositors’ money but putting more money into loans and advances could help improve the bank’s bottom line.
The other possible contributing factor to the 2008 financial success of Republic Bank is improvements in productivity. For every dollar spent on staff costs last year, it earned $1.30 in net income compared to one dollar in 2007. Further evidence of its improved productivity is seen in the return per account. Republic Bank earned nearly $10,000 per account last year, a 21 percent increase over 2007, a year that saw a mere 5 percent improvement over 2006.
Uncertainty
Despite the evidence, it does not look as if Republic Bank went far enough in realigning its portfolio of assets. It appears to persist with a business strategy that crowds out consumer and business spending with the result that loans and advances to consumers and businesses continue to lag behind investment in other assets. The strategy being pursued by Republic Bank may be good for its corporate personality but appears also to reflect a sensitivity and uncertainty about the tenuous political, economic and security situation in Guyana.
