Sheer size
Republic Bank (Guyana) ended 2014 with net assets of $13.6 billion. Also, it had 202,992 accounts, $129 billion in assets and $113 billion in deposits under its control. With those numbers, Republic Bank remains the largest bank in Guyana. Beyond that, the market felt that the company was worth far more and gave it a valuation of $35 billion, about two-and-a-half times more than its book value. The market valuation of the bank solidifies the view that Republic Bank is the largest commercial bank in Guyana. Over the next three weeks, an evaluation of the performance of the remaining three commercial banks that are part of the Lucas Stock Index (LSI) will be undertaken. From its sheer size, one would regard Republic Bank as a leader in the financial services industry. Its growth and expansion keep it ahead of the rest of the competition and a frontrunner of the industry. As such, this week’s assessment starts with Republic Bank (Guyana) since it remains a dominant force in the banking industry in the country and a study of its business strategy could offer useful insights into the challenges, opportunities and condition of the banking industry in Guyana.
This most likely is the last annual report of the bank with John Alves as Managing Director as he is scheduled to leave the organization in June of this year. As he does so, the profile of the bank presents an overall picture of stability even though one could observe periodic fluctuations in performance. Such a contrasting performance is evident between the years of 2013 and 2014. For the most recent year of reporting, Republic Bank (Guyana) generated profits of $3.6 billion before taxation in 2014 as against $3.7 billion in the prior year. This discussion considers the profit before tax because that is a true reflection of the results from the operation of the company and not the consequence of any favourable tax treatment. An institutional analysis would reveal that some factors internal to the management of the enterprise were responsible for the lower income as reported in 2014. However, declines in export revenues and poor economic performance of key industries in the Guyana economy did not help. They, along with poor political management, conspired to undermine the investment climate in the country. Further, serious burdens imposed on the financial activities of the bank from the use of countermeasures by foreign business entities could have contributed to the moderate performance and the conservative profile that some of its activity ratios reveal. The latter concern would be considered further down in this article.
Performed well
The perspective of a comparatively unfavourable performance of the bank in 2014 emerges from contrasting its income-generating operations with its efforts to build operational capacity. Both were done in the common interest of the organization, but one produced immediate results while the impact of the other could only be seen over time. In making the comparison, it would be observed that the bank actually performed well in its core business. Two factors support the observation. The principal source of the bank’s income is the interest that it earns on the money that it lends to various customers. The data reveal that the interest income earned on the money that it lent rose eight per cent above that of 2013. The problem clearly had nothing to do with the ability of the bank to generate income. Further evidence of this position emerges when interest expense is taken into account. The cost of borrowing went down sharply, falling by 11 per cent when compared to the year 2013. The question then becomes what provoked the decline in performance?
Present danger
The Lucas Stock Index (LSI) rose 0.54 percent in trading during the second period of March 2015. The stocks of five companies were traded with 406,554 shares changing hands. There were two Climbers and no Tumblers. The Climbers were Demerara Distillers Limited (DDL) whose stock rose 4.17 percent on the sale of 253,990 shares and Republic Bank Limited (RBL) whose stock rose 0.08 percent on the sale of 60,308 shares. In the meanwhile, the value of the stocks of Banks DIH (DIH), Caribbean Container Inc., and Demerara Tobacco Company (DTC) remained unchanged on the sale of 90,078; 1,050 and 1,128 shares respectively.
The answer could be found in two areas, one of which is always an ever present danger to a bank. Banks make their income from lending money to borrowers. But not all debtors are able to repay their loans on time, and this factor emerged as a significant one for Republic Bank in 2014. The deterioration in the quality of loans held by the bank rose significantly. The value of loans that were impaired in 2013 was $1.4 billion. That figure rose 107 per cent to $2.9 billion in 2014. The higher amount of loan impairment resulted in the inclusion of a significantly higher amount towards bad debt expense. As a consequence, the cost of bad debt rose 137 per cent over the 2013 period.
The other reason for the lower income before tax was linked to the expansion of the operations of the company. The company added a new banking office to its operations. In addition, Republic Bank increased its staff strength by nearly four per cent. The additional cost associated with growth in staff strength contributed to the lower income reported by the company.
Reluctant
Republic Bank continues to grow. It added over 6,000 new accounts to its portfolio last year. In addition, the bank plans to open a new branch on the East Coast this year. The bank also plans to strengthen its technological infrastructure in order to serve its customers better. Despite the growth in its customer base and branch network, one gets the feeling that Republic Bank has been reluctant to unleash the might of its banking power in Guyana. In reviewing data published by the Bank of Guyana for 2014, one gets the impression that Republic Bank was holding back. Compared to other banks in Guyana, Republic Bank had the lowest loan-to-deposits and loan-to-assets ratios. These are indicators that the bank is not confident about the market opportunities. It was not willing to lend as much of its deposits as other banks were doing.
Significant deficiencies
This observation is made with the realization that Guyana does not offer the most favourable environment for economic investment. Corruption, bureaucratic interference and high levels of income inequality plague the economic landscape. The factors of corruption and bureaucratic interference result in a higher cost of doing business while income inequality reduces opportunities for greater participation in the economic and financial system by the less endowed. In addition, the bank, like other commercial banks in Guyana, is concerned about the absence of agreed legislation that responds to national and international concerns about money laundering and the financing of terrorism. Guyana remains a country with significant deficiencies in the area of fighting money laundering and this weighs heavily on the mind of the organization as observed by the Chairman of the bank in the 2014 annual report.
Business strategy
Against this background, the question could be asked what business strategy is being employed by Republic Bank to keep its leadership position and competitive edge in the financial sector in Guyana? The answer lies in the asset-liability management of the enterprise. This is indeed the place where banks typically display their strengths and weaknesses. Republic Bank has gradually increased the share of its deposits that it places in long-term investments. For example, in 2012 Republic Bank had about 34 per cent of its deposits in long-term assets. That figure rose marginally in 2013 to 36 per cent. In 2014, the share of deposits that were in long-term investments rose to 42 per cent, suggesting that the bank believed that the Guyana economy would continue to expand and the demand for loans would be buoyant.
Marked shift
With this marked shift in strategy towards placing greater emphasis on long-term investment, there is greater need for the bank to pay closer attention to the risk management policies. Indeed, these form an ongoing part of the asset-liability management of the entity. Risk assessment and management involve credit risk, default risk, market risk and liquidity risk. While all types of risk matter, liquidity risk is the one that a bank faces on a daily basis. Liquidity is a critical factor in the banking business because of the need to meet the demand of depositors for their money. At any time depositors could approach a bank for their money and if the bank is unable to respond favourably to their demands, it could spell further trouble. There could be a run on the bank with disastrous consequences for the entire economy. So liquidity risk is a very important variable in the life of any bank.
The strategy of the bank is to keep a reasonable amount of customer deposits on hand. It is one way of taking care of its liquidity needs. Beyond that the bank keeps a facility with correspondent banks on which it could draw in the event of such a need. A review of the cash and equivalents reveals that Treasury Bills make up a substantial part of the current assets held by Republic Bank. In fact, Treasury Bills represent over 80 per cent of the cash and equivalents when the restricted statutory deposits of the bank are removed from the item. This high ratio reflects the dependence on Treasury Bills as its primary means of managing short-term liquidity.
Top of the ladder
Republic Bank believes that by improving its customer service and building up its technological strength, it would be able to continue grow its operations. The departing Managing Director could be satisfied with such a focus because it lays the foundation for strong performance in the future. The success of this strategy depends on its ability to maintain a healthy spread between interest revenues and interest cost. Success at managing its risk factors would also play a critical role in the process. This necessity is in addition to the Guyana economy experiencing faster growth and greater political stability. With its emphasis on human resource development, it is likely that Republic Bank would remain at the top of the banking ladder in Guyana for many more years.
