Attention of management
As we continue the assessment of the performance of the commercial banks in Guyana, attention turns to Citizens Bank Incorporated (CBI). CBI has been under the control of Banks DIH for more than a decade following the acquisition of 51 per cent ownership by the latter. This effort seeks to understand the business strategy employed by the bank over the past year and to determine the extent to which that strategy affected the performance of the bank. Such an inquiry is useful because there is evidence from the data in the annual report that there were reversals in fortune in several areas of the bank’s operations last year. For example, the bank lost shareholder value in 2014 and would face challenges bringing it back up in the current year. In addition, statements by the Managing Director suggest too that some aspects of operations would require the attention of the bank’s management team.
Important challenge
This is an especially important challenge for CBI because it is the smallest of the four banks that are part of the Lucas Stock Index (LSI). CBI has $42 billion in assets and $33 billion in deposits. While the assets of the company grew about two per cent, customer deposits fell five per cent. Overall, however, the liabilities of the company fell about one per cent with the result that the book value of the company reached $6.5 billion in 2014. The movement in the book value of the company represented a 16 expansion in net assets. The market value of the bank was 1.3 times its book value or $8.6 billion.
Critical variable
The performance of the bank at best could be described as mixed. A critical variable is that of its interest income. The bank lives and dies by the income earned from interest. CBI was able to increase its interest income by 12 per cent over 2013. This was achieved in two ways. One was to increase the yield on its loans and investments. Just as important was the ability of the bank to reduce its interest expense. The downward movement in interest expense gave it scope to achieve a larger spread on its loans and advances.
While CBI demonstrated some strength in growing its income, there is some room for improvement in the quality of the assets that it holds. The trade-off between portfolio risk and revenue was not a good one for CBI in 2014. According to Bank of Guyana (BOG) data, CBI is one of three banks whose ratio of non-performing loans to gross loans was relatively high. At 8.78 per cent, the ratio even exceeded the industry average of 8.64 per cent. This was equally true of its non-performing loans to gross assets where the ratio at 6.34 per cent was also above the industry average of 4.17 per cent. Despite the challenges faced by the bank, it was able to turn a profit. As reported in its annual report for 2014, CBI earned a profit before tax of $1.6 billion which was statistically similar to what it earned in 2013. However, while the return on assets was slightly better than two other banks, CBI recorded the lowest return on equity (ROE) of all the banks. Not only was it the lowest, the ROE was even below that of the industry average which stood at 5.66 per cent at the end of 2014 according to the BOG.
Responsible manner
This performance imposes a challenge on the management of the bank to do better than it has done with the money of its shareholders. Shareholders entrust management with its money and resources and in exchange management promises to utilize those resources in a responsible manner. In exchange for the right to control shareholders’ money, management promises to be accountable to its shareholders. Management did not dwell on the low ROE in its annual report, but it must be a matter of concern to it since its earnings per share (EPS) were lower also, though marginally, by two per cent when compared to 2013. The shares of the bank also experienced significant change during 2014. The price declined about 56 per cent from its price at the end of 2013.
Despite the flat performance, the important metric of capital adequacy reveals that the bank is not in trouble. CBI’s capital adequacy ratio stood at 21.3 per cent at the end of 2013 as reported by the BOG. This level of capital protection is not only in line with the industry average in Guyana, but is even better than that of two other competitors, Republic Bank Limited and Guyana Bank for Trade and Industry. Yet, management still needs to be concerned about the performance of its assets and the strategies employed to utilize them.
Strategy
As indicated earlier, the assets of CBI grew by 2.4 per cent in 2014. The growth was greater among long-term assets as against short-term assets. Long-term assets grew 20 per cent while short-term assets fell by 17 per cent. This reconfiguration of the relationship between the assets suggests that the entity is facing important challenges in managing its assets. The strategy of the bank was to grow its long-term income-generating assets and its other productive capital. As a consequence, loans and advances increased by 22 per cent while the other productive capital increased by 28 per cent.
The expansion in long-term assets at the expense of short-term assets has resulted in CBI facing a wider liquidity gap than it did in 2013. This gap must also take account of the changes in the short-term asset portfolio. It is clear that the bank decided to reduce the amount of cash it would hold and increase the amount of receivables in an effort to expand business revenues. As a consequence, the receivables of the bank rose 117 per cent over what it was in 2013 while cash on hand declined 35 per cent. CBI also reduced its long-term investment in securities by 44 per cent in order to improve its performance. The liabilities of the bank also saw significant change from 2013. Not only did deposits decline, the bank also increased its holding of deposits with longer maturities. The amount at about $1 billion, though small, represents an important shift in the financing strategy of CBI. Judging from the asset turnover ratio which appeared stable at 6.2 per cent, the business strategy employed by CBI did not yield the kind of results that it was looking for.
Customer financing
The challenge for CBI is clearly not in the area of customer financing. CBI demonstrated this by achieving higher sales in 2014 over 2013. Though the evidence is limited, one could assume that CBI enjoys good relations with its customers. Gross revenues increased by as much as 26 per cent in 2014 when compared to 2013. The problem arose as a result of the operating expenses that the company incurred in the review period. No single variable was responsible for the higher operating expenses which increased 10 per cent over 2013. The Managing Director in his report observed that “increases in employees’ emoluments, inflationary increase in goods and services, depreciation and amortization, and general and administrative expenses” were all contributory factors to the higher operating expenses. It is an issue that must be addressed by the financial enterprise if it were to alter the fortunes of the company.
Long-term financing
Always of interest is how the bank goes about financing its long-term investments. As a bank, just like other banks, CBI relies on the deposits of customers to finance its income-generating operations. As could be seen from the liquidity gap, the short-term deposits were however insufficient to finance the long-term investments of CBI. The additional financing comes primarily from the internal resources of the bank. This practice is not uncommon among the large businesses in Guyana, even though Demerara Bank Limited tends to buck this trend.
The biggest contributor was the internal equity of CBI. The bank places emphasis on the retained earnings and the reserves that it holds for various purposes. Like other companies in Guyana, CBI relies on its internal resources to meet the financing needs of its operations. The implication here is that the performance of the bank is a direct function of the quality of management of CBI. The Managing Director acknowledges this responsibility and pointed to the need to improve several variables in the operations.
The buck stops here
Though not a problem, management recognizes everything starts and ends with customer financing. It has therefore pledged to improve customer relations during 2015. With a growing liquidity gap, management also pledges to improve its risk management. In addition to focusing on its human development, it is encouraging to see that management believes that the buck stops with it. As such, it has also pledged to engage in better corporate governance. These are important issues which should gain the sustained attention of management. If that occurs, CBI could improve its performance in 2015, assuming that all other things were equal.
