Tag: GBTI

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On the Line: GBTI Half-year and Stockfeeds 2008

Introduction
In today’s Business Page we look at two reports – one on full year 2008 of the Guyana Stockfeeds Inc, published under the Companies Act 1991, and the other the half-year report of the Guyana Bank for Trade and Industry (GBTI) published under the Securities Industry Act, 1998. Because of the significantly different nature of the operations and the nature of the financial information and period ends of the two entities, no useful comparisons can be drawn and the appearance of the two reports in the same column is entirely co-incidental. Indeed, if any comparison can be drawn it is the poor quality of the editing that goes into these reports, leaving major errors, sometimes in the financial statements themselves, at other times in the narrative reports and yet others in both. For GBTI some of these were pointed out in a guest column in these pages by Robert McRae CPA on the 2008 Annual Report of the bank.

Such errors are often attributed to difficulties with printers but neither the management nor the auditors can absolve themselves from their duty to members and the public to have annual reports and accounts that meet minimum quality standards.

Guyana Stockfeeds Inc.

Highlights

2009.08.23_table1

Despite what the Chairman referred to as “enormous challenges” the company recorded an increase in turnover of some 38% with sales of rice doubling while feed sales and hatchery sales increased by a more modest 29% and 21% respectively. As expected the Chairman was particularly pleased about the performance of the company’s brand of parboiled rice ‘Angel’ on the export Caricom market.

Of the net income for the year of $123M, after allowing for deferred taxation, the company proposes $60M in dividends or 49%. Dividends of $96M in respect of 2007, of which 50% is payable in additional shares, remain outstanding. The payment of dividends by the issue of shares was not effected as a result of a court matter with the National Industrial and Commercial Investment Limited.

How the company intends to fund the cash portion of dividends totalling over $100M is, however, not quite clear as the company’s liquidity position has deteriorated with the bank overdraft more than doubling to just under half a billion dollars and current liabilities other than dividends increasing over the 12-month period from $597M to $1,069M. Interestingly note 12 of the financial statements indicates that the company had exceeded its overdraft limit of $440M by more than $40M.

As is so common with public companies in Guyana, there is no mention in the annual report or the Chairman’s Report on the performance on the Stock Exchange of the company’s shares, although this may be entirely due to the fact that there is practically no trading in the company’s shares and that the company is developing into a family company with three of the top positions – CEO, corporate secretarial and finance – being held by members of the same family, which also holds some 69 million of the 80 million shares issued. This company is evidence of the permanent failure of the government’s privatisation policy, driven more by maximising short-term returns than long-term economic democracy. In all the government’s boast about macro-economic fundamentals, it does not appear to recognise that it has divested some highly profitable entities and has little to show for the proceeds. It is too late now for it to review the Privatisation Policy Paper issued under the presidency of Dr Cheddi Jagan, although it was under his presidency that we first saw the departure from policy under then Finance Minister Asgar Ally.

Accounting weaknesses
An observer of accounting and other disclosure requirements would find much of interest in terms of the contents of the Annual Report and the quality of the financial statements, even ignoring an obvious error of $400 million on the face of the balance sheet, which some may regard as the most important of the financial statements. These relate to the dating of the auditor’s report before the financial statements were even approved by the board, inconsistency in particulars about who the company recognises as key management personnel, disclosure about shareholdings, actuarial valuations and tax reconciliations.

That the company continues to pay US$50,000 management fees to a similarly named Trinidad and Tobago company for the payment of expenses on its behalf has continued to attract negative comments, since the logic and business purpose is not immediately apparent. On the other hand, the low effective tax rate suggests that the Revenue accepts the charge as reasonable having regard to the company’s business.

GBTI
In contrast to the financial statements discussed above, those of the GBTI are unaudited and cover the half-year only. In addition, there is no requirement for an Accountant’s Review or notes explaining the policies and judgmental matters relating to key financial statement items, and it is probably these limitations that explain the apparent lack of interest by the public and the business community in such half-yearly reports. Such statements should not be disregarded, since it must be assumed that they result from the accounting records prepared, subject to the limitations identified, in accordance with acceptable accounting standards.

Highlights

2009.08.23_table2

The bank’s performance for the half-year continues a run of excellent results not only for GBTI but indeed for all the commercial banks over the past three years. As the table above shows the bank has increased both deposits and loans, but with a barely discernible increase in the loan to deposit ratio. Our banks are performing so well that any observer of our banking sector would be bemused if told about a global financial crisis, although the anecdotal and empirical evidence is that the non-financial sector is having a lean time. We should therefore be anticipating with interest the publication of the 2009 mid-year report by the Minister of Finance which is unfortunately again late.

Net income before taxes has increased by a whopping 26% over the corresponding period in 2008, while the amount of $164.8M stated as Corporation Tax is the equivalent of 23% of net income. This represents a significant increase in corresponding equivalent percentage for 2008 when it was less than 9% and in the low teens for full-year 2008. This increase is so significant both for the corresponding period in 2008 as well as full year 2008 that we can only wait on the audited full year for some more evidence of such a dramatic swing over such a short period.

Tax policy
Robert McRae, CPA who did a guest column on the bank’s 2008 annual report had drawn attention to the bank’s effective tax rate and how little our economic managers seem to know or care about tax policy. A significant part of the problem is the VAT, a tax borne not by businesses but by consumers of goods and services. Guyana is stuck with a hugely miscalculated VAT rate that has masked any other concern that the government may have had about revenue collection.

In his column McRae had also raised the ire of the bank and the Bank of Guyana when he drew attention to a transaction between the bank and the Bank of Guyana, particularly in the context that the bank had for a second straight year had a significant deficit on its statutory reserve with the central bank.

The Bank of Guyana with unusual speed and generalisation reacted to the column but significantly has refused to answer some specific questions raised publicly by McRae. While commercial banks are, and indeed every person is, entitled to responsible financial reporting, they have a duty to respond to legitimate questions from the public on issues touching on their operations.

GBTI’s Chairman Stoby was noticeably pleased with the results and is upbeat about the bank’s performance for the second half of the year. Those results will certainly be eagerly awaited, but before then we will have some of the other banks including Republic Bank which has a September 30 year end. It will be an interesting period.

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On the Line: Guyana Bank for Trade and Industry Annual Report 2008 – revisited

Guest business column by Robert V McRae, CPA

Background
Several weeks ago the Bank of Guyana (BoG) publicly and the Guyana Bank for Trade and Industry (GBTI) management privately in a letter to me, responded to a guest Business Page published in Stabroek News of April 12, 2009 under my name. Unfortunately, personal commitments precluded me from addressing this matter earlier and for this I apologise.

Of specific concern to both entities were two paragraphs under the caption ‘The blog and the BoG.’ The two paragraphs contained information derived from the Annual Report of the bank and merely raised legitimate questions over the original response to the blog, particularly why it did not acknowledge the overnight borrowing by the bank or the deficiency in the statutory reserve requirement of more than $4B at December 31, 2008. After the column had raised the matter the Bank of Guyana advised that the shortfall was “authorised,” a fact that was not evident prior to its public statement.

Overnight borrowing
While the BoG must be commended for its prompt dispelling of any doubt surrounding the bailout claim, it should have at the time acknowledged the approach for the overnight facility while asserting that transactions of a similar nature were not unusual. This was clearly an unnecessary and unfortunate omission that did little to help the cause it was seeking to promote.

In its direct response to me, the management of GBTI has correctly made the point that the BoG’s half year report 2008 reveals sixty-three trades in the inter-bank market with the value of funds traded totalling $20.4B. It is of interest to note that the average value of these trades is approximately $324M, so in terms of its magnitude, that specific transaction of $1.5B by itself must be considered unique and therefore warranting more explanation than was provided.

Reserve requirement deficiency
The second issue and the reference to the deficiency in the reserve requirement was that maintenance of this reserve is a statutory requirement and nowhere in the financial statements could the reader deduce from what date or why this shortfall had occurred, nor was there any indication whether the situation had been corrected, as was the case in the Bank’s 2007 annual report, (It has since been revealed by the BoG press release that the 2008 shortfall was corrected.)

Indeed, financial reporting standards which specify that, “if the quantitative data disclosed at the end of the reporting period are unrepresentative of the company’s exposure to risk during the period, an entity shall provide further information that is representative,” would seem to make such disclosures mandatory – another unhelpful omission.

Bank of Guyana press release
The press release also refers to discretion which the Bank of Guyana is allowed to exercise in these matters. As far as this writer is aware, discretion exists in the relevant legislation only with respect to the imposition of penalties for deficiency in the reserve requirement, and does not allow for authorisation of what is tantamount to a breach of law. Consequently it appears that the BoG acted without authority.

In the current economic climate the BoG must not only be seen to be acting promptly but it must also act impartially, and if it does engage in a public issue it must ensure it does so fully, fairly and completely.

It would have been extremely helpful and enlightening for BoG to have addressed the following:

1. The number of shortfalls in reserve requirements during 2007 and 2008 and the number of entities involved.

2. The circumstances in which BOG would “approve” a breach of the statutory reserve requirement by a financial institution.

3. GBTI management has indicated that the transactions resulting in the reserve requirement deficiency at the end of 2007 and 2008 were similar. The BoG should confirm whether it granted a similar “approval” in 2007 for the breach of the reserve requirement, and cite the specific authority for any such approval.

Conclusion
Nowhere in the earlier column was there any attempt to give credence to the spurious claim by the blog that the GBTI required a bailout, nor any question raised about the financial soundness of the bank.

As a public company, whether the management of GBTI disapproves or not, any member of the public is entitled to seek clarification of any matter on which there is inadequate or no information. Financial statements are only as good as the information they contain and the users can only draw conclusions based on what is disclosed. Rather than leave unanswered questions, the management of all public companies and most especially financial institutions should lean towards more helpful rather than less disclosure unless confidentiality or competitiveness will be compromised.

The questions raised in the article go to the heart of transparency, accountability and fairness. The BoG must avoid any appearance that it favours one institution over others and ought not to overlook, in matters of this nature, the implications for its role as an independent, supervisory watchdog over the sector.

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On the line: Guyana Bank for Trade and Industry Annual Report 2008

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
Highlights

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.

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On the line – Demerara Tobacco Company Limited and Guyana Bank for Trade and Industry 2007

Introduction

Over the course of the next two days corporate Guyana will come alive with annual general meetings scheduled to be held by two of the country’s public companies. Demerara Tobacco Company Limited (Demtoco), a subsidiary of the British American Tobacco, plc. will have its meeting on March 31 and one day later on April 1, the Guyana Bank of Trade and Industry (GBTI), a 61% subsidiary of Edward B. Beharry and Company Limited, will have its annual general meeting. The Companies Act 1991 allows companies six months to hold their AGMs and the companies are to be commended for their early meetings.

GBTI reports a 57% increase in after tax income for 2007 coming after a 51% increase in 2006 while Demtoco has had more modest increases, 34% in 2007 and 14% in 2006. By any measure these are extremely impressive results which are reflected in the performance of the companies’ share prices over the past three years and provide returns that ironically make bank deposits seem correspondingly unattractive. The average deposit account at the GBTI yielded a return of 3.5% while an investor in the shares of the bank earned 33% (26% of which represents capital appreciation) on his shares.

With inflation close to 15% in 2007, the depositor would have seen the real value of his/her deposit decline by about 12% while the investor’s return, which includes cash income by way of dividends and the increase in the market price for the share, amounts to a healthy 16%.

The lesson is that it is far more attractive to own shares in a reasonably profitable company than to put money in a bank account. The Guyana Stock Exchange (GSE) has not had the desired effect of increasing the number of public companies and with most of Guyana’s public companies being held by controlling shareholders the options for investment in Guyanese companies are limited. But with the removal of exchange controls, the operation of the CARICOM Double Taxation Treaty and the introduction of the CARICOM Single Market and Economy (CSME), there is no reason for limiting the options to Guyana.

It is true that the GSE has outperformed the regional exchanges since its inception in 2003 but much of that is due to what are called market corrections which are unlikely to continue unless all the companies on the Guyana Exchange can match the 2007 performance of Demtoco and GBTI.

Graph of share price movements

Source: The Guyana Association of Securities Companies and Intermediaries Inc., weekly trading reports

Demtoco

Turnover has barely managed to keep abreast with inflation increasing by 16% but the increase in the profit after tax is due to a 30% increase in gross profit – sales less cost of sales – as a result of two price increases in the year which unlike the increases in the price of rice and flour hardly earned a comment in the national press. There is little analysis offered by the Chairman in his one page report or by the Managing Director, neither of whom commented on any impact VAT may have had on the company’s product and performance. The company paid three interim dividends in 2007 amounting to $21.38 per share and is proposing to the shareholders a final dividend of $15.85 making a total of $37.23 giving shareholders a return of 17% on the average market price of the share during the year.

The group gets more however, having charged the company more than $600 million dollars for management services, royalties and technical and advisory services to what it is now no more than a marketing company. The company continues to justify a royalty for a product that can be bought almost anywhere outside of Guyana and seems able to justify exorbitant management services when all the company does is bring in a product sold mainly through at most a handful of distributors.

The balance sheet of the company shows a healthy situation with the company being able to make available to its fellow group companies more than $400 million dollars at the end of the year of which only 60% earns interest at the rate of 4% per annum.

Once again the company does not disclose the number of employees nor does it include anything on corporate governance. Readers will recall one past Country Manager publicly proclaiming defiance to any suggestion that it should comply with Corporate Governance Guidelines until these become legally binding prompting a rejoinder that corporate governance is not a matter of law but best practice (Stabroek News 22/5/04).

Financial Highlights

2007 2006

Change
G$M G$M G$M %
Gross turnover 4,574 3,933 641 16
Cost of sales (1,906) (1,880) (26) 1
Gross profit 2,668 2,053 615 30
Other operating income 20 18 2 12
Operating expenses (920) (772) (148) 19
Profit before taxation 1,768 1,299 469 36
Taxation (895) (648) (247) 38
Profit after taxation 873 651 222 34
Ordinary shares in issue (‘000) 23,400 23,400
Earnings per share (in dollars) 37.29 27.82
Dividends declared per share 37.23 27.75

GBTI

The report by GBTI is far more comprehensive than Demtoco’s, running to 86 pages of material and lots of pictures including two Ministers of Government. Unlike Demtoco the Bank produces a full page Statement on Corporate Governance and eye-catching Financial Highlights although the reader has to go through nineteen pages before s/he finds these.

All the indicators are positive in favour of the shareholders if not the depositors in the bank. Shareholders receive a return of 33% in dividends and capital appreciation, while depositors of interest bearing accounts earned 3.5% (3.4% in 2006) and the average of all depositors 2.6% (2.5% in 2006). Share prices during the year increased by 26% on an increase in earnings per share of 57% and if the bank’s outlook for itself and the economy is shared by investors, then it is quite possible that there will be a further movement in share prices over the next few months.

The company reports accumulated provision for loan losses amounting to 96% of its non-performing portfolio, having written off $831 million in 2006 but only $20 million in 2007. From a profit and loss account perspective the provision for loan losses declined by $70 million which has augmented the profits for the year.

Another contributor to the substantial after tax profits of the Bank is the reduced effective rate of tax it pays for the year – at 18% it is half the effective rate paid in 2006 and results from more than $300 million in interest earned being “not taxable”. The normal rate of corporation tax is 45% and if the effective rate had remained at 36%, after tax profits would be $170 million less.

Loans

A bank’s contribution to national development can be measured by its lending to key sectors of the economy. The sectoral analysis of the bank’s loan portfolio shows agriculture accounting for a mere 7.64%, a further reduction from the 9% in 2006. By contrast the share of the portfolio to the services sector has increased from 38% to 43%. Nationally agriculture accounts for approximately 25% of GDP. While the Bank was once considered the rice farmers’ bank (other than GNCB), some operators in the sector lament that the Bank has been taking a very harsh line on borrowers in the rice sector. Indeed this makes it somewhat paradoxical that the Bank won a bid to manage the EU G$1.6 billion facility to increase the efficiency and sustainability of the rice sector.

The loans to deposit ratio has declined slightly from 28% to 26% despite having won the bid and having received $825 million interest free under the Scheme. The Scheme comes to an end in June of this year but the annual report is unclear whether interest will then become payable on the amounts drawn down.

Highlights

2007 2006

Change
G$M G$M G$M %
Net Income before taxes 976 788 188 23.86
Net Income after taxes 796 506 290 57.25
Total assets 42,981 35,742 7,238 20.25
Total deposits 37,408 31,326 6,082 19.41
Loans and advances 9,745 8,745 1,000 11.43
Return on Average Assets % 2 1
Return on Average Equity % 66 42
Earnings per share $ 19.89 12.65

In their outlook for 2008 and beyond, the Chairman and the CEO were both upbeat about the prospects for the country, reflected in the extension of their branch network and new Head Office to be constructed during the year. Neither mentioned the events in Lusignan (January 26) or Bartica (February 17) and the consequential threats to the economy. It would be interesting to see which one of our two companies would be impacted more directly if the country does not solve events of that nature.

Finally, the results for both entities show how the tax system can be worked in favour of corporate taxpayers with the range of “tax shelters” that are available. Individuals, bound by a single personal allowance and a tax rate of 33⅓ %, can only read with envy.