Tag: NBS

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The GT&T share sale (Conclusion) and the New Building Society

Introduction
In today’s Business Page I conclude the discussion started last week on the announcement by Dr Roger Luncheon that the government has sold the country’s 20% shareholding in the telecommunication company Guyana Telephone and Telegraph Company Limited (GT&T) to an unknown Chinese entity. The announcement came a few days after the 2012 Budget Speech which contained no mention of the sale negotiated by NICIL of which the Finance Minister is the Chairman.

Well we now know that the Chinese company is Datang, less known for its connection with the Chinese Liberation Army than for its development, production and sale of electronic information systems and equipment. Incredibly the company appears to have not had a formal meeting with the 80% shareholder, Atlantic Tele-Network of the USA and it will certainly be interesting to learn how the usually sceptical US Government will view a partnership of their company with the Chinese who do not have a good record as a respecter of intellectual property or confidentiality of information.

Under the Companies Act 1991, the ownership of the shares in the company will pass to Datang on the delivery to them of the transfer form and the share certificate. At that point, except that the government is the government, it would cease to have any interest in GT&T. Interestingly, at that point, the Government of Guyana’s rights under the 1991 agreement with ATN in relation to any share-ownership right shall cease. Datang will no doubt soon present itself to the GT&T management with the share certificate and transfer form in their hand for what will no doubt be a very useful exchange.

Last week we were told that the government is selling its interest for US$30 million of which US$25 million is to be paid immediately and the balance paid later. Meanwhile in a couple of weeks Datang will participate in an AGM at which dividends will be on the agenda. Unfortunately Mr Winston Brassington seems to have negotiated an agreement under which dividends that ought to come to the government will go to Datang! How eerily does history have a way of repeating itself! A not too dissimilar situation arose when the PNC administration sold Guyana Telecommunications Corporation with a bundle of cash in the bank. I wonder what those who then accused the PNC of being either careless or stupid would think of the Privatisation Board and the Cabinet for giving away US$2 million.

But that is not the only give-away. At US$30 million, the price for the shares is a significant markdown on what the shares are worth. GT&T is not a public company and its shares are not traded anywhere for their value to be determined. There are then two options. The first is to take all relevant factors into account, project the income of the company into the future and discount these into present day value. The alternative is to take a price earnings ratio (a vital tool used by investors) of the shares in a similar entity and, making adjustment for specific factors, apply a P/E ratio to the earnings of the company. Using that method I have arrived at a price of approximately US$40 million.

So we – or rather Drs Luncheon and Singh and other ministers along with Brassington have given away some US$12 million of the taxpayers’ money. They did the same when they waived some G$400 million of interest and preference dividend in the Berbice Bridge Company Inc so that the private sector entities could receive theirs.

The question why these gentlemen would have acted so recklessly and secretively probably has to do with the diversion of public funds from the Consolidated Fund to the illegally operating NICIL, all the directors on the Board of which are Cabinet members. That is unheard of anywhere in any self-respecting country, but is easily explainable as the creation of an illegal fund from which Cabinet can do as it pleases: pay over price for goods and services, divert, build white elephants, etc – all in complete violation of Articles 216 and 217 of the constitution. And to add some veneer of legality and acceptability to the saga, Dr Singh the Finance Minister, had the decision passed through the Privatisation Board of which Dr Singh is the Chairman!

These bright gentlemen have decided to bypass the constitution and do through the backdoor what they are not allowed to do through the front door.

On the Line: 2011 Annual Report of New Building Society
The editor reminded me that it is that time of the year when annual reports for companies and entities with a December 31 year end become available. Starting today with the 2011 Annual Report of the New Building Society (NBS) Business Page will review those reports well aware that other national economic issues will not wait. The page will try to offer a balance between the two.

The annual general meeting (AGM) of the NBS is slated for Saturday April 28 and will be held in the Society’s new head office in North Road, to which the Society moved a few weeks ago. It is to the credit of the institution that the move appears to have gone off quite smoothly, at least so far as the customers were concerned.

Readers will recall that the Society was brought under the Financial Institutions Act in August 2010 and the results for 2011 would have been the first full year since the new status. Surprisingly, however, there was only a passing reference to the impact of this is in the Chairman’s report: “It is also to be noted that notwithstanding the Society is currently governed under the New Building Society’s Act, Chapter 36:21, the Supervision by the Bank of Guyana, must be seen as a positive sign.” I am sure members would have liked to know the full impact, if any, the FIA has had on the Society in the absence of which the directors should have indicated whether they intend to take the full four years to come into full compliance with the provisions of the Financial Institutions Act.

Highlights

Source: 2011 audited financial statements

As the table above shows interest income from mortgages and other assets fell by 5% but interest paid on deposits declined by a dramatic 26% with the result that the net interest income increased by $229 million. Loss on exchange has again raised its ugly head after the directors resiled from a members’ decision to repatriate the moneys held in the UK and as a consequence the Society lost some $26 million following a $7 million loss in 2010.

Dr Nanda Gopaul, who has signalled his intent not to continue as Chairman of the Society following his appointment as a minister of the government, in his report announced a “record profit of $772M being made, an increase of 34% over the previous year.” According to Dr Gopaul this “was achieved despite reducing our mortgage rates for lower, middle and higher income mortgagors at the beginning of the year from 4.75%, 6.95% and 7.95% to 4.25%, 6.25% and 7.45% respectively.” That was only half the truth since the reduction in interest income was only $123 million. The real reason is obvious from the graph below that shows that while the returns on loans have declined from 7.3% in 2009 to 6.7% in 2011, the average interest paid to depositors declined dramatically from 4% to 2.7%!

It would have been helpful if either the Chairman or the CEO gave an explanation for the significant reduction in the Society’s deposit rates rather than have members speculate on whether the Society is carried away by the misnomer “profits” rather than surplus, or is seeking to discourage persons putting money into the Society which it is then unable to on-lend.

Returns on Loans, investments and deposits

Source: 2008 to 2011 audited financial statements

Assets and their returns

Source: 2010 and 2011 audited financial statements

The Society has increased its loan limit to $15 million subject to ministerial approval, which it says the Society is working towards making a reality, so that its financial resources can be more beneficially utilised to the advantage of members and customers.

In 2011, there was a net increase in the number of mortgage accounts of 276 while the Society disbursed mortgage advances for the year totalling $4.2B, another record, which was 43% higher than the previous year. At year end, the mortgage portfolio was 52% of Assets or 61% of Total Investors’ balances.

The Society continues to record its satisfaction in its investment in the Berbice Bridge Company Inc, which earned the Society a healthy return during the year and some 32% cumulatively. The Berbice Bridge commuters’ pain is the NBS’s members gain. While the financial logic of the decision to make the investment cannot be faulted, the amendment to the Act permitting the investment and the financial structure of the bridge transaction by the Jagdeo-Brassington team is one costly venture for the country’s taxpayers who have had to finance substantial tax concessions benefiting the bridge investors.

Statutory breach

Source: 2009 to 2011 audited financial statements

Two years ago, Business Page highlighted the breach of the proviso to section 7 (d) of the New Building Society Act. Despite this, the situation has deteriorated and the shortfall in mortgage assets has increased by 58%.

Next week, I will review the annual report of Demerara Distillers Limited, whose annual general meeting will be held on April 27, 2012.

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New Building Society in breach of its own Act

Introduction
The annual general meeting (AGM) of the New Building Society (NBS) returned to Georgetown after a two-year sojourn in Berbice. Unfortunately neither the press nor the directors of the Society made any report on the meeting which had its own moments of interest. Today’s column will try to fill that void. Once again the NBS Concerned Members were present, vocal and prominent. There were from the Office of the President big fishes, including letter writer Dr Randy Persaud, and small fishes. There were also some prominent figures who, like Dr Persaud, perform political functions and work in the public service. But it soon became apparent that while it is always good to have adequate members’ attendance, quality matters more than numbers, except when a vote is called and proxies can be pulled out.

Business Page two weeks ago had reviewed the 2009 financial performance and the balance sheet. While the financial statements were a major item on the agenda of the meeting, it is not necessary to discuss them here again.

Comical
Shortly after the meeting was called to order, Mr Cyril Walker, Secretary of the Concerned Members group questioned why the Society had not responded to a request from long-serving member for a copy of the minutes of the last AGM. Chairman Eileen Gopaul ruled him out of order, and that was that. This was not the first time that the indefatigable Ms Cox has suffered the indignity of her request for a copy of the minutes of a members’ meeting being ignored.

The meeting then moved to the report of the auditors. Apparently it did not strike the board and its Finance Committee headed by former Commissioner of Police Mr Floyd McDonald that the firm presenting the audit report – Maurice Solomon and Company – was not the same firm – Solomon and Parmesar – that the members had appointed on the board’s recommendation after the previous auditors had declined re-appointment after decades as the Society’s auditors. It would be hard to imagine a more comical situation in a regulated financial business controlling close to $40 billion in public funds.

Challenged on the matter, Chairman Gopaul spoke for about three minutes without making any logical, let alone, sense. As I write, I now realise how unmemorable that response was. The issue was more than a technical change of name as Dr Gopaul seemed to think. During 2009, the appointed firm had split down the middle with the departure of partner Harry Parmesar, FCCA, taking with him several key staff members. What the Audit Committee should have done was carry out a due diligence to satisfy itself that the firm had retained sufficient expertise and experience to undertake such a major audit. With no financial expertise among the directors, maybe they never thought about it. As Ramon Gaskin pointed out, there should have been some note to this effect in the report of the directors.

Corporate arrogance
The directors had proudly boasted that the results were the best ever for the Society, describing these as a 97% increase over 2008. While the Concerned Members suggested that the comparison was misleading, and the line for line increase was 9.6%, they did not dispute the actual profit in 2009. Instead, they proposed a rebate to specified classes of borrowers and adjustment to the borrowing rates, a common practice some years ago. The Society is a mutual organisation so the profits in practice belong to the members and like any corporate entity, the members are paid a dividend. The Chairman did not allow for this to be put to the members but promised that the directors would “look at it.”

Contributing to the profit comparison was a gain on exchange losses on UK investment in 2009 compared with a $200 million loss in 2008. Called to explain why a 2009 decision of the members that the UK investments be repatriated, Dr Gopaul asserted that it was not a decision but “a discussion.” He is possibly the only person whose recollection would have led him to that interpretation, but again members are powerless in the face of this corporate arrogance. So it seems the investments stand, waiting for the usual swings that have characterised the pound sterling for the better part of the last decade.

No estoppel in tax evasion
Two other corporate governance issues attracted much attention. Concerned Members argued that whatever may have been the practice in the past, there should be no pension scheme for directors, to which the Chairman asked, apparently rhetorically, whether directors were not workers. The only problem is that workers are subject to contracts of employment and their employment is subject to an age limit. The directors may also note that there is no contractual relationship and that the same body – the members – that voted pensions can also vote to end the scheme. This is a governance issue, not a dubious claim of worker rights.

The second was in relation to remuneration. The practice of the NBS has been to split the remuneration between fees and travelling – the one being taxable and the other presumed non-taxable. Dr Gopaul’s first response was that directors use their own vehicles to do NBS business and the second was that that the practice came from the days of “Ram” which prompted Gaskin to reply that there is no estoppel in tax evasion.

Statutory breach
There was a sustained exchange between this columnist and the Chairman and the Society’s CEO that exposed how little the bosses understand the New Building Society Act under which the Society operates. I asked Dr Gopaul for the statutory reference and further explanation for his statement in the annual report that the Society was “racing near to the lending limit.” I pleaded with him that the Society had already exceeded that limit and offered to move a motion for an amendment that would have begun the regularization process. Dr Gopaul would have none of it, pointing out that his own board, its auditors and the Bank of Guyana were all convinced that they were right and I was wrong.

I have since confirmed my interpretation with a source in the Bank of Guyana and am more convinced than ever, that the NBS at December 31, 2009 had breached the lending limit prescribed by section 7 of the NBS Act by $3.8 billion, as follows:

Application of the proviso to section 7 (d) of the New Building Society Act to the financial statements for the year ended 31 December 2009:

Despite being described in the annual report as an “uninformed little group of mischief makers and pseudo intellectuals,” Concerned Members take no pleasure in being proved right when the NBS is found to be in breach of its own Act. We believe however that the tardiness of the Minister of Finance in introducing legislation to bring the NBS under the regulatory oversight of the Bank of Guyana would have saved the NBS from this embarrassment.

Expel the…
If lack of understanding of its own Act by the board was not bad enough, their support for an amendment to the rules that would permit the NBS to expel a member at any time shows how mischievous or misinformed the board members are when it comes to serious issues. Originally, rule 13 only allowed the NBS to decline “to admit or continue a member” within one month of the payment of the entrance fee. That time restriction was removed on a motion under Any Other Business, fourteen days notice having been given.

Immediately after the motion was read by the new member, the Chairman sought to put it to a vote, which was objected to by the Concerned Members who asked for a discussion. The motion was supported by all the directors, and overwhelmingly by the floor. The member who moved the motion is an attorney-at-law working at the Office of the President and is a daughter of a PPP/C member of parliament. Afterwards, I met and spoke with her outside of the meeting, in the presence of another top PPP person. She did not even understand what she had done. What was worse was that the board on which sits a Senior Counsel, did not know either.

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On the Line: 2009 Annual Reports of the Guyana Bank for Trade and Industry and the New Building Society

Introduction
Business Page today interrupts its series on the state-owned Guyana Sugar Corporation to present an overview of the annual reports and accounts of two of the country’s financial institutions which will soon be holding their annual members’ general meetings at which the presentation of the annual reports is a major agenda item. One of these is the commercial bank, the Guyana Bank of Trade and Industry which is a licensed financial institution regulated by the Bank of Guyana under the Financial Institutions Act. The other is the New Building Society Limited, which carries on a financial business but which the Bank of Guyana claims does not fall within the act and which, despite several commitments by the Bank of Guyana and the government, remains unregulated. As a result, the bank is subject to the Single Borrowers Limit and other “strong financial regulations,” as described by no less than the Minster of Finance himself, while the NBS is not.

This is not the only note of contrast. One has to look no further than the Chairman’s reports by Mr Robin Stoby SC and Dr Nanda Gopaul of the two institutions respectively to see how they reflect the backgrounds, styles and personalities of the individuals. Both of them had good reason to be satisfied about the results of their entities. But while Mr Stoby was professional and measured, even enthusiastic at times, Dr Gopaul showed how difficult it is for him to adjust his political style to dealing with the commercial world.

He had no qualms about castigating members of the NBS as an “uninformed little group of mischief makers and pseudo intellectuals”; or about praising Housing Minister Irfaan Alli who now risks sanction by the Privileges Committee of the National Assembly for misleading the National Assembly; or making claims about the economy that are at best questionable. While Dr Gopaul claims that the Guyana currency has appreciated during the year, the GBTI Annual Report – and you would expect the bank to know – reported that the Guyana dollar market exchange rate was $202.75 compared with $201.75 during 2008. He also said that the fiscal deficit was at its lowest in 10 years. Perhaps he has been wrongly advised by his Finance Committee comprising former Commissioner of Police Mr Floyd McDonald and trade unionist Mr Kenneth Joseph.

It also goes beyond the two chairmen. The directors of GBTI are all experienced, private sector persons, while those of the NBS with one exception are all connected, directly or indirectly with the ruling party. This necessarily flows through to the quality of governance which has been a major and continuing issue at the NBS, particularly in relation to proxy voting, pensions for directors, and a modern code of corporate governance.

GBTI
The annual report of the GBTI which will be holding its meeting on Monday, April 19, 2010 shows the bank continuing a remarkable run in which since 2006, net income before taxes has increased by 25.8% in 2009, 14.8% in 2008 and 23.9% in 2007, making for a cumulative increase since 2006 of 78.8%. Because of the tax effect, after-tax profits have increased cumulatively over the same period by 95.9%.

The Beharry family holds a 61% controlling interest with the remainder of the shares spread among hundreds of members, but the actual number and any other significant concentrations are not disclosed in the annual report.

Earnings per share for the year were 24.8% in 2009, marginally up from the 23.5% in 2008. With the company’s shares trading at $140, the P/E ratio, a popular investment measure, has improved slightly, to 5.6, making the security one of the most attractive in the domestic market. One area of significance is the increase in the effective rate of taxation which for 2009 is 29.7%, compared with an effective rate of 16.0% in 2008. The corporation tax charge for the year is 26.2%, compared with 13.6% in 2008. Readers are aware that the nominal rate of corporation tax on banks, commercial and telecommunication companies is 45%. As a result of the higher effective rate of tax, the Return on Average Assets and Average Equity have both declined, albeit marginally.

The interest earned on the average of net loan balances declined from 13.4% to 13.1% while the average interest paid on deposits was 2.2%, compared with 2.6% in 2008. This apparently low interest rate is in some significant measure due to the high level of non-interest bearing demand deposits which averaged more than $10 billion during the year. The bank continues to earn significant amounts from foreign exchange transactions with Exchange Trading Gains increasing from $664M or 18.4% of total income in 2008 to $733 million or 19.1% in 2009. As this column noted last year, the gains on foreign exchange alone cover the total staff costs of $612.6 million, which is a decrease from the previous year.

The continuing good run allows Chairman Robin Stoby to announce for yet another year, “the highest dividend payout in absolute terms in the bank’s long history.” At $7.5 per share, total dividends in 2009 will represent 30.3% of the year’s distributable profits, compared with 25.5% in 2008 and 25.1% in 2007. By comparison, the dividend payout ratio of Republic Bank Guyana Limited for 2009 was 41.2%.

Highlights

The bank’s deposits increased in line with the growth in deposits of the financial sector, thus allowing it to retain a 21% market share of deposits. Its market share of loans however declined from 22% to 20.3%. The bank’s financial condition remains very strong and shareholders’ funds have increased from $4.7 billion to $5.7 billion.

Mainly due to what is described as capital work-in-progress of $4.1 billion, the value of property, plant and equipment has increased from $3.8 billion to $5.6 billion. In addition to the new head office, the bank is also building a new branch at Diamond on the East Bank of Demerara. At the sod-turning in 2008 the bank had announced the cost of the new head office building at $2.6 billion. Unless there are some other capital developments that have not been announced, it seems that there has been a significant cost overrun on the head office. The financial statements also reveal that the bank had actually exceeded the Single Borrower Limit by its investment in Government of Trinidad and Tobago Sovereign Bonds, although it fails to disclose the amount of the excess.

As they receive the report of the continued successful performance of the bank, shareholders are likely to overlook these matters, as well as the sudden departure of the bank’s CEO in October 2009. The meeting should be quite a quiet affair.

The New Building Society
After a break of two years when the directors took the annual meeting to Berbice, the annual general meeting of the NBS will return to the Pegasus Hotel next Saturday at 1.30 pm. The directors will report a profit of $588 million, describing it as an increase of 97% following a write-off in 2008 of a $200 million exchange loss on its sterling investment. According to the audited Statement of Income the profit for the preceding year was $487 million, so that the increase in profit for the current year is 9.6%.

Highlights

As is evident, the increase in net income before exchange difference was 9.63% but after taking account of an exchange gain in 2009 compared with an exchange loss in 2008, the change in net income is 97.2%. Just for the benefit of the financially minded, the accounting treatment of the gain is not in accordance with the rules of accounting.

Total assets of the NBS increased by 6.6% compared with 9.3% of the GBTI while its investors’ balances – largely equivalent to depositors’ balances – increased by 5.8%, compared with GBTI 11.9%. Despite this, and due to its tax exempt status, no reserve requirement and more discretionary provisioning rules, the NBS pays higher rates of interest on deposits and yet charges lower rates on its loans.

There is no doubt that the investments in the Berbice Bridge Company Inc are attractive, even for a tax-exempt entity. The issue has been concentration. Having acquired $1,520,000 of such investments from CLICO in 2009, the total of $1,870,000 represents 34.9% of the reserves at the end of the year. As a prudential rule, the Financial Institutions Act limits any single investment by financial institutions to 25% of their capital base.

The Society’s pension fund recorded unfunded obligations of $21.8M compared to a surplus of $21.5M, a significant turnaround of over 200%. No mention is made of the cause of this decline. Accounting rules have allowed a significant larger obligation to be presented in the financial statements.

The last time the NBS had a meeting at the Pegasus, there was quite a furore. It is unlikely that history will repeat itself.