Govt owes NBIC US$40M for GNCB's losses
Overview and review of the performance of the National Bank of Industry and Commerce Limited for
Stabroek News
February 12, 2004
INTRODUCTION
NBIC is sometimes portrayed as the successor to the Royal Bank of Canada, established in 1837 and which operated as a foreign owned bank until its nationalization in 1984. After 13 years as a state-owned and controlled bank, NBIC eventually became a subsidiary of the Republic Bank of Trinidad and Tobago on October 1997, consequent upon the Guyana government's sale of a controlling interest in keeping with its stated objectives of privatization as dictated by the World Bank/IMF structural adjustment programme.
One can therefore say, the bank has come full circle from private-foreign ownership and control in 1984 through state-ownership and reversion to foreign control in 1997. This then represents the principal feature of the recent history of Royal and Republic/NBIC and is simultaneously reflective of the economic models dominant in Guyana since independence.
The settled routine the board/management of NBIC enjoyed since 1984 was, however, severely challenged in October 1992 with the advent of the PPP/C administration. This revolved around determined efforts of the new administration to restructure the Board and to put in place a new chairman and directors to secure its own working majority. These efforts had been met with equally stiff resistance from former Chairman Sase Narine and others who successfully thwarted the government's plan at two successive annual general meetings where the new administration's comprehension of the detailed procedures to effect such changes was found deficient in a hostile environment.
In the end, Chairman Ashton Chase and his nominees including Bharrat Jagdeo, Raymond Gaskin and others were installed but only after the senior management had been forcefully encouraged to facilitate the transition. The bank eventually settled down under the chairmanship of Chase, who remains Chairman and sole survivor of the group of PPP/C government nominees even after the takeover by Republic Bank.
NBIC continues to grow and expand with the acquisition of certain assets and liabilities of the Guyana National Cooperative Bank in March 2003 and now boasts a network of 11 branches.
PERFORMANCE AND GROWTH - 10 years to 2003
Every single major indicator of the Bank has shown quite significant changes over the last ten years or so and serves to highlight the evolution in ownership and management.
The figures below explain:
1992 1993 2002 2003
(G$M) (G$M) (G$M) (G$M)
Cash resources 3,785 6,229 5,652 8,675
Investments 6,270 7,853 13,165 17,636
Loans and advances 1,516 3,275 13,043 13,183
Total Assets 12,889 19,972 34,569 52,686
Total deposits 10,684 16,251 30,854 48,590
Shareholders equity 669 1,028 2,804 3,199
Net income before taxation 596 689 89 266
Taxation 254 289 (40) (107)
Net income after taxation 342 400 129 373
INCOME
Interest income of $3,017M comprises $1852 million in interest on loans and advances ($1900M in 2002), $1149M on investments ($742M in 2002) and $16M as others ($24M in 2002) making a grand total of $3,018M. There is another item of revenue called "other income" of $879M ($737M in 2002), which showed a 20% increase. This is not broken down but probably accounts for growing revenues from fees and charges, penalties etc and represents a major source of revenue for the bank. In 1992, this item was $153M. There is a growing trend internationally to garner more revenues from these non-interest types of income.
The interest income of $1852M on loans and advances totalling $13,182M (13043M in 2002) represents a 14% average annualized revenue rate on lending. This is well within the rates reported by the Bank of Guyana for commercial lending. In 2003, the Central Bank reported an average of 16.5% as the weighted average lending rate and 15.2% as the prime-lending rate. Having regard to the rigorous demands of the Financial Institutions Act and guidelines on recognizing loan interest, this seems a "reasonable return."
In 2003, NBIC charged against its revenues an amount of $655M (623M in 2002) as loan losses (net of recoveries). Such a high rate of losses would have naturally depressed the interest income. Compared with 2002, interest income from loans and advances declined marginally from $1900M to $1852M while total outstanding loans and advances increased marginally from $13,042M to $13,183M. Some stagnation appears to be taking place here in absolute dollar terms but NBIC's share in the banking system is greater since overall, commercial banks loans and advances have declined from $48.6B at September 2002 to $40.4B at September 2003. Most of this reported decline actually took place in March 2003 ($8.2B) but the Bank of Guyana does not identify the reasons or the institutions.
Interest income from investments show a sharp increase in 2003 of approximately 55% moving from $742M in 2002 to $1,149M in 2003. Total investments at balance sheet date increased significantly from $13,165M in 2002 to $17,636 M in 2003 or approximately 34%. Holdings of Government of Guyana T-Bills increased by $2,520M from 2002 to reach a total of $10,937M (a 30% increase) in 2003 and investments held for sale also increased sharply by 90% from $2252M to $4311M in the last 12 months (stated at fair value). This reflects an increase of $2,006M (at cost) in 2003. Regional government and Government guaranteed investments increased by $806M in 2003 and investments in regional unlisted companies stood at $1200M in 2003 (2002-nil). Unfortunately, the notes to the financial statements do not assist the reader in properly identifying these transactions except to say that of the investments shown in the Balance Sheet, $3432M was purchased through Republic Bank. There is no mention of fees earned (if any) by Republic on these bond purchases.
The interest income of $1149M on total investments of $17,636M represents a yield of 6.5% as against 14% on loans and advances. This compares with a yield of approximately 8.8% in 2002. This decline may be attributable to the continuing decline in Treasury Bills (T-Bill) interest rates over the period.
It would have been useful to disaggregate the revenues earned from these investments and show the yield of each class, especially since the principal shareholder, Republic Bank, appears to be a major player in these transactions. In any situation, where such large sums of depositors funds ($3,431M) have been used to purchase bonds through Republic Bank, the minority shareholders holding 49% of total equity ought to be provided with more detailed information on this subject, particularly since these are new areas facilitated by Republic.
The additional fact that Republic Bank is the parent company of both the National Commercial Bank of Grenada and of the Barbados National Bank makes it more urgent to be able to track these regional flows.
Total interest income of $3,018M on investments, loans and advances and Guyana government debentures (all totalling approximately $39B) is in the order of a 7.7% gross yield. In 1995, the Bank realized $2,9B in income on similar assets totalling only 16B, thus earning approximately 18% overall. Of course, since then lending rates and T-Bill rates have declined sharply but so have savings rates.
Nonetheless, the overall yield seems to be poor and contributes significantly to poor profitability. This problem of poor yields/low profitability is aggravated by a tendency to sacrifice more profitability re: riskier loan making in favour of the safety of government T-Bills and securities in the world of regional bonds and other instruments.
EXPENDITURES
Interest Expense
Interest expenses were $837M on savings deposits (768M in 2002) and $348M on fixed/term deposits and others (459M - 2002). Savings deposits at Balance sheet date were $30,692M, ($18,908 - 2002), a sharp increase of about 64% while fixed/term and others amounted to $17,896M, up from $11,945M in 2002 - an increase of about 50%.
These increases in deposits, totalling nearly $18,000M, were occasioned principally by the assumption/acquisition of deposits from the GNCB in March 2003. The precise details of the deposits assumed from GNCB are not disclosed. But the expenditures of $1,185M represent a 2.5% interest rate on average on total deposits before withholding tax of 20% is applied.
Notwithstanding the overwhelming increase in deposits, the bank paid out less in interest payment in 2003 than it did in 2002, with a portfolio of $18,000 million more. This is truly mind-boggling. In 2002, total interest paid on $30,854M in deposits was $1,226M or a 4% average annualized return.
As revealed above this yield declined to a 2.5% average in 2003. Of course the GNCB deposits were assumed on March 15, 2003 so interest on certain deposits would not have been due and payable for the entire year. Nevertheless any mobilisation of $18,000M on deposits in a single fiscal year that brings in its wake a smaller exposure to the profitability of the institution must truly rank as a financial miracle.
Other types of expenditure
The types of expenditures stated are normal for any banking institution but the sheer quantum and growth raises questions of expenditure control.
Total non-interest expenses amounted to $1,790M in 2003 ($1,465M in 2002), an increase of about 22%. This is quite significant for a 12-month period. Here again, it must be said that the bank took on more staff, increased its brand network and must have incurred certain costs re: the GNCB transaction. But the bottom line is that total non interest expenses consumed about 87% of net income, which though quite out of control was a small improvement on 2002 when non interest expenses gobbled up over 94% of revenues leaving the bank bereft of any profitability to write home about or to pay dividends.
In 1992, non-interest expense accounted for only 34% of income and in 1993 about 38%. In 1995 this increased to 52% from 41% in 1994.
There is definitely something wrong with the bank's regular expenses on the face of it both with the growth and level of expenses. This level of expenses seriously threatens the profitability of the bank. Were it not for the miserably low interest payment to the depositors the bank would have sustained serious losses.
It appears from the financial data that savings rates of necessity must be forced downwards and rigorously suppressed in order to achieve a positive bottom line. The bank also needs to continue to suppress this expenditure or raise the yield on its loans, advances and other investments, which is not feasible. On a deposit base of $48,590M in 2003, a mere increase of 0.6 of one per cent in averaged annualized interest rates would eliminate all profits for the bank.
This is not a good position for the bank to be in. It is perched too precariously on the line between profit and loss and needs to look at its overall performance with respect to interest payable and receivable, and the total level of expenses. The bank's miserable profit of just $88M in 2002 did not allow it to pay dividends.
At September 2003, total deposits of all commercial banks totaled $111,522M of which NBIC accounted for over 43%. In any well-regulated environment where management lives and dies by quarterly earning reports and shareholders track quarterly performances, alarm bells would have been clanging long ago.
Included in expenses for 2003 is the sum of $35 million paid to Republic Bank for the provision of management, credit analysis, internal and other services. It is not clear why this is necessary since NBIC already employs a mini army of 560 persons including highly trained and experienced managers, credit analysts, internal auditors etc. In 2002, the year in which no dividend was paid to shareholders, NBIC paid $25.4m for these services to Republic Bank, the parent company.
It has been the norm in privatisation deals that the foreign parent company ensures its fees "off the top" for undefined services. This happened in the case of GT&T/ATN and the GPL/CDC/ESBI transactions to name a few.
The costs of management fees increased by nearly 40% for the 12-month period ended September 2003 for NBIC, at a time when the bank struggled to post $266M in net profit before tax. This represents a miserable .5 of one per cent return on gross assets exceeding $52,685 million.
It is abundantly clear that much work needs to be done to control expenses at NBIC. The recent announcement that a rural branch will soon be built at a mind-boggling cost of $188M tends to reinforce the notion of a cavalier approach to spending.
PROFITABILITY
The overall profitability of $266M in 2003 and $89M in 2002 can therefore be described as quite dismal, especially since this bank has traditionally posted quite substantial profits in the past, prior to privatisation on a much smaller asset base.
These were as follows:
Years Profits
1991 $336 million
1992 $596 million
1993 $689 million
1994 $772 million
1995 $627 million
The fall of NBIC profits makes for interesting analysis.
TAXATION
According to the financial statements and contrary to popular notions of how things work in a bank, the net income after taxation was considerably enhanced by the tax credits for 2003 and 2002, which were $192M and $118M respectively.
When current taxation of $85M (2003) and $78M (2002) is aggregated, the net effect is a tax credit of $107M (2003) and $39M (2002), thus resulting in far greater sums $373M (2003) and $129M becoming available as retained earnings than the recorded accounting profits.
This situation contrasts markedly with the tax payments of the bank in earlier years. Back then it was not so complicated. In those days you made profits and paid taxes on profits, like everybody else.
The following are example from previous years.
Year profits taxes net income after tax
1991 $336m 193m $143m
1992 $596m 254m $342m
1993 $689m 289m $400m
1994 $772m $368m $404m
1995 $628m $314m $314m
2002 $89m $(39M) $128M
2003 $266M $(107M) $373M
NBIC profits and taxes pre and post privatization make for interesting analysis and defy multilateral institutions theory that companies are more efficient in the hands of the private sector.
BALANCE SHEET
It is difficult to accurately pronounce on the assumption/acquisition of certain assets and liabilities of the Guyana National Cooperative Bank on March 2003 by NBIC because details have not been disclosed publicly. Similarly the details of the purchase of the controlling interest in the bank by Republic have not been publicly disclosed since 1997.
Nonetheless the former transaction re GNCB more impacts the balance sheet than the latter since in this case it is the NBIC itself doing the assumption rather than Republic.
The GNCB deal
The way in which the GNCB deal was structured involved NBIC's assumption of the deposits held by GNCB and certain assets of GNCB excluding the loan portfolio.
This resulted in a lopsided arrangement because the GNCB deposits were in excess of $15 billion or so and its transferable assets were well below the liabilities.
In order to "guarantee" to NBIC that the net assets would be $2000M, the government then issued a debenture for the sum of $7,918m payable by the end of year ten with interest ranging from 1.060% to 2.774% over the prevailing GOG one-year treasury bill rate.
In this extraordinary transaction at the end of it, the seller promised to pay the purchaser about US$40M for taking this burden off its hands.
Now this is truly one of a kind in the annals of privatisation where the so-called purchaser has to be paid US$40M by the state over time with interest.
NBIC calculates that its so-called "price" of $2,706M paid for these net assets exceeded the net assets based on "fair value" when revalued. Arising out of this revaluation of the assets an amount exceeding $1,100M was capitalised as "goodwill".
On the face of it, the amount paid exceeded the $2,000M guaranteed price by only $706M but in the absence of details this excess was finally determined to be $1,174M.
For sheer innovation and creativity, the transaction resulting in the vendor having to pay the purchaser G$7918M with interest over time after the purchaser allegedly paid $2706M is worthy of study by the Harvard and Wharton Business School.
Besides which, it is debatable whether the government can lawfully assume such a debt without parliamentary approval.
The Bank of Guyana report for the period ended June 2003 does not reflect this debenture of $7,918m as a part of the domestic public debt, which it is and which was issued on March 15, 2003. The Bank of Guyana reports no change in debentures $3898m for each month June 2002 - June 2003. (Table 7.1 half-year report and statistical bulletin 2003). All of this makes one wonder whether the Bank of Guyana knows everything that the government is doing that impacts the financial statistics and whether the right hand truly knows what the left hand is doing.
The GNCB
This article is essentially about NBIC but it is worth examining in a preliminary manner how it is that the government paid so handsomely for NBIC to take GNCB off its hands.
GNCB was established in 1970. By 1991 its share capital was about $515M, with a net worth of $429M. Its losses in 1990 were $1,000M and 1992 a further G$885M. In keeping with the COFA act, the government issued debentures of $1.8 billion to cover those losses. In 1993 the bank broke even. From 1994 - 2002, the government issued further debentures of about $3.7 billion to bring to a total $5.5 billion in debentures to cover the additional losses.
These debentures were a receivable from the government and were shown as GNCB's assets. In 1995 GNCB merged with Gaibank. By 2001 December this merged bank had a net worth of $2.3 billion. On the eve of privatization, this declined to 1.9B, including the COFA debentures. The privatisation of the bank provided serious challenges. There were many different ways in which it could have been done without creating such a massive domestic debt.
Unfortunately the method eventually used was bound to create difficulties because it was decided not to sell the loans but to dispose of all the liabilities of all the branches to one buyer. The yawning gap had to be bridged particularly since a "guaranteed price" was on the table. On the eve of privatization, deposits were about $14 000 million and performing loans $1400 million. The losses appeared unstoppable and irreversible even though new contract managers from Ireland were installed since 1st February 1999. Bad loans were in the order of $7000 million. This was the position of the bank that broke even in 1993 but failed miserably after board and management changes were made thereafter. The expectations of the merger remain unfulfilled. This alone is sufficient for a separate analysis.
In the end the NBIC assumed the GNCB savings deposits, secure and safe in the comfort of the debenture cushion valued US$40M to be paid by the taxpayers of Guyana.
Why a bank that was having its own difficulties turning a profit would want to take on such liabilities is anybody's guess.
At the end of September 2003, the net worth of NBIC was $3200m with Republic's value of its 51% around $1664M after having invested about $2000m in 1997 for the controlling interest, and a further $2706m in the GNCB transaction by NBIC itself.
Conclusion
The NBIC is an interesting study in the evolving and changing fortunes of an institution as it moves through various forms of ownership and management. The FIA has certainly contributed to greater caution in lending with strict provisioning requirements but that does not explain the poor profitability.
The directors need to review seriously the Bank's performance especially with regard to controlling non-interest expenses, to improve overall investment yield and to ponder the wisdom of suppressing savings yield to avoid bottom line losses.
Poor profitability impacts negatively on taxes payable to the treasury and dividends to shareholders. Republic Bank should start paying more attention to the 49% minority shareholders. NBIC is capable of a better performance. Of nine directors on the board there are only three Guyanese residents non-executive directors chairman Ashton Chase, Errol Cheong and Magda Pollard.
The most disturbing feature emanating from the privatisation of GNCB is that the Government of Guyana issued debentures on May 15,2003 in the sum G$7918.01 million and on March 28th, 2003 introduced the 2003 budget in the National Assembly - just 13 days later and said not a word about this unprecedented and incredible addition to the domestic debt to the National Assembly.
The minister merely stated a sale price of US$14.1M conveniently forgetting the US$40M debenture.
This failure or neglect to report this matter fully is totally unjustifiable and it's non-appearance in the Bank of Guyana reports is worrisome especially for those who look to the Ministry and Bank of Guyana for accurate and reliable data on the national economy.
The auditors of NBIC are Ram & McRae, Chartered Accountants.