Is NBIC an attractive investment?
Patrick van Beek looks at its Interim Financial Report
Stabroek News
May 21, 2004
On May 11, 2004 NBIC published their Interim Financial Report for the six months ended March 31, 2004. This was well within the 4 months required by the Securities Industry 1998 (Disclosure by Reporting Issuers) Regula-tions and the efforts of the directors, management and staff in bringing relevant information to shareholders and potential investors before it becomes out of date should be commended. Sometimes actions speak louder than words, and in the opinion of this analyst this is especially the case with corporate governance; rapid publication of financial statements is a definite sign that the directors take their responsibility to the shareholders seriously. The statements published appear to contain all the financial information required by the disclosure regulations and include a summary balance sheet which is not required though this analyst considers it a grave failing of the regulations that a balance sheet is not a mandatory requirement.
Net income after taxation for the 6 month period stands at $230M, which represents earnings of 0.77 per share of the company. Annualised, this is $460M which is an increase of some 23% compared with the 12 month period to September 30, 03. By comparison net income after tax increased by some 188% from September 30, 02 to September 30, 03. The rapid growth in earnings following the sharp fall in 2001 seems to be slowing as earnings pass the levels seen in 2000.
It is thus of some interest to see if there are any seasonal patterns to earnings for the previous four 6-month periods and whether the total for the year could be expected to be greater or smaller than twice the six month figure. The profit after tax for the 12 months to March 2004 is $463M which is very close to twice the six month figure. This is a consequence of the profit after tax in the two 6-month periods; to September 2003 and March 2004, being almost identical at $233 and $230 respectively.
This picture suggests that profit before tax is lower in the second half of the year than the first. It remains to be seen whether this pattern will continue into 2004. An analysis of trends in each of the components which make up profit shows most items moving gradually between six month periods. The exception is general expenses, which after a jump to $374M in the six months to September 2003 fell back to $243M in the 6 months to March 2004. Profit for the 2004 financial year will depend critically on whether a similar jump occurs in the second 6 month period.
While the majority of the post-tax earnings in respect of the 2002 financial year occurred in the first half of the year, the majority of the post-tax earnings in respect of the 2003 financial year fell in the second half, though this could be due to distortions in the post-tax profits from deferred tax credits in the annual reports which do not seem to have made their way into the interim results. The six month earnings to March 2004 have actually fallen back 1.3% following growth of 509% and 66% in March 2003 and September 2003 respectively.
Loans, Deposits & Investments
Given the current economic outlook it is refreshing to see that not only deposits but also loans and advances grew in the interim period, loans by 10.17% and deposits by 4.19%. With the fledgling nature of the capital market in Guyana, the commercial banks remain the main source of raising new capital, and if the additional $1,341M in outstanding advances represents new loans then this is a significant injection of funds into the economy.
Despite the low average rate of interest being paid, depositors seem to be happy to continue to place more and more cash on deposit. Treasury bill rates are hovering around the 4% rate; this seems to be the yardstick for rates, however average (annualised) rates paid on deposits were almost 1.5% less than this falling to 2.58%, in the interim period, close to the lowest level of rates paid in any 6 month period in recent history.
Investments also increased: by some 9.44%, though cash balances reduced by 3.73%. This seems to be a common theme amongst the commercial banks, which are shying away from low returns available on cash locally and investing more and more in both longer term and overseas securities. The bank is thus taking an increasing duration and currency mismatch risk. Based on the 2003 annual report some 4.90% is invested outside of Guyana. Given the recent history of the currency, most commentators, including this analyst, believe the risk of the currency strengthening significantly to be slight and so the company is more likely to be seeing currency gains and not losses on these investments. The only risk this analyst sees would be if large amounts of deposits were withdrawn from the banking sector in a short space of time. If the banks needed to liquidate overseas assets to generate cash to meet these withdrawals this could cause the Guyanese dollar to appreciate in the short term, thereby further reducing the value of the overseas investments in G$ terms. Provided the exposure does not continue unchecked this analyst believes that the risk to this bank at this time is not significant.
More significant is the mismatch between the term of the assets and liabilities. From the 2003 annual report 35% of the assets are now of a term longer than 5 years but 99.7% of the liabilities fall due within 1 year. If world interest rates continue to rise as central banks in developed countries increase base rates, for example in response to perceived inflationary pressures caused by oil prices being at a 21 year high, the company may see significant capital losses on its longer term overseas investments, which will not be offset by a compensating fall in liabilities. However investments between 1 and 5 years represent some 8.8% and investments over 5 years represent just 5% of total assets so the exposure appears to be limited, though if the value of investments over 1 year in duration were to fall by just 5% this would knock some $330M or around 10% from the share capital and reserves.
If the company carries on seeing its deposit base expanding together with more loans being issued at rates similar to those being paid, it will continue to provide a healthy return on its equity. Annualised rates for both pre-and post tax returns on equity were into healthy double digits for the interim period. This analyst considers there to be only a few reasons the depositor base will contract in the short term. As well as the general state of the economy and competition from other sources that offer greater potential returns, the main other reason is if customer service did not live up to depositors' expectations.
Returns to Shareholders
Given the promising returns being shown above it is instructive to see how a purchaser of NBIC's shares would have fared if they bought in when the shares were first traded on the exchange at $15 on July 21, 2003. Since that time an investor would have received the final dividend of $0.15 or a 1% return on investment, coupled with an interim dividend of $0.167 or 1.11% of their initial investment. In the meantime the share price has fallen some 20%, with the shares last trading at 11.9 on May 17, 2004. This gives a holding period return of -18.5%, i.e., for every dollar invested the investor would have lost 18.5 cents (and this analysis ignores dealing costs allowing for which would further worsen returns).
This analyst believes the reasons for the poor returns are twofold:
1. When NBIC first traded on the exchange the P/E ratio was over 25 - which suggested the shares were overvalued relative to the rest of the market at that price. If the shares had been trading at a P/E of around 8 at that time they would have been trading at $4.4 not $15 and the returns if purchased at that price would have been considerable.
2. The payout ratio which is the proportion of profits paid out as dividends has been low. Since trading began on the exchange NBIC has consistently paid out around 20% of post-tax profits as dividends. By comparison, the highest payout ratio for stocks trading on the exchange is around 75%. The average (weighted by market capitalisation) is around 38%.
Is NBIC an attractive investment at the moment?
There is currently stock on offer at $12 on the exchange. This means that someone can buy NBIC shares at this price by going to one of the registered brokers. Based on the earnings per share of 1.54 and dividends paid of 0.317 in the last 12 months this puts the P/E ratio at 7.79 and the dividend yield at 2.69% (ignoring dealing costs).
The P/E ratio seems to be reflective of the rest of the market, with P/E ratios ranging from 4.0 to 10.4. The average (weighted by market capitalisation) is 7.37. Net asset value per share (share capital & reserves/number shares in issue) now stands at 11.4. So on both of these measures the shares seem evenly priced. However at a yield of 2.69%, you may still be able to get a better return after tax on a deposit savings account. Whether dividends improve in excess of the increases to earnings depends entirely on whether you view the dividend policy changing and the payout ratio increasing in the future. If NBIC's payout ratio were to increase to 40% of earnings after tax (which is the rate being paid by one of its competitors) this would put the dividend yield at a healthy 5.1%, well in excess of the returns available on any deposit savings account after tax. One wonders whether Republic Bank Ltd, the parent company and majority shareholder, will put pressure on its subsidiary to increase dividends. Given there are a number of service contracts in place between the parent and its subsidiary, the parent may be quite happy to collect a return via this route rather than through dividends which it must split with the minority shareholders.
A less cynical view is that the service contracts are being offered at economic cost and the parent will seek to extract a satisfactory return through an increased dividend payout in future.
Patrick van Beek is an Actuary by profession and is a Fellow of the Institute of Actuaries in the United Kingdom. He heads Caribbean Actuarial & Financial Services, the first business locally to offer acturial services in Guyana.