Investor's Diary - Guyana Bank for Trade and Industry December 31, 2006 Annual Report
Business Page
By Patrick van Beek
Stabroek News
March 4, 2007
Introduction
Last Sunday (February 25) Guyana Bank for Trade and Industry (BTI) published the summary of its financial statements as required by the Financial Institutions Act; the annual report was also recently mailed out to shareholders. This is well in advance of the six months stipulated by the Companies Act and Securities Industry (Disclosure by Reporting Issuers) Regulations 2002 and the four months stipulated by the Securities Industry Act (SIA). One wonders why, over four years after the SIA and the subsidiary regulations made thereunder came into force they are still allowed to co-exist with such an inconsistency.
At the risk of making the same observation every time I carry out an analysis I cannot emphasise the importance of up-to-date and accurate financial information. The Directors and Management and staff should feel pleased with their accomplishment: BTI is the first company traded on the stock exchange with a December year end to publish their annual report this year.
Unfortunately, the rapid gestation of the report may be in part responsible for several (admittedly minor) errors and omissions. The annual report has an addendum in respect of the appointment of a director to fill a casual vacancy. The capitalisation of the "Financial HigHligHts" heading on page 20 had me reading it three times trying to figure out what was wrong with the spelling (nothing as it turns out if the capitalisation is ignored). The auditor's report gives a clean bill of health in respect of the accounts "set out on pages…" though it should be clear from the context to which pages the opinion relates. For the real eagle-eyed there were a couple of inconsistencies on the financial highlights page - the 2004 shareholders' equity has been restated, yet the figure shown in the highlights remains the figure from the 2005 annual report, and despite reclassifying properties as available for sale investments they are not shown in the investments in the highlights. Finally, to my eye the print quality of the report has been reduced compared alongside the 2005 report. All-in-all these issues serve to denigrate the quality of the report, which is a shame as it detracts from the message within. I wonder if GBTI had a dedicated Finance Director or Chief Financial Officer (CFO) overseeing the production whether the report would have been of a higher quality.
Stock Performance
BTI's share price had its ups and downs during 2006, dropping as low as $60 - though this coincided with a general sell-off in the market in the run up to the elections.
In my review of the BTI's interim financial statements I indicated the shares justified a price earnings ratio of 8.8 and at $66.1 BTI is undervalued. I concluded that the stock was only going one way - up and thus was a definite buy with a one year forecast of $95. Those who heeded my advice would have benefited handsomely: in the last six months GBTI's share price has appreciated some 19% and last traded just shy of their all time high of $80 - closing 44% of the gap between $66.1 and $95.
Company Performance
In common with its peers in the banking sector, BTI has once again seen double digit earnings growth. In 2002 BTI's non-performing loans stood at just shy of half its portfolio. Now, thanks to aggressive write-offs non-performing loans stand at just 11.5% of the portfolio (which is still one of the highest proportions in Guyana); though 91.5% of this amount is provided for. Of all the commercial banks, BTI has probably benefited the most from the excess liquidity in the system. Not having to compete for deposits has allowed the company to earn a healthy spread income from its depositor base thus allowing billions of dollars to be provided for against which non-performing loans were written-off.
The increase in GBTI's profitability is largely down to three components: an increase in the spread between investments/loans and deposits (from 5.35% to 6.16%), a larger deposit base on which the spread is earned (up 16%) and the recovery of loans previously written off ($193.4 million). This last component warrants examination in a little more detail as neither the chairman nor the CEO brought attention to what is essentially a volatile source of revenue contributing to 24.5% of profit before tax; the amount of which may be considerably less in future years (in 2005 the figure was just $62.5 million).
Digging into this figure further reveals another interesting point - the fall in non-interest expenses from $1,245.2 million to $1,212.2 million (2.6%) is much less than the fall in the provision charged for bad and doubtful debts net of the recoveries ($508.1 million to $316.6 million). The CEO's report actually states non-interest expense declined by 15%, which appears to be the fall in "other" non-interest expenses. Stripping the provision out of expenses reveals net expenses increased by $158.6 million from $737.0 million to $895.7 million or 22%. I found it somewhat disturbing that the reason for this dramatic increase in expenses was not commented on in the report, and I intend to follow this up at the annual general meeting scheduled for the March 19.
Financial Highlights
Justified PE & Investor's Diary recommendation
I think BTI's prospects do not look as strong as they did six months ago. A substantial component of the bottom line is due to loan recoveries which may not be repeated or may even decrease in years to come, and stripping the net provision sees a 22% increase in expenses which must be controlled if profitability is to be maintained. When I first saw the final dividend proposed (bringing the total for the year to $4 per share) I thought it was extremely meagre - just 31.6% of earnings per share of $12.65. However given that the Directors are not likely to want to cut dividends the low payout ratio may be a reflection that next year's performance may not be as spectacular as this one.
The fall in the payout ratio has hurt BTI's prospects: I have said it before in these pages - Guyanese investors do not expect returns by way of capital appreciation - which makes the dividend valuation model the most applicable in valuing companies trading on the local stock exchange. Even though earnings per share have increased, at this payout ratio only a price earnings (PE) ratio of 7.0 is justified corresponding to a share price of G$88 assuming a 10% growth in earnings and a required return of 15%. This is very close to the book price of G$91.1 per share.
At the current best bid of G$80 this means BTI is still expected to offer some value, so my recommendation for this stock remains a buy. My one year forecast from 6 months ago now looks more realistic for 12 months from now which allowing for 10% growth on G$88 puts it at $97.
This writer has an interest in BTI by virtue of the writer and/or an associate being a shareholder.
Disclaimer: All information contained in this article has been obtained from sources that the writer believes to be accurate and reliable. All opinions and estimates constitute the Author's judgement as of the date of the article; however neither its accuracy and completeness nor the opinions based thereon are guaranteed. As such, no warranty, express or implied, as to the accuracy, timeliness or completeness of this article is given or made by the writer or this newspaper in any form whatsoever. The writer and/or its associates may, where applicable effect transactions, or have positions in securities or companies mentioned herein. Neither the information nor any opinion expressed, shall be construed to be, or constitute an offer ore a solicitation to buy or sell.