Banks and their cus­tomers

Part 1

Stabroek News Sunday - - NEWS - with Rawle Lu­cas

De­cline in profits

The Guyana Bank for Trade & In­dus­try (GBTI) has re­ported its half-year profits for the year 2017. In a Stabroek News ar­ti­cle on Au­gust 23rd, it was re­ported that the bank’s af­ter tax half-year profits stood at $603 mil­lion, down a whop­ping 37 per cent ($358 mil­lion) com­pared to $961 mil­lion af­ter tax profit dur­ing the same pe­riod in 2016. The re­ported in­for­ma­tion is not the type of news that share­hold­ers of the bank would want to hear. The de­cline in profits, while trou­bling to share­hold­ers, does not put the fi­nan­cial sound­ness of the in­sti­tu­tion at risk. This is one bad year of many years of suc­cess­ful bil­lion-dol­lar re­ports of profits. The half-year per­for­mance re­port fol­lows an al­leged fraud which con­sumed some $941 mil­lion and cost some staff mem­bers their jobs. Fraud is not un­com­mon in the fi­nan­cial world, but the size of the fraud is al­ways a mat­ter of in­ter­est. Since the af­fected bank is a ma­jor part of the bank­ing sys­tem in Guyana, it is nat­u­ral for peo­ple to won­der about the de­cline in profits and its im­pli­ca­tions for their abil­ity to bor­row. There is much in the re­la­tion­ship be­tween banks and their cus­tomers. This ar­ti­cle will look at the re­la­tion­ship be­tween banks and households since the lat­ter are the ones with the most to lose.

Six banks

Be­fore do­ing so, it would be im­por­tant to re­mind read­ers that the bank­ing sys­tem in Guyana con­sists of six com­mer­cial banks. In ad­di­tion to Cit­i­zens Bank, De­mer­ara Bank, Guyana Bank for Trade and In­dus­try and Repub­lic Bank which are part of the stock in­dex that is pre­pared by this writer, there are two ad­di­tional banks. One is the Bank of Bar­oda and the other is Sco­tia­bank. Ac­cord­ing to data re­leased by the Bank of Guyana, the com­mer­cial banks are gen­er­ally in good shape. They are ad­e­quately cap­i­tal­ized and they are sta­ble. In light of this ob­ser­va­tion, it is use­ful to get a sense of where the mar­ket stands in re­la­tion to the banks.

Mar­ket value

Around this pe­riod in Au­gust 2016, the mar­ket value of the four com­mer­cial banks that are part of the stock in­dex pre­pared by this writer stood at $74.34 bil­lion. In 2017, the mar­ket value is $73.75 bil­lion. This change re­flects a de­cline in value of the com­pa­nies by less than one per cent. It should come as no sur­prise to any­one that the mar­ket value of GBTI was down 11 per cent, de­clin­ing from an amount of nearly $18 bil­lion to $16 bil­lion. But the de­cline in mar­ket value is not seen in GBTI alone. De­mer­ara Bank Lim­ited also saw a de­cline by five per cent in the value of its mar­ket cap­i­tal­iza­tion. This de­cline oc­curred even though DBL did not have the neg­a­tive ex­pe­ri­ence of GBTI. None­the­less, the over­all sit­u­a­tion of the com­mer­cial banks can be re­garded as sat­is­fac­tory de­spite the spe­cific prob­lem of fraud iden­ti­fied above and the dis­tor­tions in the for­eign ex­change mar­ket ear­lier in the year. These ob­ser­va­tions would bring no com­fort to the share­hold­ers of GBTI, whose ex­pec­ta­tions of div­i­dend pay­ments for 2017 might now have to be tem­pered.

In­ter­est in the per­for­mance of the bank­ing sys­tem goes be­yond that of share­hold­ers of com­mer­cial banks. Households and busi­nesses have a keen in­ter­est in what happens in the bank­ing sys­tem. They rep­re­sent the back­bone of the in­ter­me­di­a­tion ser­vices. In fact, it is their com­ple­men­tary re­la­tion­ship that makes the bank­ing sys­tem tick. The bank­ing sys­tem is one of those mar­ket­places where households have a large pres­ence but seem to ex­ert very lit­tle in­flu­ence. The pres­ence of households is re­flected in the amount of money that they de­posit in the banks by open­ing var­i­ous types of sav­ings ac­counts. Ta­ble 1 be­low shows the share of bank de­posits be­tween households and busi­nesses in the pe­riod 2007 to 2011.

The data in the Ta­ble 1 re­veals that households pro­vided 82 per cent of the money from the pri­vate sec­tor that com­mer­cial banks had in their pos­ses­sion dur­ing the pe­riod in ref­er­ence. At the same time, busi­nesses con­trib­uted 18 per cent of the de­posits. Banks there­fore de­pend heav­ily on households to make their in­ter­me­di­a­tion ser­vice work. In­ter­est rates of­fered to de­pos­i­tors dur­ing that pe­riod were not very at­trac­tive. Start­ing at 3.15 per cent in 2007, the in­ter­est rate of­fered by com­mer­cial banks to de­pos­i­tors de­clined 37 per cent to reach 1.99 per cent in 2011.

Busi­nesses

Just as they look to households to put money into the bank­ing sys­tem, they look to busi­nesses to take it out of the bank­ing sys­tem and help put it into the econ­omy. Ta­ble 2 be­low for the cor­re­spond­ing pe­riod shows that busi­nesses bor­row the bulk of the money that banks put into the econ­omy.

Sec­ond time-pe­riod

The sec­ond time-pe­riod un­der re­view dis­plays its own set of char­ac­ter­is­tics. The share of de­posits from households de­clined nearly three per­cent­age points from money de­posited in the prior pe­riod. In­ter­est rates on sav­ings ac­counts con­tin­ued their de­cline too and did so

by 25 per cent from 2012 to 2016. It is not sur­pris­ing that households did other things with their money as against putting it into the bank­ing sys­tem as sug­gested by the data in Ta­ble 3 be­low.

The cheaper cost of bor­row­ing by the banks largely from households of­ten sets up the cry of foul, when it is the lat­ter’s de­sire to bor­row the money they put in the bank. The lamen­ta­tion is of­ten trig­gered by the high cost as­so­ci­ated with ac­cess­ing the money.

(To be con­tin­ued)

TA­BLE 1

TA­BLE 2

TA­BLE 3

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