By G.A. Dwyer Astaphan
It is a bit late, but the Annual Report of the National Bank Limited and its subsidiaries for 2009 is now out, and the Group’s annual general meeting is to be held on 30th November.
I will presume, if the lateness exceeded 120 days following the end of the fiscal year, that the Group will have received the requisite approval of the Eastern Caribbean Central Bank, as prescribed by law.
Many of us recall that in its fiscal year 2008, the Group had benefited by an $80 million windfall as a result of a one-off transaction with Visa Inc., the well known credit card company. So it would come as no surprise if the 2009 Report painted a less rosy picture than that of the year before, all the more so in the challenging economic circumstances which have prevailed over the past coupe of years.
Yet despite the obvious decline, statements in the Report by the Group’s Chairman and its Managing Director suggest optimism and confidence.
Well, while I too prefer to be optimistic and confident, I am also concerned. And I would be a lot happier with some explanations.
The Report shows that, compared with the 2008 results, the Group’s Total Assets declined by $162 million(or 8%), and Cash and Cash Equivalents went down by $222 million (or 45%) in 2009.
Gross Operating Income was $48.5 million in 2009 (compared with $166 million in 2008), Net Income was $41.6 million in 2009 (compared with $113.5 million in 2008), and Net Fees and Commissions Income was $42.9 million in 2009 (compared with $51.8 million in 2008).
You will notice that all of these results point in the wrong direction. And this raises some concerns, one of which is that if most of Fees and Commissions Income, say $30-40 million, or more, came from credit card transactions in 2009, and if the Group’s special relationship with Visa Inc. ended in 2010, could the Group end up having a very tiny, or a zero Net Income, or even a Net Loss, for the year 2010, all other things being equal?
Indeed, could it turn out to be a large Net Loss in 2010 if the economy is slower in 2010 than it was in 2009? And if, God forbid, that were to happen, how far reaching would the consequences be?
We already know how difficult things are in the country. Workers are struggling with downsizing, closures, layoffs, frozen increments, and getting jobs; homeowners are increasingly anxious about maintaining mortgages as they see university students on island going into the hotels; and the whole country is struggling with high prices, with a hastily, clumsily and ruthlessly introduced VAT, and with massive pending electricity and water increases that the Minister of Finance, in one of his most disrespectful acts to date, still has not advised the country on.
People are also struggling with the ‘brightness’ of the Minister of Finance who, upon introducing VAT, had said that it would replace ten taxes, but who, after passing the Act, proceeded to reintroduce some of those same taxes under different names (one at a 33% higher rate than before) and who, before the ink on the VAT Act was dry, went into Parliament, stooges in tow, and passed a VAT Amendment Act empowering himself to exempt persons from VAT as he pleases (as if he does not already have enough power and as if he has not demonstrated an abject disinclination and or disability to use it properly.
So will we now see the bigger operators and developers exempted from charging VAT to their customers? If so, how more revenue losses would be incurred by the Government and how would that impact on its indebtedness to the National Bank Group? How would the national economy be affected?
And people are also struggling with the fact that in his ‘brightness’, he has set up a situation whereby certain tourist purchases will be exempted from the VAT, but you and I will have to pay it. Today I bought an item in a store. There were two price tags, one without VAT for the tourists and the other with VAT for you and me.
People have already started getting visitors to buy things for them, and when that cannot be done, they will send to get them overseas, or go themselves.
People are struggling with the economic and other consequences of all of this ’brightness’ which they are having to face, and will have to face for some time to come.
All of which will make them less able to invest, transact and spend, and will have a negative impact on the performance, not only of the National Bank Group, but also of all other banks and businesses in the economy.
So I have to be concerned.
But there is even more cause for concern.
The Report stated that interest on non-performing loans was included in the Group’s income for 2009, and that the Report for the previous year was adjusted to show the same.
Now while this may be allowed by the law and by the relevant accounting rules, it nevertheless tells me that the Group is showing income that it is not actually receiving; income on paper which does not exist in reality.
This will end up as a differential between what the Income Statements show versus what the Cash Flow Statements show, and, as is the case with any and every bank, cash is king!
So I am left to wonder why it was included and how far back with non-performing loans does it go. I am concerned.
There is more.
The Government owns 51% of the 81 million issued shares, which is about 41.3 million shares. If each share is valued at $2.50, then the Government’s share in the Group is worth about $103.3 million.
Public sector indebtedness to the Group as at June 30th, 2009 was $1.062 billion. That debt increased by over $25 million in 2009. Again, a trend in the wrong direction. And I am concerned that it might be higher in 2010, and that far too much of the total debt to the Group is owed by a single debtor; that is, the Government.
And Net Interest owed by the public sector to the Group for 2009 was $37 million. Interest alone! This makes me wonder whether some or all of the debt owed by the Government to the Group might be included in the non-performing loans portfolio.
How is the public sector debt to the Group going to be reduced to acceptable levels? Yes, the Group has thousands of acres of Government lands holding as security, but land is not a liquid asset, and if the Group is in a spot of bother, it might not have the luxury of time to sell off land in order to save itself and its customers.
I am not saying that the Group is in that spot of bother. But I am concerned.
One option is for the Government to sell its shares to the Group and have its debt reduced by the $103-plus million. That could provide breathing space, as well as increasing, or, as the case may be, reviving confidence and entrepreneurship among the people of this nation.
Such a move would further expose the bad job that has been done by the Minister of Finance and it would embarrass him eternally, because the Government would then be selling its shares to pay off debt. Under his stewardship, it had already lost 9% of its shares and had gotten nothing in return.
But his ego won’t allow for that, and those around him might not have the guts to bring it up, and to press for, indeed, insist upon (in the best interests of the people of this nation) a clinical and rational solution, whether or not such solution includes selling the shares to the Group to reduce the Government’s indebtedness to it.
But he also won’t allow it because he would no longer have the power to plant his caddies on the Boards of the Group, and so lose his control and influence (remembering that he is second in command when it comes to the National Bank Group of Companies). Also, he would no longer have an institution to prop up years of his own fiscal inefficiency and profligacy.
All of this is a perfect reason and opportunity, now that so many warts have been exposed, for his colleagues, in the interests of the National Bank Group and the nation, to send him packing.
I want at this point to recognize Sam Condor for standing up to him this past week with the letter and with his boycott of Parliament, in order to send the signal that he would no longer put up with his autocratic, interfering and disrespectful behavior.
Back to the National Bank Group, and yet another concern. As at June 30th, 2009 public sector deposits in the Group stood at $610 million. My guess is that much, maybe most, of that money is Social Security’s money. Let us say $500 million.
Firstly, I am not comfortable with so much money from Social Security being held in one institution. I will presume that Social Security’s terms of reference allow it to invest that amount of money in one institution, but is it the most prudent thing to do, even if the Group is as solid as solid can be, and the risk is, at worst, minimal?
Is the rate of return the best that Social Security can do?
One question that I frequently ask myself is whether part and parcel of the deal between the Group, which is holding more and more Government debt, is that the bulk of Social Security’s money must be put in National Bank. If so, then Social Security’s money is essentially being used as a kind of ransom.
In this potential ‘triangle of death’ the Government needs the Bank, and in order to help out the Government, the Bank needs to hold on to Social Security’s hundreds of millions of dollars. And in the ‘triangle’, as Social Security puts money in the Bank at, say 7%, Government goes and borrows it at 9.5%.
Only people who are ‘too bright’ do things like that.
These three most important institutions in the country need to work with each other and enhance each other, but not in this manner. As far as I am concerned, what is going on here is troubling for all three institutions, and for the whole nation
So I am concerned.
I’m also concerned with what happens to Social Security’s money after it has gone into the Bank.
We know that under its governing laws and rules it has to be careful where it invests the people’s money.
Yet the Report which we are discussing states that of $420 million which the Group invested in 2009, as much as $370 million (which is 88% of that $420 million) was invested in securities that were “unrated”.
Now “unrated” is not necessarily a good word in the business world. It represents investments which are generally considered to be of poor credit quality. An exception might be Government Treasury Bills, and of that $370 million $93 million are invested in Treasury Bill issued by Governments in the region. So let us exclude that amount, and we are left with $277 million.
And let us be clear and fair. Not because an investment is classified as “unrated” means that it is necessarily unsound.
However, it would ease my concern (and, I am sure, the concern of others) if the Group were to explain specifically where that $277 million is invested. And for two very good reasons: Firstly, banks and other financial institutions are tied to a higher-than-average responsibility with regard to investing people’s money. And secondly, that principle applies also to Social Security, and if Social Security, which is obliged to invest the people’s money in the most careful and strict ways, puts our money in the National Bank which, in turn, invests it in “unrated”, otherwise known as “junk” securities, then we may have very, very real cause for concern.
I am already concerned about an investment made recently by Social Security and by an exclusive marketing agreement which it entered into for the sale of its 193 homes (which I am told, have already been oversubscribed). The folks who made these decisions will have some explaining to do to the people of this nation very soon. They did a wrong thing.
And now it would be good for the decision makers at the National Bank Group of Companies to do some explaining. There is simply too much at stake.
