Introduction

Demerara Bank Ltd (DBL) kicks off the full year reporting season for those companies with September 30th year ends. A full summary of its balance sheet and profit and loss has been published less than two months after the year end; a sign that the company is taking governance seriously. It should come as no surprise that those reporting issuers who are quickest to publish their financial information tend to have the best performing share prices. The ability to report in a timely manner instils confidence in investors that the company can manage its affairs well and hence generate profits for shareholders as well.

For the year ended 30 September 2007 DBL’s profit after tax was G$560.4m. To put this into perspective for the financial year ending in 2001 the combined net profit after tax for the publically traded commercial banking sector as a whole was just G$437m. The fact that one company is able to generate the profit of the entire sector just six years ago is a reflection of the tremendous growth in the sector. Of course it is not just DBL that has grown profits, the entire sector has seen substantial growth and I fully expect that the sector as a whole will generate net profits in excess of G$2B for the financial years ending in 2007. The banking sector is now having a measurable impact on GDP.

Drivers of performance

Deposits have grown 10% to G$17.9 billion, and though the spread between interest earned and interest paid has fallen in percentage terms, the extra deposits have allowed net interest to increase from $498.0m to $607.9m. Combined with a reduction in the amount of loan losses provided for and a 22% reduction in non-interest expenses this has seen profit before tax more than double to G$708.0m, up from G$345.9m one year ago.

Substantial change in asset portfolio

A year ago I questioned whether DBL was a bank or an investment company, with investments being the largest category of assets in the balance sheet. As of 30 March 2007 investments had increased still further; up to 47.9% of total assets. In the six months since the period covered by the interim financial statements investments have fallen to just 22% of total assets, reflected by a 184% increase in cash and cash equivalents, now standing at $7.7B, or 48.2% of total assets. I was wondering whether this reflects maturity of existing instruments, their sale or perhaps reclassification. Because the held to maturity is not required to be market to market IFRS requires that if any proportion of the holdings from the held to maturity portfolio are sold then the entire portfolio must be re-classified as available for sale and market to market.

Prospects

Trading in DBL has picked up somewhat in the last year, with several trades in the last year (though most trades have been for small volumes). The illiquid nature of the market has meant that despite there being only a few buyers the price has been pushed up to G$14, though last Monday’s trading session saw the price fall back to G$10 on somewhat increased volumes. DBL first traded at G$3 and a similar PE, so nearly all the share price growth is a reflection of earnings growth. The payout ratio has increased slightly compared with a year ago and the dividend in respect of the financial year has increased a healthy 122.2% to $0.4.

I think the share price is not currently pricing in much earnings growth. This tends to be a reflection of the cautious outlook in Guyana for equities as whole. Nonetheless the substantial shift in the bank’s asset portfolio is likely to bring down investment income considerably. The outlook for the company’s earnings will depend in a large part on the extent to which this reflects a temporary position between investments or a tactical change in asset allocation to reflect a more conservative stance.