Hakrinbank had another successful financial year in 2006, thanks in part to the improved management of our operating processes and also the positive effect that the favourable macro-economic environment had on our business. Our total assets increased, while our balance sheet ratios improved and operating results rose. We comfortably achieved the main financial objectives that we set ourselves in our 2005 – 2007 Strategic Policy Plan, in which we fore- cast annual real growth in income of at least 15% - 20% and a real growth in profits of at least 10%. Despite a few expense items coming out higher than forecast we very nearly achieved our operational objective of an efficiency ratio of 55%.
Score card
Objective Actual
2006 2006
Financial targets
Real growth in income 15-20% 20,3%* √ Real growth in profits > 10% 35,3%* √
Operational targets
Efficiency ratio 55% 56%
* Real growth is nominal growth adjusted for average inflation of 11.3%
A detailed analysis of the main items in the balance sheet and the consolidated results of Hakrinbank can be found below, followed by information on the proposed appropriation of the profit.
Consolidated balance sheet
Total assets at the 2006 year-end amounted to SRD 606.46 million. This represented an increase of SRD 134.78 million, or 28.6%, compared with the previous year. This percentage is higher than the increase of 18% achieved in 2005.
Total assets (in millions of SRD)
Most of the increase on the assets side of the balance sheet is attributable to Receivables from clients and Receivables from credit institutions. The increase in these items contributed to the rise in interest income. Cash and cash equivalents and Tangible fixed assets also rose, while the value of investments in treasury paper fell slightly.
The increase in Receivables from clients was substantial, with a rise from SRD 229.73 million in 2005 to SRD 306.45 million in 2006. The SRD 76.72 million increase in lending, representing a rise of 33.40% from the previous year, was attributable to both Hakrinbank and Nationale Trust- en Finan- cierings Maatschappij. It related to loans in local currency and also to loans denominated in foreign currencies. Most of the increase in receivables was attributable to lending in the trade, housing construction, industrial and fishing sectors, while the volumes of consumer credit loans provided by our subsidiary also rose significantly. Receivables from credit institutions increased in the year under review by SRD 46.03 million to SRD 172.69 million as a result of the rise in the foreign-currency credit balances held for third parties and invested in part at foreign banks. Some
0 100 200 300 400 500 700 600 2002 181.0 2003 251.5 2004 399.6 2005 471.7 2006 606.5
Cash and cash equivalents rose by 11.9% to SRD 72.06 million, in part because of the increase in funds entrusted to us. This latter increase correlates to the growth in the domestic money supply. Tangible fixed assets were also SRD 4.76 million higher at SRD 20.66 million, mainly because of the revaluation of fixed assets. Under the Central Bank of Suriname’s rules, such revaluations are permitted only once every three years. This revaluation has dispensed with the hidden reserves relating to property in the balance sheet.
The items on the liabilities side of the balance sheet can be divided into three main groups: Amounts owed to third parties (specifically Amounts owed to clients), Provisions and Shareholders’ equity. Amounts owed to clients, which represent our most important source of funding, rose by SRD 106.89 million, or 25.24%, to SRD 530.42 million. Savings, which include long-term investments, rose slightly more (29.11%) than Other debts, which include credit balances on checking accounts. This development reflects our policy of seeking to attract more long-term funding in order to maintain a healthy funding structure. This policy is under- pinned by the current stable macro-economic environment, in which private individuals and businesses are increasingly prepared to invest money for longer periods.
The item Amounts owed to credit institutions rose by SRD 7.35 million to reach SRD 22.07 million at the year-end. This item relates to the daily clearing of amounts owed to and by other banks in the inter- bank market and is simply the position on the last day of the year.
Provisions rose by a total of SRD 3.09 million to SRD 7.23 million, primarily because of employee- related liabilities.
Shareholders’ equity rose by SRD 12.0 million, or 56.55%, to reach SRD 33.24 million by the year-end. The main reasons for this were the transfer of SRD 8.11 million of net profit to the general reserve – which brought this to a total of SRD 23.58 million at the year-end – and the increase of SRD 3.90 million in the revaluation reserve, which now totals SRD 9.59 million. The rise in shareholders’ equity has reinforced the bank’s solidity and has also had a positive effect on its business activities in that it is now able to consider applications for larger loans.
Off-balance sheet items, such as guarantees provided and letters of credit opened, which have an impact on the bank’s solvency position because of the element of risk they contain, rose by SRD 19.09 million to SRD 22.76 million in 2006.
Consolidated results
Once again, the consolidated results improved significantly, albeit at a lower rate in percentage terms than in the previous year.
Operating result before tax
(in thousands of SRD)
The bank earned a net profit before tax of SRD 19.95 million in 2006. This increase of SRD 6.71 million, or 50.63%, on the profit in 2005 was well above the target set for the year of a real increase (i.e. adjusted for inflation) of at least 10%. The net profit after tax totalled SRD 12.77 million, compared with SRD 8.48 million in 2005. The rise in the profit is the result of income increasing by SRD 12.44 mil- lion, or 33.92%, to SRD 49.10 million and expenses rising by SRD 5.73 million, or 24.48%, to SRD 29.15 million.
Income
As stated above, total operating income rose s ignificantly. This increase was attributable both to interest income and other (i.e. non-interest) income. The increase in the share of non-interest income from 21.3% to 24.5% of the total was a particularly important development. Our policy is to aim to increase this latter income to a structural level of around 35% of the total. It should, however be
0 2,500 5,000 7,500 10,000 15,000 12,500 17,500 22,500 20,000 2002 2003 2004 2005 2006 2,347.5 6,783.1 8,579.5 13,243.1 19,948.4
emphasised that some of this income is of a volatile nature and so will require careful and alert manage- ment. Interest income currently accounts for 75.5% of total income. We comfortably achieved our over- all target of real growth in income of 15% - 20%.
Interest income
Net interest income rose in the year under review by SRD 8.22 million to SRD 37.06 million. This was the result of growth in the lending portfolio and the rise in international capital market interest rates. The reason why income from investments in Republic of Suriname treasury paper was lower than in 2005, despite an unchanged level of investment, was because of the annual interest rate on these invest- ments being reduced from 12.5% to 10% during the year.
Although the increasing competition had an impact on our margins, the growth in lending volumes meant we were nevertheless able to improve our profitability. The growth in lending volumes was accompanied by tighter credit and assets and liabilities management, specifically of our liquidity position. This meant that our net interest margin remained satisfactory, despite the slight fall referred to above. Thanks to the decision to upgrade the relevant management information system, our over- all liquidity position could be closely monitored on a daily basis and managed profitably. Tighter management of our foreign-currency liquidity position also contributed to the improvement in this result.
Non-interest income
Fee and commission income and other income increased by SRD 1.58 million to SRD 9.35 million, primarily because of earnings from domestic pay- ment services, treasury activities and lending- related income such as arrangement fees and guarantee commission. Our insurance activities also made a positive contribution to this increase in income.
The result of financial transactions improved significantly in 2006, with an increase of SRD 2.64 million, whereas the year 2005 had seen a decrease. The increase in 2006 was primarily the result of the appreciation of the EURO and USD vis a vis the Surinamese Dollar. The euro rose by 11.81% against our local currency in 2006, while the USD rose by
invest part of our foreign currencies in the international capital markets generated a satis- factory return. We will therefore be pursuing this policy more intensively in the future.
Expenses
Operating expenses rose by SRD 6.02 million, or 27.74%, to SRD 27.71 million in 2006, with most of this increase being attributable to employee-related costs. The various provisions required were one of the reasons why this item rose by SRD 4.33 mil- lion, or 31.47%, to SRD 18.09 million. The staff provisions relate to provisions for pensioners’ rights, including medical provisions.
Other operating expenses also rose considerably, with the increase in this case being by SRD 1.38 mil- lion, or 24.16%, to SRD 7.07 million. Although some of these higher expenses are of an incidental nature, such as the costs of the activities arranged to mark the bank’s seventieth anniversary, the majority is of a structural nature, including, for example, the costs of postage and security.
The increase in operating expenses was higher than budgeted.We will therefore be seeking to redress this by improving our costs management and increasing our overall efficiency.
A total of SRD 1.44 million was transferred to specific provisions for bad and doubtful debtors. This transfer, which was slightly lower than in 2005, is the result of the improved quality of the lending portfolio and the very prudent policies we apply when assessing credit quality.
Ratios
Solvency
The most important solvency ratios are the capital ratio and the BIS ratio. The capital ratio, which is the ratio of tangible shareholders’ equity to total assets, is a standard solvency ratio, while the BIS ratio is more tailored to the banking sector. The BIS ratio relates shareholders’ equity to the sum of the various risk-weighted assets and is a better way of assessing the solvency of a bank.
The capital ratio at the 2006 year-end was 5.48%, which represented an increase of 0.98 percentage points. Tangible shareholders’ equity as a percentage
rise of around 57% in shareholders’ equity in 2006, which exceeded the increase in the lending portfolio. The bank’s BIS ratio at the year-end was 11.31%, compared with 10.01% at the end of 2005. As usual, we comfortably complied with the solvency standards set by the Central Bank of Suriname. These are in essence based on the Basle I Capital Accord, which specifies a minimum ratio of 8%.
BIS ratio (%)
Profitability
The most important indicators of our profitability are the RoE and RoA, which are discussed in detail in the ‘Business of the bank’ section of this report. Both these ratios improved thanks to the operating results achieved for the year
Return on equity (%)
The sharp rise in shareholders’ equity had as a consequence that the RoE improved only marginally, despite the significant increase in profit. The RoA rose by 3 percentage points thanks to more active assets and liabilities management, an improvement in the quality of our lending portfolio, the strong growth in other income and the reduction in the SRD cash reserve requirement. The ratio was also boosted by the increase to 9% in the percentage of the compulsory cash reserve permitted to be used for long-term housing loans on favourable terms.
Return on assets (%)
Our policy is designed to achieve further improvements in these ratios.
0 2 4 6 8 10 14 12 2002 9.74 2003 11.68 2004 10.19 2005 10.01 2006 11.31 0 5 10 20 25 35 50 40 15 30 45 2002 2003 2004 2005 2006 26.4 40.2 39.9 46.1 46.9 0 0.25 0.50 1.00 1.25 1.75 2.50 2.00 0.75 1.50 2.25 2002 1.01 2003 1.69 2004 1.69 2005 1.95 2006 2.37
Operations
The most important operational or productivity ratio is the efficiency ratio.
Efficiencyratio (%)
The efficiency ratio, which is the total expenses less provisions expressed as a percentage of total income, is a good measure of operating efficiency. The lower this ratio is, the more efficient the operations are. The downward trend in this ratio continued in the year under review. Thanks to the fact that the increase in income exceeded the increase in expenses, our ratio improved from 59% in 2005 to 56% in 2006. However, the sharper than expected rise in certain expense items meant we were unable to achieve our target of 55%. We will therefore be implementing various efficiency measures in 2007 in an effort to reduce this ratio to around 53% by the year-end. Our efforts to achieve further reductions in the efficiency ratio will focus on improving our assets
and liabilities management, increasing our earning capacity and implementing various cost-saving measures.
Hakrinbank share
Our policy is to pay an attractive dividend representing one third of the net profit for the year. This policy also takes account of our solvency, profitability and growth objectives. More information on the Hakrinbank share and its performance over the years can be found below. The developments in the share price reflect the favourable development of our business over the years, with both profits and dividends per share on a rising trend. The price/earnings ratio indicates that Hakrinbank shares are a good investment. For the purposes of comparison, the previous years’ figures have been converted to reflect the exchange of 20 old shares of SRG 7.50 nominal value for each new share of SRD 0.15 nominal value that took place in 2006.
Development of share price (in SRD)
Key figures showing development of Hakrinbank share (in SRD)
2006 2005 2004 2003 2002
Price at year-end 136.00 124.00 106.00 79.20 61.00
Net asset value at year-end 71.37 45.59 33.38 25.71 16.16
Market capitalisation (x SRD 1,000) 63.335 57.746 49.364 36.883 23.673
Net earnings per share 27.41 18.20 11.79 9.43 4.26
Dividend per share 10.00 6.07 4.00 2.80 0.91
Dividend yield (%) 7.4 4.9 3.8 3.5 3.5 0 10 20 40 50 70 90 80 30 60 2002 77 2003 64 2004 63 2005 59 2006 56 50 60 70 80 90 100 120 110 130 150 140 2002 2003 2004 2005 2006 61.0 79.2 106.0 124.0 136.0
Appropriation of profit for the 2006 financial year
As the above figures show, the net earnings of SRD 27.41 per share were 51% higher than in 2005. The improved underlying result and the bank’s reasonable solvency position mean we are able to propose a cash dividend to the General Meeting of Shareholders that is 65% higher than in 2005. The proposed increase in the dividend demonstrates the importance we attach to generating value for our shareholders. The additional amount included to mark the bank’s seventieth anniversary means the proposed dividend is higher than the one third of net profit normally paid out.
We propose appropriating the profit as follows: 1. Payment of a cash dividend of SRD 10.00 per
share of SRD 0.15 nominal value, which amounts to a dividend percentage of 6,666.67%. This includes the extra amount of SRD 1.00 per share paid to mark Hakrinbank’s seventieth anniversary. An amount of SRD 1.40 per share was distributed as an interim dividend in October 2006, which means a total amount of SRD 4.66 million being distributed for the year and a pay-out ratio of 36.48%.
2. Transfer of the remaining profit of SRD 8.11 million to the General Reserve.
The proposed appropriation of profit will further reinforce the bank’s shareholders’ equity. This will increase the bank’s solidity and improve its potential for growth, while also ensuring we can comply with the Central Bank of Suriname’s requirement for investment programmes to be funded by share- holders’ equity. Improving our solvency is also important in anticipation of a possible tightening of the solvency requirements.
Outlook for 2007
We expect the favourable economic trends seen in recent years to continue in 2007. We are assuming a stable macro-economic environment, falling inflation, stable exchange rates and economic growth of around 6%. There will be substantial investments in various sectors of the economy, while the government’s financial position and the monetary reserve will both continue to improve. Hakrinbank will benefit from the external economic environment. We are expecting to achieve increased volumes of business, which will in turn boost the bank’s growth and profitability. The
growth rates we have budgeted for the year are admittedly lower than in 2006 because of the falling inflation and the effect that the increasing competition in the market will have on our margins. We will therefore be seeking to introduce more innovative products and to diversify the range of financial services we offer as a means of improving our profitability.
Our employees put in another excellent performance in 2006, our anniversary year, and this forms the basis of the impressive results achieved by our business activities. Productivity improved, as did the level of service our employees provide, and these factors both played a major part in boosting the already good image enjoyed by Hakrinbank. The hard work and efforts of all our employees helped our bank to establish various new records for growth and profitability in its seventieth anniversary year. We are very grateful to them for the commit- ment and loyalty they have demonstrated.
We should also like to take this opportunity to thank all the members of the Supervisory Board for their active involvement in our activities and the tremendous efforts they made during the year. We are obviously also particularly grateful to our many and valued clients – both consumer and commercial – for their business and the trust and loyalty they have shown to Hakrinbank N.V. and its subsidiary, Nationale Trust- en Financierings Maatschappij.
Paramaribo, 10 April 2007
Executive Board Hakrinbank N.V. Jim D. Bousaid, Chief Executive Officer