SBM: In the limelight for the wrong reasons

The SBM came into the limelight last week for the wrong reasons. Its previous year accounts were overhauled due to wrong classification of certain items

Normally, banks are equipped with the required internal accounting and internal auditing expertise to prepare their accounts for presentation to their External Auditors to enable the latter to form the opinion that they “give a true and fair view of the financial position” of the bank.

The profits realized by our two major local commercial banks, the Mauritius Commercial Bank, (MCB) and the SBM Bank (Mauritius), (SBM), make headlines each year. The net annual profit is in the range of Rs 4 to 7 billion for the MCB and it revolves around Rs 3 to 4 billion in the case of the SBM, projecting, if it were necessary, their ordinal positions and the position of their prominent executives in the system.

Once such figures are flaunted in public, there are some public outcries that the banks would be ripping off customers with a plethora of unjustified bank charges, which would explain the huge amounts of their profits. To complete the ritual, the MCB, on its part, lets it be known that not all its profits originate from within Mauritius. The SBM usually remains quiet.

The SBM’s accounts for 2015 show some major revision of its annual results for this year and for preceding years. Earlier published figures have had to be restated for non-compliance with Accounting Standards as stated by the SBM Holdings Directors signing the accounts for 2015, specifically International Accounting Standard 38.

In the process, the restated annual profit of the SBM group was maintained more or less around the bank’s habitual net profit of Rs 4.4 billion for the year ended 2013. But the net profit figures for 2014 and 2015 came way down to Rs 1.9 billion and Rs 1.6 billion, respectively, out of range with previous years’ track records.

Expenses relating to an IT project started in 2012 and which has cost a big amount have had to be reclassified from ‘assets’ to ordinary expenses. In other words, there is no counterpart asset to show for the expenses incurred. Hopefully, the actual total cost incurred for this project each year has been properly allocated annually and is properly reflected in the 2013 profit figure.

The restatement of past years’ published accounts has hit hard the accounts of the bank group for 2014. As a result, the group’s net profit has got sharply reduced to a mere Rs 1.9 billion for 2014 after what the bank states, amounts to a revision of previously inflated figures for the year. This sharp downward revision of the net profits for 2014 is due “to restatement of expenditures incurred relating to inefficiencies in the implementation of the Group’s information technology project which do not qualify (under applicable Accounting Standards) to be treated as capital expenditure” contrary to the way it had been shown in the bank’s previous year’s published accounts.

The bank had treated, in its published 2014 Accounts, the expenses incurred in relation to the IT project (what is the total cost for the project overall?) as the acquisition of additional “assets” whereas, in fact, it was a mere expenditure with no counterpart asset to show for it. So, in the new revised version of the accounts presented along with the 2015 Accounts, the assets had to be run down and the expenses so incurred by the bank treated, as they should, as an expense. This explains why the profit figure has declined sharply for 2014.

Did the bank’s accountants bring this fact of wrong classification, having the effect of showing a higher profit figure for 2014 than it was actually the case, to the attention of the bank’s Board members before the accounts were signed off? If they did and the Board insisted to represent the bank’s accounts prepared by them and shown to the External Auditors of the bank as being “free from material misstatement, whether due to fraud or error”, the Board members have a duty to explain their decision.

It appears that the “inefficiently” executed information technology project of the bank has involved it into a disproportionately high expense in the billions of rupees. The total amount involved needs to be explained, in the first place. Hopefully also, this big contract was secured in the open market place through a proper bidding process.

Secondly, if after incurring such an enormous expense, the project cost has been disqualified from being treated as an asset contributing to the bank’s regular stream of income under the Accounting Standards – hence its downgrade to the status of an ordinary expense negatively impacting on the bank’s profit figure – the question arises as to how the big cost incurred will be recovered. Will the bank customers have to face more bank charges to make good the shortfalls arising from the “inefficiently implemented information technology project”, again? Or, will the shareholders (including some public bodies) pay up by foregoing dividends?

The bank group’s profits for 2015 (Rs 1.6 billion) are well below trend, nothing to do with the Rs 4 to 5 billion in the years before. One of the factors contributing to this low annual profit performance is a provision set aside to make good a loss of Rs 1.9 billion, being an impairment (bad debt) loss on financial assets. The SBM Group explains this spurt in bad debts in 2015 to credit losses in relation to a major conglomerate (possibly the BAI group) and to two large impaired offshore corporate accounts.

The loss incurred, due to possibly the BAI group, is being recognized only in 2015, not earlier. As presented in the 2015 Accounts, it would appear that the irrecoverability of the sums involved in the BAI case came to be known to the bank’s Board only in 2015 (when the BAI group was dismantled). Should one understand that both principal and interest payments were being regularly serviced by the BAI group on its debt to the bank in the period before 2015,  that the bank didn’t have to “capitalize” BAI’s unpaid interest in past years as well? If  principal repayment was not met on time and interest payable not received as and when due, the question arises as to why provision for impaired advances was not made, as it should have been the case,  in the accounts before 2015.

One would like to believe that the impaired offshore corporate accounts referred to above became impaired in 2015 only and that this fact was not known to the SBM earlier. If the impairment happened before 2015, the write-down of the bank’s profits would have to be attributed to the time their non-performing nature was first recognized and not to the financial year 2015 alone.

It is a good thing, despite all, that the SBM’s accounts are being straightened up to reflect its correct position. It is not unusual for financial institutions to have recourse to creative accounting in order not to show up weaknesses they have accumulated on their balance sheets. It helps to show “brilliant” profit figures at appropriate times, camouflaging bad debts, to remain in the good books of decision-makers. This is what a number of the world’s biggest financial institutions were doing before the crash of 2008.

It has often been said that dominant chief executives make it almost impossible for Board members to find out the truth until it is too late. Boards discover that systems and controls have been overtaken on occasion to make financial institutions serve ends which are not compatible with the true objectives of the institutions.

In the case of the SBM, it was set up in 1973 not to project a strong image of its plenipotentiary executives; it was set up to bring competition in the local market for financial services that was moving towards increased cartelisation in the single-minded pursuit of profits, but also to enhance the financial inclusion of so many that were staying out of the market for financial services.

The twin failures – not abiding by international Accounting Standards and concentrating money into potentially bad debts – that the 2015 Accounts point out was certainly not the agenda meant for it. A big question remains: who did effectively benefit from the huge amount expensed, relating to the “inefficiencies in the implementation of the Group’s information technology project”?

*  Published in print edition on 15 April 2016