Sunday, July 11, 2010

Bahrain Islamic Bank - Trouble on the Horizon?



Today an apparently rather "pleased" as well as "satisfied" BIsB announced that:
BisB has taken the option of enhancing its financial position, by increasing its provisions mainly due its investment portfolio, rather than announcing profits for its mid–year results.
AA:  Should the reader interpret this to mean that contrary to IFRS, AAOIFI "FAS" allow a reporting entity full discretion to take provisions even when they are not really needed?  Perhaps, merely as "a precautionary step against any market changes, and in line with the Bank's conservative policy in this regard."  No deterioration in the portfolio here.  Move along.  It's pretty much in line with 2009 when the Bank appropriated "precautionary provisions" as "a conseqeunce to the International Financial and Economic condition".

By the way if you're wondering BIsB "has registered non-cash losses to the tune of BD 5.7 million for the first half of the current year."  In 1Q10 it had a small profit of BD1.2 million. 2Q10 Financials here.

We also learned that:
The Board of Directors agreed to increase the paid-up capital of the Bank by up to 75 % by issuing new shares with at its nominal share price issue of 100 Fils per share.
And that:
Mr. Khalid Abdulla Al-Bassam went on to confirm the Bank’s strong financial position and its satisfactory liquidity status and reiterated that the Bank needs the new injection of cash to finance the growth requirements in its business activities.
AA:  Apparently a rather sudden decision on an expansion strategy.  You'll recall that no capital increase was presented at the 16 March 2010 Annual General Meeting for 2009.   Perhaps like AA you're  also wondering where BIsB is going to grow by 75% particularly in this market.  Though perhaps a part of the capital increase will go to cover the BD35 million deduction from regulatory capital for the "excess amount over maximum permitted large exposure limit".  That and 2009's BD20 million loss were the primary cause of the approximate halving of the CAR.  (Note 16 2009 Audited Financials).

It's also a bit surprising that a successful institution like BIsB is offering its shares at par BD0.100 - when it trades at BD0.159 per share and its book value per share is BD0.183.  Though I suppose one might note that roughly a year ago the Bank traded for BD0.264.  And that its order book is one-sided with more than 100,000 shares on "offer" - roughly 14 x the last traded volume.  Market data here.

There would appear be more here than meets the eye at first glance.
  1. Clearly, BIsB - which is well known for its focus on the real estate sector (not only for lending but also for  proprietary investment  in construction and development companies -- has some issues with its portfolio.    
  2. It needs provisions.
  3. It needs additional capital.  Hence the Rights Offering at par.
  4. That being said, Moody's ratings on the Bank remain the same as they did in March 2010 a respectable Baa1..

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