Tuesday, October 5, 2010

Unicorn Investment Bank - A Second Look at 1H10 Financials


Unicorn has now released its 1H10 financials as well as the Central Bank of Bahrain-mandated Basel II Pillar III disclosures.  

I waited after they posted the first copy of the financials in the hopes that the "fancier" copy to follow would have more details.

Sadly, it did not.  

The number of notes in 1H10's report is only five compared the sixteen that were in 1Q10's report.  Or for that matter the 17 in 1H09"s report.  

Cynics out there might say that after losing US$160.5 million in 2Q10 the bank is trying to hide something.  Personally, I think it's motivated by a cost cutting campaign. Ink is quite expensive.  Even the virtual ink used on the Internet.

Because of the paucity of information in the financials, analysis is a "bit" difficult.

First the good news, no problem with the US$51.5 million in fair value losses on Investment Securities.   The net change from 31 December 2009 to 30 June 2010 is US$67.1 million.  It's composed of (a) the fair value losses through the income statement of US$51.5 million (b) fair value losses directly to equity of US$3.2 million, (c) securities sold of US$36.4 million plus the US$4.3 million loss on the sale partially offset by new securities purchased of US$28.2 million.

The problem is with the US$97.4 million in impairment provisions.  As above using the information in the Cashflow Statement, it appears that there were no purchases or sales of Investments in Associates or Joint Ventures.  The net change from 31 December 2009 to 30 June 2010 is US$27.5 million and it can be assumed that this is due to impairment provisions.  (But note it's an assumption.  It's not proven).

Other Assets are down US$95.7 million over the comparable period.  The Cashflow shows US$70.2 million in proceeds received, leaving US$25.5 million unaccounted for.  Interestingly enough in Note 3.1.4 of Unicorn's Basel II Pillar III disclosures, the increment in impairment provisions between 31 December 2009 and 30 June 2010 is US$20 million (from US$5mm to US$25 million).  It's unclear what is going on here.  The Total Column doesn't seem to add in some cases.  And certainly in more than one case does not tally to the balance sheet.  My working assumption is that Unicorn considers some of the assets in Other Assets as not subject to credit risk.   Perhaps, prepayments?

At this point we've accounted for (or at least think we have) some US$53 million of the impairment provision.  

Assets Held for Sale have decreased US$40.6 million though the Cashflow Statement tells us that US$7 million in cash was received.  So that's another US33.6 million of implied chargeoffs.  If they hadn't occurred, then the bank would not have broken even on the sale.  So we're now at US$86.6 million.    (As a side note, it seems the liabilities associated with the Assets Held for Sale have been folded into Other Liabilities.  Though I can't reconcile to the Cashflow Statement showing a US$5.6 million decline in Other Liabilities).
The charge for Goodwill gets us another US$2 million making the running total US88.8 million. 

Finding the remaining US$8.6 million is left as an "exercise for the student".

We can look at this another way through Note 5 Segment Information which provides a breakout by business line.  All amounts below are rounded to the nearest million of US$.


Cap Markets

& Treasury
Private

Equity
Corporate

Finance
Asset

Mgmt
Strategic

M&A
Other Total
EBIP&FVUS$19US$4(US$1)US$0(US$4)(US$29)(US$11)
Impairment Provisions(US$15)(US$15)(US$0)(US$2)(US$37)(US$28)(US$97)
FV on Securities(US$10)(US$30)(US$9)(US$0)(US$2)(US$0)(US$51)
Net Loss(US$6)(US$41)(US$10)(US$2)(US$43)(US$58)(US$160)

Two comments:
  1. On an operating basis (before provisions and fair value changes) two LOBs are profitable:  Treasury and Private Equity.
  2. However, changes in fair value are a measure of operating profit.  That means that only Treasury was profitable.
  3. After accounting for impairment provisions and fair value changes, each of Unicorn's LOBs was loss making.  Now I suspect that the new CEO wants to clear the books of any potential losses so he starts with a clean slate.  And sometimes there i a strong motive to over provision to provide a bit of lift to future earnings.  Reversals of provisions or mark to models can be quite handy in establishing one's value.  It also gives the company a story to tell about dramatic progress  as it tries to  overcome the lingering effects of the bad times on its reputation. Hard to know if there's a real problem in the assets or if some of this is "taking a bath".

4 comments:

Anonymous said...

The same way you should not mix business with pleasure, you should not mix business with religion

Abu 'Arqala said...

Anonymous

I believe that for most religions the concept is that believer should apply his religion in all aspects of his life.

As they say in the West, one shouldn't only be a Christian on Sundays (meaning one's religion is limited to attending services at his or her church).

As to your comment, I think upon careful reflection you may find that many of these institutions do not mix religion with business at all. Business is first and foremost. Religion is a mere marketing tool and the tenets of the religion are ignored.

Anonymous said...

This is precisely what I mean by mixing religion and business: a marketing tool and more. It does not matter if it is sunday, friday or saturday....

Anonymous said...

it is easy to critise and ignor the
facts that islamic institutions did
very well compared to conventional ones
UNICORN made huge profits in the past and will do so again after the great financial crisis made by non islamic banks and the latter ones will have less compititors in future.