Friday, January 6, 2017

Analyzing KHCB's Financials - Credit Metrics Part 2



Continuing our financial analysis of KHCB's lending portfolio, today we'll take a look at past due loans that have not yet been classified as impaired.

Past Due but Not Impaired Loans (PDNI)
  1. When a bank declares a loan impaired, it takes provisions, ceases accruing income, etc.  It does not do so, with PDNIs.
  2. Often today’s PDNIs turn into tomorrow’s impaired loans.
  3. But note that a PDNI is not of itself conclusive proof that the loan will turn out to be “bad”.  Sometimes a borrower has a legitimate reason for being late and brings the loan current.
  4. What analysts look for is trends in PDNI (increasing, decreasing) and the length a PDNI is past due to form an opinion on future impairments.
Let’s start with a macro view.  What has been the trend at KHCB between 2011 and 2015? 

KHCB Past Due But Not Impaired Loans 2011-2015

2015
2014
2013
2012
2011
BHD Millions
60.8
35.8
39.0
39.5
18.7
% FA & LA
15.7%
10.6%
13.7%
14.8%
8.8%

  1. At first glance, the trend doesn’t look good.  But let’s dig a bit deeper.  
  2. How are the loans distributed by time past due? The theory being the longer a loan has been past due the weaker the probability of full collection.   

KHCB PDNIs Over 90 Days Past Due

2015
2014
2013
2012
2011
90-180 Days
7.93
1.01
1.58
3.12
1.95
% All PDNIs
13.0%
2.8%
4.0%
7.9%
10.4%






180+ Days
17.2
1.0
1.8
4.7
8.3
% All PDNIs
28.3%
2.8%
4.5%
12.0%
44.4%






All Over 90 Days
25.2
2.0
3.3
7.9
10.3
% All PDNIs
41.4%
5.7%
8.6%
19.9%
54.8%

  1. This is an even bleaker picture. 
  2. In 2015 41.4% of all PDNIs are over 90 days past due. 
  3. 28.3% of all PDNIs are over 180 days.  That is PDNIs are skewed to the longest shown past due “maturity bucket”.
  4. The last time the numbers were comparable (2011) there was a massive loss two years later due to provisioning.
  5. AA wonders and maybe you do too how loans can be past due for more than 180 days without being considered impaired.
  6. But can think of two explanations.
  7. The loans are collateralized by highly liquid assets with a robust margin of safety and based on impeccable legally enforceable agreements.  That is, if the borrower doesn't repay, the collateral is sufficient to repay principal and interest in full and the agreement is so watertight that no judicial delay will occur.
  8. Another is something a GCC national banker once told me about “Islamic” banking.   “AA”, he said, “it’s often said that Islam has no miracles.  No wine into water.  No raising of the dead.  No healing of lepers.  And that is true, except with regard to ‘Islamic’ banking.  There halal profit rates miraculously track interest rates even with the latter are at a level so low that the average suk merchant couldn’t make a living.  But that’s not the only miracle. One can make a profit by buying and selling to oneself.” 
  9. AA supposes that if this is true, then loans can be past due 180 days without being impaired.    أعلم الله
So far we haven't found a compelling reason why KHCB would be a good fit with GFHFG's new strategy.

One more post--a look at collateral--and AA's deep dive into KHCB's financials will come to an end.  Perhaps the "gold" is here that bolsters KHCB's credit portfolio.  

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