Let's look at two press releases on ADIB's 2009 financial performance. One reflects well on the professionalism of the institution. The other frankly does not.
Let's start with the offending press release.
First, at WAM the headline reads "ADIB Reports An Operating Profit of AED 1,527 mn for the 2009 Financial Year."
This approach illustrates another of Abu Arqala's 8 Simple Rules of Financial Analysis. When the earnings headline doesn't mention net income, you know there's an earnings problem. And a corollary: the further down in the press release the net income line is buried the more serious the problem. There were a couple of egregious examples of this in Bahrain a while back, despite a very clear statement in the Central Bank of Bahrain's Rulebook Module PD about burying bad information.
In the second paragraph, after being regaled with the year's numerous achievements we get the bad news:
After a year of multiple achievements, including: increasing total customer numbers by 27.2% to 342,097; the opening of the 50th branch in the UAE; an increase of 25.1% in total assets to AED 64.1 billion; the strengthening in both capital adequacy (to 16.96% under Basel II) and liquidity ratios (financing to deposits ratio improved to 83.9%); and a top three year-on-year improvement in customer service ratings, the Bank has taken a preemptive decision to set aside a year's earnings to enhance its total provisions and secure future growth.
You'll notice that the provisions aren't described as being necessary to cover duff loans and investments that the bank has made. They are actually a pre-emptive decision to "enhance total provisions and secure future growth". Right.
Equally amusing is the later statement "while the growth in customer financing comes on the back of a robust credit process that ensured the booking of quality assets." If the credit process is so robust, why then is there a need for provisions of this magnitude? Or are these the sins of the past?
In regard to credit quality asset growth of 25% during the year is touted as though this were some great accomplishment. It is really not that hard to make loans to people. The trick is of course collecting the loans you've made. That raises a second of AA's 8 Simple Rules of Financial Analysis. When a bank has explosive growth in assets, look for a spike in bad loans to follow in the next 18 to 24 months.
In regard to credit quality asset growth of 25% during the year is touted as though this were some great accomplishment. It is really not that hard to make loans to people. The trick is of course collecting the loans you've made. That raises a second of AA's 8 Simple Rules of Financial Analysis. When a bank has explosive growth in assets, look for a spike in bad loans to follow in the next 18 to 24 months.
If things are just fine, I suppose there is also an intriguing question why the Federal Government and the Emirate of Abu Dhabi had to put in additional capital in the form of Tier 2 instruments. If I'm not mistaken the amounts are not trivial: AED4.2 billion compared to shareholders' equity of AED5.9 billion as of 30 September 2009.
The press release then goes on to recount a variety of peripheral and not particularly important issues related to 2009's financial performance. It seems in the hope that the bad news will be buried in so much prose that the reader will miss it or forget it by the time he finishes.
A couple of comments:
- Provisions generally are the result of past mistakes and/or to be fair as well bad luck. There's no real banker who's never made a bad loan unless it's someone who works in administration. That being said, precisely how booking a provision leads to further growth isn't clear. In fact, when a bank has to take a provision this size, it might be a good occasion for it to consider whether a bit more moderation in growth (booking assets) is advisable.
- Does whoever wrote this press release actually believe that this sort of announcement isn't perfectly transparent? And doesn't elicit a snicker or two from just about everyone who reads it? And leave the impression of less than kalaam sharif?
Turning to the press release at the ADX, this is much more professional and deals with the provisioning issue in its headline: "To Provide A Solid Base for Future Growth, Abu Dhabi Islamic Bank Sets Aside A Year's Earnings As Provisions".
There the hard news is dealt with up front. Some of my same quibbles would apply to the sugar coating of the need for the provisions, but at least the thorny issue is raised.
BTW provisions are now 4.2% of gross financings up from 1.69% the previous year. Simply put, bankers don't take provisions for fun. Taking provisions is one of the hardest things for a banker to do because it directly impacts his or her career and bonus. Also it is very hard to get unneeded provisions past competent, diligent auditors particularly given the current constraints under IFRS for recognition of impairments.
So we're left with a question. Did WAM take ADIB's reasonable press release and cut and paste to create what we saw above? I'm guessing this is the case. If so, then ADIB and others would be well advised to have a word with WAM to avoid "Gulf News journalism standards" in the future.
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1 comment:
"the Bank has taken a preemptive decision to set aside a year's earnings to enhance its total provisions and secure future growth."
classic bank jargon, also complete and utter bullcrap.
provisions of that size are not preemptive, they are reactive. Its obvious that UAE's banks have some serious issues on their books.
Its a time-bomb just ticking away over there... altho it is good that most of the banks have been fairly transparent about their exposure, unlike Saudi's banks which have been utterly mum about any and all exposure.
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