Update 27 April: A reader has pointed out that I overlooked the collateral held by GB and outlined in Note 26 of the 2008 fiscal year end financials. "Problem" solved. Clearly, it really pays to read the entire financial report.
AlWatan carries remarks from Michel Accad, CEO of Gulf Bank, in which he states that 25% of GB's loan portfolio is doubtful of collection. On the positive side GB has reserves equal to 87% of the doubtful amount.
AlWatan carries remarks from Michel Accad, CEO of Gulf Bank, in which he states that 25% of GB's loan portfolio is doubtful of collection. On the positive side GB has reserves equal to 87% of the doubtful amount.
In discussing 1Q10 results he noted the that the operating results included KD14 million from the sale of the investment portfolio, making GB's recurring earnings about KD30 million, noting that KD25 million to KD30 million was an expected quarterly run rate.
He also said that he anticipates that GB won't require provisioning (presumably heavy provisioning) in the second half of the year.
I must confess I don't follow the math here.
Using 25% doubtful portfolio, GB has heavy provisioning for at least the rest of the year. Unless Michel is referring to only a part of the portfolio. Using 87% cover also suggests that provisioning will require more than one quarter. If we assume that devoting 2Q10's projected KD30 million brings provisions to 100%, then doubtful loans are roughly 15% to 16% of the gross portfolio. I suppose another explanation could be that GB is not targeting 100% cover of doubtful loans.
Here's the analysis.
Since detailed information on the loan portfolio at 31 March 2010 is not available in GB's 1Q10 interims, we'll have to use Fiscal 2009 data as our analytical starting point.
At 31 December 2009, GB's gross loan portfolio was KD3.787 billion and Loan Loss Reserve ("LLR") KD0.522 billion. So net loans were KD3.266 billion.
At 31 March 2010 the net loan portfolio was KD3.163 billion. GB added roughly KD43 million to its LLR, thus a reasonable assumptions is that the LLR at 31 March was KD0.565 billion.
If this represents 87% cover of doubtful loans, then doubtful loans are some KD0.649 billion. However, 25% of Gross Loans (estimated as the sum of KD3.163 billion net loans plus the LLR of KD0.565 billion) = KD0.932 billion.
Using the lower estimate of doubtful loans of KD0.649 billion, then GB is KD84 million short. Which would seem to imply provisioning away most of the rest of the year's income using a KD25 million to KD 30 million quarterly run rate. Obviously with the higher KD0.932 billion estimate, heavy provisions continue into next year.
If we assume one more quarter of provisioning income will do the trick, (as implied by Michel's statement) then that would take loan provisions to KD0.595 billion. That's more like 15% to 16% doubtful loans.
Anyone out there with an explanation or comment, please post.
Posts
4 comments:
Too lazy to do the proper maths but following factors may be involved.
1. CBK expects specific provisions to be kept separate from general risk provisions - and therefore thay cannot be used to make specific provisions (or to reach mandatory coverage ratios.
2. CBK coverage ratios are (still I think)100% for bad (12 months past due), 50% for doubtful (6 months past due) and 20% for substandard (90 days past due). As impaired loans age, the provisioning requirement rises.
3. Provisions are usually made on the basis of gross outstanding less value of collateral held. provisioning required can therefore move up or down in inverse proportion to collateral valuation.
4. Finally, some bad loans will come good (or be the subject of a settlement with haircut less than provisions held). Set against this (and probably rather larger in current climate) new NPLs will appear.
"CITIBANK RULE" When taking over as the new boss of a branch (or a bank), classify as non-performing as much of your predecessor's loan book as you can get away with. This craters the first year profit but you are not to blame - he is. Then spend next three years "recovering" these "new NPLs", and collecting performance bonuses on resulting profits.
Note 13 of GBs 2009 financial statements details NPLs as KD 1,148,626,000. Gross loans are KD 3,787,329,000 so NPLs are 30% of loan portfolio. There are provisions of KD 521,576,000. Note 26A shows collateral of KD 602,894,00 against these NPLs so coverage ratio is 98%.
Advocatus
Thanks.
It really does pay to read all the notes in the financials.
Laocoboy2
Thanks.
I think it's not only a Citibank rule.
Known as the "big bath".
I've even seen a couple of cases where after taking the bath - the management kept blaming the previous one for problems, though strangely enough if there was good news, it was all the new management's brilliance and hard work.
Post a Comment