All in the Family: UGB to Seek Central Bank of Kuwait Permission for Additional Three Months to Buy Burgan Bank Shares

(Readers are invited to select the photo they believe 
most appropriate in the context of this news item.)

You'll recall that motivated by impeccable almost geometric logic, UGB had decided earlier that it was a wise investment indeed to acquire a large chunk of Burgan Bank's shares. (Additional posts can be accessed using the tag "UGB").

UGB had obtained Central Bank of Kuwait approval which expired  4 September. It now reportedly will seek a three month extension as we learn from Al Watan citing informed sources.

To help the two parties consummate this "marriage", KIPCO will manage the contract which could include it kindly selling some of its own shares to UGB or "collecting" shares (presumably from the market).

There are no values like family values. 

Burgan Bank 2Q10 Financials: A Closer Look

Let's take a closer look at Burgan's 2Q10 financials.  Press release here.

Income Statement

Net interest income for 1H10 at KD50 million was in line with 1H09's 48.6 million – no doubt some of the increase resulting from the consolidation of Tunis International Bank ("TIB") and Bank of Baghdad ("BoB") which BB acquired from United Gulf Bank, a related party (common KIPCO ownership). Earlier post on the asset sale here.

A similar case with Fees and Commissions: KD16.5 million in 1H10 versus KD15.9 million in 1H09.

Other Income (FX, Investment Income, Share in Associates Results, Dividends and Other) was KD17.1 million versus KD14.6 the half year earlier. As Burgan states in Note 5 referring to the acquisition of banks from UGB, "The business combination was achieved in stages. The Bank re-measured its previously held equity interest in BoB and TIB at the acquisition-date fair value and recognized a resulting gain of KD10,909 thousand , net of acquisition related expenses of KD43 thousand in the interim condensed income statement as part of "Net investment income" (note 10)."  Proving I guess, if one needed any proof, of just how wise and profitable these acquisitions were and are!

Operating Profit before provisions was KD53.8 million versus KD55.9 in 1H09.

Provisions were KD51.1 million versus KD27.8 million in 2009. 

As per Note 13, Provision for Impairment of Loans and Advances is split among BB's three LOBs as follows: 

1. Banking KD53.4 million charge 
2. Treasury and Investment Banking KD6.8 million "recovery" and 
3. International KD4.6 million charge.
   

As per BB's press release, with its specific provisions plus KD33 million of unallocated general provision, its Non Performing Loans are covered at 58%. 

Let's go back to FYE 2009 financials. At that point as per Note 5: 

1. Non Performing Loans totaled KD236.7 million.
2. KD5 million of which are "pre 1990 invasion" loans fully provided for. 
3. Specific Provisions were KD98.4 million.
4. General Provisions 80.8 million.
   

Since then it has added KD51.1 million in Specific Provisions. The language of the press release is not clear. It states that "In addition KD33 million in unallocated precautionary general provisions is available in the bank's books which resulted in a 58% provision coverage ratio". 

Either this means that only KD33 million of the KD80.8 million in General Provisions have been allocated to cover NPLs. Or that during 1H10, BB transferred some KD47.8 million in General Provisions to Specific Provisions. 

Because Burgan's regulator doesn't think this sort of information is useful it has not mandated that it be disclosed. Nor has it required the movement in the Provisions Account to be disclosed (write offs, FX movements, recoveries, etc). Apparently the KIPCO Group's legendary Shafafiyah Program doesn't call for this disclosure. Or perhaps Burgan may not deviate from the Central Bank's mandated form. Whatever the case, the lack of information affects the precision of the calculation below.

If we assume that only KD33 million of General Provisions are being counted for the 58% ratio, then Burgan's non performing loans are roughly KD314.7 million =(KD98.4 +KD51.1 +KD33)/.58. If on the other hand, Burgan made the KD47.8 million transfer from General to Specific, then NPLs are KD397.1 million. = (KD98.4 +KD47.8 +KD51.1 +KD33)/.58.

Those equate respectively to 13.3% and 16.6% of the gross Loans and Advances Portfolio (L&A as stated on the balance sheet plus the Provisions). One can assume that the 1H10 capital increase was motivated primarily by a need to shore up the Bank's defenses against troubled credits. And so these sort of levels make sense.

Balance Sheet

I didn't see any significant changes on the face of the balance sheet.

Looking at Note 3, Burgan has redirected some of its Cash and Banks from current accounts to time accounts (due within 30 days). At 1H09, the ratio of current deposits to total Cash and Banks was roughly 40%, falling to 35% at FYE09, and 19.7% at 1H10. No doubt motivated by Burgan'sTreasury's desire to wring a few more bps into interest income.

From Note 14, we see that KD168.8 million of Burgan's liquidity  (=Cash and Banks)  -- roughly 32.5% -- is placed with related parties. Sadly, it seems that United Gulf Bank has not bothered to publish the notes to either its 1Q10 or 2Q10 interim financials on its website. Without related party disclosures, it's not possible to say how much of UGB's US$401.9 million in interbanks taken at 1H10 were from related parties like Burgan. However, we do have data for FYE09 when US$333.2 (72.7%) of UGB's US$458.3 million in Due to Banks was from "Associates" (in which category Burgan should fall, though it may not be responsible for all of UGB's related party deposits. It is a big Family after all!). At FYE09 (Note 18), Burgan has KD172 million with Other Related Parties (US$602 million).

Finally from Note 13, we see that Burgan allocates its assets: KD1.1 billion to Banking KD1.4 billion to Treasury and Investment Banking and KD1.0 billion to International.

Cashflow

Operating Profit before Changes in Operating Assets and Liabilities is pretty much the same: KD46.8 million in 1H10 versus KD54.9 million the comparable period in 2009. 

Change in Operating Assets and Liabilities are a net source of funds of KD207 million in 2010 versus a rough balance in 2009 – a source of KD0.8 million. 

A substantial portion of the funds were used to acquire new subsidiaries – some KD92.7 million – which as Note 5 discloses were those involving UGB. 

During 1H10, Burgan paid down some KD72.8 million in Other Borrowed Funds, including KD48.1 million in a subordinated debt from a related party after obtaining "the approval from the regulatory authorities". (Note 14). The Bank also raised KD100.8 million in capital during the period.

After considering all the various items in cashflow, Burgan's cash decline is KD83.3  million (almost spot on equal to the payment to UGB for the acquisitions and the repayment of the related party subordinated loan).

Since AA is not only a strong believer in but also a strong supporter of Family Values, I am positive this is just a coincidence.

All in the Family?: Heavy Trading In Kuwait International Bank Shares - Who's Buying?

AlQabas reports that in the past 10 business days some 90.1 million shares of KIB (8.6%)  have been traded.  KD 19.5 million worth in 1121 contracts.  Apparently someone is buying because the share price  is rising.  2 fils yesterday on 7.5 million shares.  Compared to the KSE which is on a downward trend closing 17.7 points lower.

The speculation is that someone is accumulating a position.

The article does note the requirement for disclosure when one's position hits the 5% mark.  Though I suppose several of one's friends could buy just under the "wire".

Maybe Tessio, Clemenza, Fredo, Tom Hagen, etc.   One suspects not Barzini or Tattaglia.

All in the Family: KIPCO, Burgan, and United Gulf Bank

As you'll recall in late June, United Gulf Bank (90.7% owned by KIPCO) announced that it was selling Tunis International Bank to Burgan Bank Kuwait (55.47% owned by KIPCO and affiliates) for US$725 million.  This being part of a larger strategy by Burgan Bank to develop its international banking franchise by buying the international banking franchise of UGB.  

Prior notable steps in that process were the May 2009 successful transfer of UGB's shares in Algeria Gulf Bank and Baghdad Bank to Burgan Bank.  As per the press release, "Mr Masaud Hyatt' MD said:

“The transfer of the commercial banks has provided excellent return to our shareholders and will allow UGB to focus on its investment banking & asset management business.”

That transfer was preceded by the transfer of ownership of UGB's shares in Jordan Kuwait Bank to UGB in July 2008.  

“By transferring our investment in JKB to Burgan Bank, UGB has realized the hidden value of the asset and, by reinvesting the proceeds into Burgan Bank, UGB is acquiring a premier investment grade listed asset which will provide growth and value to our shareholders. As one of the region’s leading investment banks, it is astute business for UGB to re-invest in a business that we have helped to build.”

And, perhaps, even more "astute business" to recognize a profit on such a re-investment which some uncharitable souls out there (but definitely NOT Abu Arqala) might characterize as selling to oneself!

Today, UGB announced on the Bahrain Stock Exchange that it had secured the approval of the Central Bank of Kuwait to buy up to 20% of the shares of Burgan Bank  (over the next three months).

Do I perhaps sense another example of  "astute business"?

I'd close this post by noting that many in the West today lament the decline of the traditional family.   The adverse impact on society from the loss of family values. This is so keen a concern that in one country at least one political party has had great electoral success portraying itself as the defender of family values.  And, as some would have it, F.D. as well. 

As we now look to the The Midlde East, particularly the KIPCO Family, it's understandable that we might feel more keenly our sense of loss and perhaps frankly some envy. Here is a region and culture well known for strong family solidarity.  A place where families play an important role in the lives of individuals and society in aggregate.  My family, your family, The Family.