KHCB Strategic "Fit" with GFH - Historical Context

At the End of a Wild Ride One Winds Up Where One Started 

For the discussion about KHCB’s strategic fit with GFH, a bit of context by way of historical data, though as I noted in my 1 December post, the success of GFHFG’s strategy depends on future performance not past.

Some introductory comments.

Since my earlier analysis, I’ve introduced two comparable, Bahrain Islamic Bank (BIsB) and Qatar Islamic Bank (QIB) and provide data for two periods:  the last ten and five years. 

Definitions:

1. GFH includes income from KHCB.  
2. GFH X KHCB does not.
3. Amounts are in millions of US dollars (GFH's base currency).
4. BD and QR have been translated to US dollars using respective official peg rates. 
5. As before, STDVP = Standard Deviation of the Population and STDVS = Standard Deviation of the Sample.

Let’s start with the long view – ten years financial data.

Net Income Statistical Analysis 2006-2015
	Mean	STDVP	STDVS
GFH	-$22.87	299.36	315.55
KHCB	$15.41	31.34	33.04
GFH X KHCB	-$30.04	293.96	309.86
BIsB	-$6.82	59.71	62.94
QIB	$386.18	68.55	72.26

Over the ten-year period, KHCB generated some $154 million equivalent in net profit.  But this was largely due to two fat years—2007 and 2008—whose net profit of $128 million (note that’s 83% of the ten year’s total) was driven by investment banking fees (revenue not net profit) of $128 million.  Revenue that has not recurred and is likely to in the future. As that indicates, the commercial banking business by itself has not been wildly successful (first euphemism of this post) over the period.  

That being said, KHCB increased GFH’s net income by about $71.7—GFH’s share of the $154 million—but really didn’t “move the needle” much (AA’s corporate buzzword of the post).  The mean improved slightly, but volatility barely moved.

The ratio of STDP and STDS to mean for GFH, KHCB, and BIsB indicates the high volatility of results.  These metrics are definitely not indicators of “stable or recurring” income or profitability.  The negative means and rather “modest” (second euphemism) positive mean is another indication of weakness.

The story is much different at QIB.  There the STD is a fraction of a rather healthy mean.  In the case of QIB, we’d predict positive earnings as the most likely outcome using the above data.  Not so with the others.

Now for a five year view.

Net Income Statistical Analysis 2011-2015
	Mean	STDVP	STDVS
GFH	$0.44	11.55	12.91
KHCB	-$4.17	24.27	27.13
GFH X KHCB	$2.42	9.21	10.29
BIsB	-$14.32	49.23	55.04
QIB	$411.87	70.45	78.77

During this five year period, two things are clear about KHCB’s performance: 

1. It was more volatile than GFH’s. 
2. KHCB had a net loss over the period driven by credit problems. GFH did not, but just barely.     

In this period, GFH would have been better off without KHCB as net income would have been higher by some $10 million and volatility lower.  But GFH’s earnings would still not be stable.  Thus, with or without KHCB GFH did not achieve stable earnings.  It doesn’t require sophisticated math or even a calculator to figure out that ROE was dismal.  My earlier post has comparative ROE figures. As well, net income over the period did not rise even to “hobby” levels on an absolute basis.  

Based on a historical analysis, there is little to support KHCB as a pillar of GFH’s new strategy. 

What GFH needs is for KHCB to deliver not only a stable income but also much larger quantum of positive net income.  Neither of which KHCB has shown any ability to deliver.

But things change.

Blackberry was once the leading provider of business cell phones.   At  that point no one had ever heard of an IPhone.     

We’ll turn our attention to that issue in coming posts.

Bahrain Islamic Bank - Trouble on the Horizon?

Today an apparently rather "pleased" as well as "satisfied" BIsB announced that:

BisB has taken the option of enhancing its financial position, by increasing its provisions mainly due its investment portfolio, rather than announcing profits for its mid–year results.

AA:  Should the reader interpret this to mean that contrary to IFRS, AAOIFI "FAS" allow a reporting entity full discretion to take provisions even when they are not really needed?  Perhaps, merely as "a precautionary step against any market changes, and in line with the Bank's conservative policy in this regard."  No deterioration in the portfolio here.  Move along.  It's pretty much in line with 2009 when the Bank appropriated "precautionary provisions" as "a conseqeunce to the International Financial and Economic condition".

By the way if you're wondering BIsB "has registered non-cash losses to the tune of BD 5.7 million for the first half of the current year."  In 1Q10 it had a small profit of BD1.2 million. 2Q10 Financials here.

We also learned that:

The Board of Directors agreed to increase the paid-up capital of the Bank by up to 75 % by issuing new shares with at its nominal share price issue of 100 Fils per share.

And that:

Mr. Khalid Abdulla Al-Bassam went on to confirm the Bank’s strong financial position and its satisfactory liquidity status and reiterated that the Bank needs the new injection of cash to finance the growth requirements in its business activities.

AA:  Apparently a rather sudden decision on an expansion strategy.  You'll recall that no capital increase was presented at the 16 March 2010 Annual General Meeting for 2009.   Perhaps like AA you're  also wondering where BIsB is going to grow by 75% particularly in this market.  Though perhaps a part of the capital increase will go to cover the BD35 million deduction from regulatory capital for the "excess amount over maximum permitted large exposure limit".  That and 2009's BD20 million loss were the primary cause of the approximate halving of the CAR.  (Note 16 2009 Audited Financials).

It's also a bit surprising that a successful institution like BIsB is offering its shares at par BD0.100 - when it trades at BD0.159 per share and its book value per share is BD0.183.  Though I suppose one might note that roughly a year ago the Bank traded for BD0.264.  And that its order book is one-sided with more than 100,000 shares on "offer" - roughly 14 x the last traded volume.  Market data here.

There would appear be more here than meets the eye at first glance.

1. Clearly, BIsB - which is well known for its focus on the real estate sector (not only for lending but also for  proprietary investment  in construction and development companies -- has some issues with its portfolio.    
2. It needs provisions.
3. It needs additional capital.  Hence the Rights Offering at par.
4. That being said, Moody's ratings on the Bank remain the same as they did in March 2010 a respectable Baa1..