From a review of TIBC's financials, it's clear that the bank was exposed to significant risks arising from certain legal arrangements with its holding company, Ahmad Hamad AlGosaibi and Brothers ("AHAB"). AHAB held legal title to TIBC's investment portfolio and to the collateral on its loans. And this may be a large part of the reason for the collapse of this apparently well capitalized bank.
In both cases, under the legal agreements between AHAB and TIBC, AHAB held these assets in "trust" for the bank. But the critical legal issue is whether such a trust structure would be recognized by a Saudi Court. That is, would the Saudi Court look through AHAB's legal title to ascribe direct ownership of the assets to TIBC? If it did, then these assets would be outside of AHAB's "estate" and would not be subject to an AHAB bankruptcy, insolvency or administration. If it did not, then these are AHAB's assets to be divided among AHAB's creditors - not just TIBC.
Update: From the Golden Belt 1 Sukuk (Saad Group): ""The concept of trust as deemed in common law jurisdictions does not exist in Saudi Arabian law." Here's the link to that post.
I'm guessing as with Awal that TIBC's problem is solvency not liquidity. With TIBC's relatively high equity to total assets ratio, there would have had to been a substantial erosion in asset values to trigger insolvency. From the structure of TIBC's balance sheet the two areas where this is most likely to have occurred in are loans and investments. The loss of the assets themselves would have the most impact on the bank's equity.
Now to the detail.
Unlike Awal, TIBC posts more financial info on its
website. At the "Publication" drop down menu, you'll find quarterly financials for 2008 and audited annual financials for 2005 through 2008.
As with Awal, let's focus on the changes from 3Q08 to 4Q08.
Total Assets declined US$498.5 million from US$4.3 billion to US$3.8 billion - roughly 11.6%. Compared to 4Q07 the decline was a more modest 6.6%.
On the liability side, the major declines were US$268 million in due to banks, US$70.5 million in due to customers, US$30.9 million in due to related parties, and US$12 million in other liabilities. A total of US$381.5 million. A decline of US$117 million in equity accounted the remainder. Declines are all fairly reasonably spread and there is no one group with a major cashflow in its favor as with Awal.
It's difficult to use TIBC's 2008 quarterly financials to analyze term loans because the bank and its auditors appear not to have been able to make their minds up about a consistent presentation of term loans on the balance sheet during 2008. After appearing earlier in the year, these completely disappeared in 3Q08 only to re-emerge in 4Q08. Looking at Note 10 in the fiscal year end ("FYE") 2007 financials, TIBC had US$375 million of outstanding term loans. US$100 million was due in the next twelve months. In the 2Q08 financials term loans had decreased by $100 million and US$75 million was shown as due in the next twelve months (Note 8). This suggests that there was no prepayment of term loans. However, if there were, it would appear to be only for US$75 million - though this amount may be included in Due to Banks as a current payment. The presentation in TIBC's financials is confusing on this score and so it's difficult to be definitive.
On the asset side, cash and banks were down US$429.4 million. This funded the reduction of US$381.5 million in liabilities plus increases in loans of US$77.2 million and other assets of $24.5 million. The US$171 million drop in investments was largely due to US$117 million in (non cash) fair value adjustments (reflected directly in equity) plus an apparent US$54 million of cash realizations.
At 31 December 2008, equity was US$1.3 billion and total assets US$3.8 billion. Like Awal, rather sharp declines in asset values would have to have occurred to significantly erode capital to zero or near zero.
Let's take a closer look at the balance sheet.
- Cash and Banks was US$1.1 billion. Three key items from Note 4. (a) 86% of these deposits were with banks and financial institutions in Europe. (b) 76% of deposits were with A rated counterparties. (c) TIBC claimed a strict risk concentration limit of 10% of capital. Also there are no related party deposits of any significance disclosed in Note 25. Taking these comments at face value, one would not expect a major loss in this asset category.
- Investments were carried at US418.1 million with negative fair value adjustments of US$426.6 million. Earlier in the year TIBC carried its investments at fair value through profit and loss ("FVTPL"). At 31 March 2008, TIBC had recorded a net loss of US$204 million. due to investment losses taken through the income statement. After 1Q08 TIBC engaged in an asset sale and asset purchase with related parties (presumably its parent AHAB). Sales of US$867.2 million and purchases of US$839.1 million. The sales would allow TIBC to dispose of the FVTPL assets - transferring them to available for sale ("AFS") would not have been possible. However, the new investments could be booked as AFS with no problem. Why AFS? Because any changes in fair value could be taken directly to equity by passing the income statement. Through the miracle of accounting principles, TIBC was able to report a net profit of US$156.1 million for fiscal 2008. The US$426.6 million loss on investments was recorded directly in equity. However, when we look at comprehensive income, we see that the bank actually had a loss for the year of US$270 million (US$156.1 million in net income minus the US$426.6 million in negative fair value adjustments). Another key piece of information is in Note 7 where it states that the bank's investment securities are registered in the name of the holding company (AHAB). Use of a Saudi registered company to act as shareholder would facilitate TIBC making investments in the Kingdom. There is no obvious legal reason/advantage to have AHAB hold shares in the UAE, Kuwait or other GCC stockmarkets. However, as outlined above, this arrangement could also present a danger to the bank if there were a problem at AHAB and a Saudi Court did not recognize TIBC's title. Then the bank would be one of AHAB's creditors with a claim on AHAB's estate rather than as the legal owner of the investments. This could be a potential area where asset values were lost. Bolstering this view is that it appears the investments were shares traded on the Tadawwul (Saudi market). There has not been a complete collapse in share prices on that market.
- TIBC's main business is commercial lending with US$2.3 billion out of the bank's US$3.8 billion of assets at FYE 08. Again from Note 4, 99.9% of the loan portfolio was in the GCC/Middle East region. TIBC also discloses that the majority of loans and advances are secured with a minimum coverage of 110%. Describing the collateral later in the Note, TIBC says that it is land deeds, plant and machinery or cash collateral. From the liability side of the balance sheet (customer deposits), it's clear that cash collateral is de minimis. Usually with land or plant and machinery, most banks use a much lower borrowing base. That is, they will lend maybe 50% or so against such assets given their illiquidity and high discounts required to sell. If Borrower A didn't make a go with his factory, why would Buyer B believe he could unless he could get them at a steep discount a la Irridium? And again there is the same note as with investments. The holding company is the legal holder of the lien on a trust basis for the bank. That implies that most of the loans were in Saudi Arabia - as there would be no advantage to using AHAB to hold collateral in another country. There is the same problem as with the investments: if the holding company gets into trouble, all the collateral may be blocked in its estate, leaving the bank as a creditor of the holding company and with uncollateralized loans.
Finally, one parting comment on a
recent report that creditors had tracked down some gold shipments involving AlGosaibi and Saad.
TIBC began gold trading in 2006 with sales volumes of some US$1.2 billion, followed by US$2.3 billion in 2007 and US$2.5 billion in 2008. Profit margins were roughly 1.4% of sales. It's unclear if TIBC were matching spot trades or whether it was taking actual possession of the gold. The news articles suggest it was taking possession - at least for the sums mentioned in those articles. It will be interesting to follow developments on this topic.
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