Kuwait FSSA: Snapshot of Banking Sector

You probably have seen articles mentioning some of the criticisms and recommendations contained in the IMF's recent update of its Financial Sector Stability Assessment for Kuwait.

While I hope to review those in following posts in the not too distant future, I'd like to start by drawing on some of the material to give a macro picture of the Kuwaiti commercial banking sector – both conventional and Shari'ah compliant. This will complement the earlier post on other economic sectors in the country based on Al Joman's analysis.

Let's begin with a look at some macro numbers on the sector. These are taken from Table 5 Page 19. And these are only a few of the statistics there.

Banks' asset composition (Central Bank of Kuwait and IMF estimates). Amounts below are percentages.

Category	06	07	08	09
Trade	11.6	10.1	9.8	8.8
Industry	4.3	5.4	6.2	5.8
Real Estate & Construction	28.7	30.6	31.3	32.2
Agriculture & Fishing	0.2	0.1	0.1	0.1
Investment Companies	8.8	11.7	10.9	11.1
Oil &Gas	0.6	0.4	0.6	1.0
Public Services	0.7	0.4	0.1	0.1
Consumer – Credit Cards	1.5	1.2	0.8	0.6
Consumer –Auto	4.0	2.6	2.2	2.0
Consumer – Consumer Loans	19.9	17.0	15.2	16.4
Consumer – Mortgages	3.5	2.7	2.5	2.2
Consumer – Equity Purchase Loans	10.3	10.1	11.1	10.5
Other	5.8	7.6	9.2	9.1

 
Some observations. 

1. There is significant exposure to Real Estate/Construction, Investment Companies, and Consumer Loans for Share Purchases. Almost 54%.   One might describe these as not primarily productive sectors but derivative sectors feeding off wealth created by other sectors. 
2. By contrast there is relatively little lending to what are usually considered primary productive sectors:  manufacturing, farming and trading sectors.  That reflects lending opportunities by and large rather than lender red lining.
3. Consumer lending is a significant LOB at 39.2%, 33.6%, 31.8% and 31.8%. 
4. Lending for share purchases is 10%+. A particularly tricky business to engage in given the volatility in the KSE and lack of proper supervision/regulation. 
5. Consumer loans are another major segment. In the words of the FSSA "low risks loans since they are guaranteed by salary assignments". This is a mantra you will just about every commercial banker in the Gulf mention. What they don't mention is that at many lenders there are no maximum loan to salary ratios – designed to make sure borrowers have a serviceable debt burden. A reason why the Central Bank of Bahrain established these in a regulation. Or that if a person loses his job (something happening a bit more frequently these days), there is no salary to assign. And what are we to make of agitation in the Majlis Al Umma for the Government to buy up consumer debt, if everything is fine?
   

Some additional metrics, again percentages.

Category	06	07	08	09
NPLs to Total Loans	3.9	3.2	5.3	9.7
NPLs Net of Provisions to Capital	14.3	11.4	26.0	45.7
Large Exposure to Tier I Capital	144.0	129.8	129.5	144.9
ROAA	3.7	3.6	0.9	0.8
ROAE	28.8	29.4	7.7	6.8
Equity Exposure to Shareholders' Equity	53.2	56.9	67.6	68.5

 

More observations. 

1. I think the trends are what are more important. Clearly, the direction of these ratios is not surprising given knowledge of the difficulties faced by the banking sector over the past few years. 
2. The second ratio's dramatic increase is due to an almost doubling of NPLs between 2008 and 2009. There was an equally dramatic drop in provision coverage from 124% in 2007 to 89.4% in 2008 and 68.3% in 2009. 
3. Also note that the last ratio reflects (a) lending for equity purchases and (b) equity taken as collateral for other extensions of credit.
   

Let's look at the FSSA's comments.

1. In its Risk Assessment Matrix, the IMF notes concentrations in exposure to real estate, investment companies and stock prices, commenting that a decline in real estate or stock prices could lead to a major increase in Non Performing Loans ("NPLs"). 
2. It also notes Kuwaiti banks have minimal sovereign risk exposure. 
3. Reasonably good liquidity with liquid assets at 26% of total assets. 
4. Banks' assets predominantly domestic – some 80%. And I'd guess international exposure may be primarily with NBK. 
5. Loan to deposit ratio under 100% at 91% in 2009. 
6. In terms of assessing a severe realisation of a threat sometimes in the next three years, it assigns a medium risk of occurrence (PD) and medium loss (LGD). 
7. Banks could broadly withstand IMF's stress tests (outlined in Appendix IV Tables 3, 4 and 5.

Referring to the stress tests there were three: a base case, an intermediate case and a severe case.  And the test was for yeat 2010.

1. Baseline Case:  All 10 banks have Capital Adequacy over 12%.  No problems with liquidity.
2. Scenario 1(Intermediate):   1 bank has capital less than 8%, 4 between 8% and 12% and 5 over 12%.  Of the Top 5 banks, 3 are in 8 to 12% category and 2 above 12%.  No liquidity problems.  Recapitalization of banks below 12% threshold requires 1% of GDP.
3. Scenario 2 (Severe):  1 medium size bank loses all its capital, 4 banks are below 8% but above 0%, 2 banks in the 8% to 12% range, and 3 banks above 12%.  Of the Top 5 Banks, 3 are in the 0% to 8% range, 1 in the 8% to 12% range, and 1 bank only exceeds 12%.  (Presumably Abu Shukri).  No liquidity problems.  Recap amount here is 3.8% of GDP. 
   

New BIS Data Report on Property Prices

The BIS has launched a new data series on worldwide property prices.  Available here.

The property price statistics bring together data from a variety of national sources. The BIS, with the assistance of its member central banks,  has obtained approval of these sources to disseminate the  statistics as long as the national sources are clearly indicated. The sources and any relevant disclaimers are listed separately (sources of data). Copyright in these data must be honoured. 

The property price statistics include data from 37 countries, and are available at different frequencies. The dataset is updated at the end of each month. The data differ significantly from country to country, for instance in terms of type of property, area covered, property vintage, priced unit and seasonal adjustment. This reflects the fact that there are currently no specific international standards for property price statistics

Lu'lu (Pearl) Real Estate -2009 Losses KD9.5 Million Bank Lawsuit for US$539.2 Million

Pearl issued a press release on its 2009 financials this morning (3 August) on the KSE.  Text below.  Arabic only as usual.

While the loss is eye-catching, what is of even more importance is the lawsuit by a Kuwaiti bank against the Company for US$539,200,000 plus interest for derivatives transactions.   Even in the miraculous world of Kuwait, there is no way Pearl can pay even one tenth of that amount.

Quick translation of the main points from the press release and then some comments.  (Note the figures on the left are 31 December 2008 comparables):

1. 2009 Net Loss KD9.542,591
2. Loss per share KD37.94
3. Current Assets KD20,653,865
4. Total Assets KD56,686,155
5. Current Liabilities KD42,979,231
6. Total Liabilities KD47,262,815
7. Shareholders' Equity KD9,423,340
8. Income from Related Parties KD1,290,260
9. Expenses to Related Parties KD137,332

Pearl's auditors noted they do not have details on how the lawsuit amount was calculated.  And that this case raises a material uncertainty so they cannot express an opinion on the financials.  Technically, an audit opinion disclaimer.

Now the tafsir.

1. At 3Q09, Pearl's net loss was KD6,777 million.  So there doesn't appear to have been any dramatic increase in losses in 4Q09.
2. Minority interest which was KD1.225 million at 3Q09 seems to have disappeared.  Usually Shareholders' equity is reported excluding Minority Interests.  Unless roughly half the 4Q09 loss is attributable to Minority Interests.  Anyone out there who knows, please post a comment.
3. By my rough calculation, Pearl has lost around 71% of legal (paid in capital).  One caveat:  without knowing what happened to the Minority Interests, this can be only a rough guess.
4. AlZumorrodah Investments owns a majority of the  Company.  Somewhere around 53%.  You can access other posts involving AlZumorrodah by using the epynomous "label"
5. Pearl is suspended from trading on the KSE as it has not presented its 31 March 2010 financial yet.
6. The Board has sensibly recommended against any dividends for 2009.  (Mentioned in the headline  on the KSE's announcement page but not in the Arabic text below).

]  مجلس ادارة(لؤلؤة)(موقوفة)يوصي بعدم توزيع ارباح للسنةالمنتهيةفى31-12-09 ‏
يعلن سوق الكويت للأوراق المالية أن مجلس ادارة شركة لؤلؤة الكويت العقارية
ِ(لؤلؤة) قد اجتمع يوم الاربعاء الموافق 28-07-2010،واعتمد البيانات المالية
السنوية للشركة للسنة المنتهية في 31-12-2009 ،
وفقا لما يلي:‏
ِ1) الفترات الحالية:‏
البند       السنة المنتهية في 31-12-09   السنة المنتهية في 31-12-08‏
الربح(خسارة)(د.ك)             (9.542.591)         (7.935.133)‏
ربحية(خسارة)السهم (فلس كويتي) (37.94)               (31.54) ‏
اجمالي الموجودات المتداولة    20.653.865         27.550.454‏
اجمالي الموجودات              56.686.155         66.884.194‏
اجمالي المطلوبات المتداولة     42.979.231         42.335.372‏
اجمالي المطلوبات               47.262.815        47.539.987‏
ِ اجمالي حقوق المساهمين       9.423.340          19.344.207‏
بلغ اجمالي الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 1.290.260 د.ك
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 137.332 د.ك
علما بان تقرير مراقب الحسابات يحتوي على اساس عدم ابداء الراي التالي:‏
اساس عدم ابداء الراي:‏
قامت شركة لؤلؤة الكويت العقارية - ش.م.ك.(مقفلة) بالدخول في معاملات مشتقات
مالية مع احدى البنوك المحلية ، وقد قام البنك برفع دعوى قضائية على الشركة
بالمطالبة بمبلغ 539.200.000 دولار امريكي مع الفوائد . ان اساس احتساب هذا
المبلغ غير متاح لنا ، وحتى تاريخ اصدار البيانات المالية المجمعة المرفقة ‏
ما زالت القضية منظورة امام القضاء ولايمكن حاليا تحديد نتيجة هذه القضية ‏
على الشركة (ايضاح 35) .‏
عدم ابداء راي:‏
بسبب الاثر الجوهري للامر المذكور في فقرة اساس عدم ابداء الراي ، لم نتمكن ‏
من الحصول على ادلة تدقيق كافية وملائمة لابداء راي التدقيق ، ولذا فإننا ‏
لا نبدي راي حول هذه البيانات المالية المجمعة .‏

AlGosaibi v Maan AlSanea - Al Gosaibi to Get "Fixed"?

There are several meanings to the word "fix":

1. To repair something that is broken:  He "fixed" the pipe.
2. To arrange for a desired outcome:   He "fixed" the race.
3. To spay or neuter an animal:  Tom's cat was "fixed".

In previous posts on this topic we've dealt with the one or more of the first two meanings.

Now let's look at the third.

As seems likely now, the main action in the resolution of the dispute between AHAB and Mr. AlSanea over allegations  of misconduct as well as the resolution of the creditors' repayment is going to take place in the Kingdom.

In legal action outside of the Kingdom, AHAB (or its counsel) have:

1. Made rather serious allegations against Mr. Al Sanea (Allegations he continues to vigorously deny) which are not only personally damaging to him but as well to the reputation of the Kingdom.  And a bit socially discordant for folks who like to settle their disputes among themselves - quietly, by mutual consent out of the lime light.
2. Expressed a preference for NY and other foreign non Saudi jurisdictions which might be seen as spreading doubts about their ability to secure justice in the Kingdom.  And, if a family like AlGosaibi can't get justice, who then can?  This has involved some comments about the Special Saudi Commission.  As well, there have been other comments usually in response to forum non conveniens pleadings - which could be interpreted  to evidence the belief that the Saudi Courts are inferior to those of say New York.  And again very publicly made.

Will there now be a strong sentiment on the part of the authorities to send a clear message to Saudis that the patient quiet strategy that Mr. Al Sanea practiced is preferable to the more noisy one of the AlGosaibi's?  Or will all be forgiven in the reconciliation proceedings to take place in Saudi?  After all, the family is an old and important one.

In case you're wondering, AHAB's logo is in two separate "pieces" on its website.  Perhaps a symbol of things to come?

AlGosaibi v Maan AlSanea - The Financial Times "The Fix is In"

Here at Suq Al Mal some of the most vigorous exercise we get is from patting ourselves on the back. 

Before I head to the showers after this strenuous work-out, I'd just note that those who read Suq Al Mal read the main theme from today's Financial Times article starting back in June.  And most recently here.

From the FT:

The two decisions put a halt to the key cases at the heart of the scandal, and are a blow for Ahab, which has mounted an aggressive campaign against Mr Sanea, accusing him of a “massive fraud” that it claims could be as much as $10bn

Saudi officials have been tight-lipped about the dispute, and a high-level committee was set up to resolve the issue away from public glare. But it has reportedly been annoyed by the attention Ahab and its allegations have heaped on the conservative kingdom. 

And as always we close by noting that Mr. AlSanea continues to vigorously deny involvement in any fraud or other misconduct.

Dubai: The Emirati Goldfinger

Fancy expensive car proving honesty and sincerity.

Dubai is known as an important gold trading center.  Apparently the story of Damas is just one of many.

This is another.

An Emirati identified solely as AA, was taking gold from an Iranian woman, FH,  promising her he was selling to Russians at a "higher price".  Presumably because the Russians in the UAE are not sharp traders.  In one example, she gave him gold worth DH850,000 and he gave her a check for DH500,000.  

One could make a small fortune in such exchanges - though starting with a large fortune would be a prerequisite.

In any case the woman was sure this chap was on the "up and up". 

FH said that each time the accused, who addressed her as 'mother' visited her he used a different car. And, therefore, she believed whatever he said and never suspected him.

As Ken over at Wall St WTF can testify, justice has both a long arm and is swift in the Emirate of Dubai.  Interpol arrested the chap in Thailand and he's been arraigned in Dubai.

The accused has denied the accusation and the Dubai Misdemeanor Court has adjourned the case until August 9.

A couple of further notes.

Despite the similarity of names (AA), like a certain prominent Kuwaiti-Saudi businessman, I continue to deny any wrongdoing.  Mother, why won't you believe me?

And for Ken at Wall St WTF:

1. You've expressed some concern at your blog as to the  vigor (or lack thereof) in the legal pursuit of the Flying Abdullah Brothers.  Perhaps the judicial venue for this case  - the Misdemeanor Court - is an indication of the seriousness with which such crimes are viewed in the Emirate?
2. Also as one who has worked with the DIFX/DFSA, perhaps you can  advise whether Iranians are working there in senior management.  That potentially could explain a lot of things.  He called me "mother" when he signed his Enforceable Undertaking.

Al Joman: Analysis of Loans by Kuwait Economic Sectors

Last month the fine folks at Al Joman Center for Economic Consultancy published a series of reports analyzing loans by economic sectors (as defined on the KSE) except for the Banks Sector.

Looking at aggregate sector data, we can get an idea of the relative size of a sector and thus its relative importance in the national economy. 

Also by looking at the relative borrowings by firms within a sector we can get a better understanding of the dynamics of that sector. Is the sector dominated by one or a few firms? Or is competition fairly widespread? Which firms are the major players in a sector? 

In several sectors the largest firms (measured by debt) are fairly small.  This is a reflection of the overall size of the Kuwaiti economy as well as government dominance in certain economic activities.

But, and there is always a "but" with AA, there are some factors which mean any conclusions we draw are imperfect: 

1. Al Joman's reports are based only on companies whose shares are traded on the KSE. Private firms are not included. 
2. We're using debt as a proxy for asset size. This ignores equity, though one might argue in a land devoted to OPM debt is not a bad proxy. 
3. Not all firms have released current financial reports. 
4. Companies in certain sectors have borrowed for offshore business and investments. Examples are companies in the Investment Sector or in the Services Sector, e.g., Zain or Agility. Thus, there is some external "noise" in the numbers.
   

But, (a word used almost as often on SAM as "interesting"), we can get a reasonable macro idea or directional perspective from the data we have.

Before we do, some technical "directions" to make your navigation of the reports as useful and easy as possible.  This KSE link will take you to the English language drop down menu for Sectors and the list of companies comprising each Sector. Each company is shown and its Stock Symbol Number. Those SSN's are important (especially for those who don't read Arabic, the language of Al Joman's reports) because the data in Al Joman's report for each Sector is roughly in SSN order. A click of the language button on the right عربي will get you to the Arabic language page. And this link to Al Joman's report page.

Let's begin with an overview via Al Joman's 7 September report - their initial report meant as a macro summary.

All amounts are in KD millions.

Sector	31 Mar 10	30 Jun 09
Investment	5,747	5,937
Insurance	17	30
Real Estate	1,978	1,835
Industry	1,845	1,853
Services	3,916	4,347
Food	171	198
Parallel Market	65	33
TOTAL	13,740	14,233

 

As you look in the individual Sector reports, you'll notice that the total loans do not exactly agree to those shown in the above table. The differences are relatively minor and, to repeat myself (another common occurrence at SAM) can be ignored as we are looking for a macro perspective and general "directional" trends. 

For those, like AA, for whom no nit is to small to pick, here is an updated table. No, in an uncharacteristic move, I didn't refoot the detail to make sure these totals tally to the detail.

Sector	31 Mar 10	30 Jun 09
Investment	5,668	5,937
Insurance	17	30
Real Estate	1,963	1,838
Industry	1,845	1,853
Services	3,936	4,355
Food	171	198
Parallel Market	66	33
TOTAL	13,666	14,244

Since the first table adds to 13,739 for 31 March 2010, presumably due to rounding, the difference  between the original and adjusted tables is "off" by one.   
 

In the Investment Sector (51 firms) of the 5 largest borrowers 4 are distressed. KIPCO being the one "happy" firm. 

Data in KD million as of 31 March 2010. Total Loans at 1Q10 were KD5,668.

Firm	Amount	% Total Loans
Investment Dar	963	17.0%
KIPCO	619	10.9%
Global Investment House	588	10.4%
Aayan Leasing	416	7.3%
Aref Investment	339	6.0%
TOTAL	2,925	51.6%

 

In the Insurance Sector (7 firms) only 3 firms have loans, خليج ت (Gulf Insurance) at KD10.8 and اهلية ت AlAhleia at KD5.3 account for 92.6% of the 1Q10 total. AlAhleia having reduced its borrowings by roughly KD11 from 2Q09. 

In the Real Estate Sector (36 firms) there is no similar dominance. The largest borrower is تمدين ع (Tamdeen) with KD219 or 11.1% of the total as of 1Q10. Al Joman has not reported on لؤلؤة (Lu'lu) Pearl Real Estate or صفاة عالمي (Safat Global). Safat last reported FYE08 when it had KD15. Pearl 3Q09 when it had KD41. If you're looking at the KSE Sector page, note there is no stock with symbol 407. Also Al Joman has جراند (Grand) out of order in its list – using the KSE Symbol Number order as the right one.

In the Industry Sector (28 firms), صناعات (National Industries Group or NI Group) dominates with KD969.7 or 52.6% at 1Q10. The next largest firm أنابيب (Kuwait Pipe Industries and Oil Services Company) has only KD163. 

In the Services Sector (59 firms) زين  (Zain) and أجيليتي (Agility) dominate accounting for roughly 48.6% of total loans at 1Q10 with KD1,556 and KD356 million respectively as compared to 2Q09 when they were 59.1% with KD2,164 and KD411 respectively.

In the Food Sector (6 firms) the aptly named اغذية "Food" (Americana) dominates with roughly 92.2% of 1Q10 loans with KD157.7. And as the slogan now goes "Americana – 100% Arabian".  And note that United Food Industries Group's symbol is almost the same as Americana's, except UFIG has the definite article "أل" in front, i.e., الغذائية.  Be careful when placing that order with your broker!

In the Parallel Market (14 firms) صفاة عقار (Safat Real Estate) at KD19.8, ميدان (Maydan) at KD18.3 and عمار (Emaar) at KD11.2 account for 74.5% of 1Q10's total. Again note that the KSE list has gaps missing in the sequential order.  Symbols 2001, 2002, 2004, 2009, and 2016 are not used.

Damas - Auditors' Report

The Auditors' Report has been posted on NasdaqDubai:

This report is being released again due to technical difficulties experienced by some parties in downloading the Auditor’s Report.

Let's be crystal clear here.  This was definitely not due to a failing by the Company, nor its media consultant, nor NasdaqDubai.  Obviously, it's the fault of the downloader.  I apologize for my manifest error and lack of technical skills. 

In any case, Damas' auditors have issued an "emphasis of matter" report.  And that is muted by the language of Note  2 - which avoids such words as "material uncertainty" in reference to "going concern".  Clearly, it's smooth sailing.

Update:  It's been pointed out to me by a kindly reader that the Audit Report itself does contain the sentence:  "“In the event that the financial restructuring plan is not signed as envisaged or the standstill agreement is not extended further, there could be significant uncertainty over the ability of the group to continue operating as a going concern.”

Fair enough.  I stand corrected.

Damas: A Gem of Loss AED1.9 Billion for Fiscal 2010

You may have seen the news articles on the loss.  Here in the Gulf News.  Or Khaleej Times.  As usual, if you're looking for more content, you'll find it at The National.

Hopefully, this post will expand the discussion.

For this excursion, here are Damas' Press Release and its Audited Annual Report for 2010 (inexplicably missing the audit report).  Presumably a technical issue because ASDA'A - Burson Marsteller was involved in distributing this. I've sent NasdaqDubai an email to note the oversight.  If you live in the Emirate, you might give them a call. 

The first thing that becomes obvious is that the new board and management are  "taking an accounting bath" - writing down everything they possibly can.  This associates the loss with the previous board and management.  And then when there are recoveries in these same items in the future, they (the new "team") will look like "blooming business geniuses". 

The second thing is that the number of areas where writedowns or provisions have taken place give an idea of the extent of the corporate rot.  There seems scarcely an asset category  or company activity that was not touched.  In cases like this one has to be quite a charitable soul to ascribe the lowest possible level of intelligence and competence to those involved.  Otherwise one would be forced to conclude that they were complicit in the Abdullah Brothers' crimes.  That would, of course, include Damas' Accounting and Finance Department, its internal auditors, its Board Audit Committee and its then external auditors. 

Let's step through the charges.

First "impairments" of AED 790.6 million.   Note 11.

1. AED457 million against the AED767 million due from the Abdullah Brothers (Note 26).  A provision of 59.6%.  This is composed of the AED606 million  in unauthorized withdrawals plus AED150 million in a lost deposit - lost as a bank seized it for a gold loan to the Abdullah Brothers.  Less AED3.3 million in Board fees for fiscal 2010 - we'll file that  under "insult added to injury".  Seems Damas has a soft spot for the Abdullahs and still believes it needs to compensate them for the wise and highly beneficial services they provided to the Company during fiscal 2010.  We can be sure of one thing.  The Company will recover at least AED150 million from the Abdullahs by offsetting the AED150 million subordinated loan the Abdullahs made to the Company.
2. AED106.1 million against real estate due to a downturn in the market values.
3. AED54.7 million for investments in persistent loss making jointly controlled entities which are impacted by a change in the role of the Abdullah Brothers.  Since the losses were incurred while they were running the Company, is the assumption that now that they are not, the situation will change for the worse?
4. AED28.4 million for certain associates due to uncertainty of future cash profits.
5. AED84.4 million for long term loans and receivables from related parties.  Apparently wisely made by Damas with no fixed repayment tenors, no interest applicable and no collateral.  
6. AED14.1 million for available for sale investments.
7. AED16.0 million for intangible assets.
8. AED29.8 for receivables.

Now to Provisions - AED572 million.  Note 12.

1. AED434 million for Inventories (Note 22 (ii)).  Seems Damas gave gold from its inventory to certain "consignment vendors, ventures, debtors, associates, and jointly controlled entities without any margin and to certain parties against cash margin."  Some AED618.2 million (of which AED613.5 was gold) against which it had AED183.8 million in collateral.  It has fully provisioned the remaining amount AED434.4 million.  Once Damas "lent" gold or other inventory, then those assets should have been separated from the rest of inventory.  Especially since the amount is significant - 30% of total inventory.
2. AED121.1 million for doubtful receivables - in very rough numbers 37% of gross receivables.  There's one proven business way to increase sales and that's to sell on very easy terms.  Selling to people who can't or won't pay back works every time.  We are told that this provision is motivated by the change in the role of the Abdullah Brothers in the Company. It seems that the Abdullah Brothers originally approved the extension of these receivables. Which is perhaps why they weren't collected.  Now that they are no longer in control we are to conclude that the receivables won't be collected and must be written off? Frankly, I'm not following the logic here.
3. AED16.6 million for "slow moving inventories".  Since a jeweller's inventory turns really slowly these have to be some "real gems", no doubt.

Third, an AED79,6 million loss on settlement of bank liabilities (Note 13). 

1. AED73.3 million:  Damas couldn't meet margin calls against gold loans.  Wonder where the gold went? Borrowed by an Executive Director?  So the Company had to give Inventory with a cost of AED140.1 million for which the bank gave them AED66.8 million.  That led to an AED73.3 million loss.  Damas is buying back the inventory in a phased manner at the purchase price originally paid to the bank.  
2. AED6.2 million loss on a jewellery for debt exchange.

Provision for Dubai Ventures Loan AED311.5 million (Note 21).

1. You'll recall this transaction was part of the fraud perpetrated by the Abdullah Brothers at the time of the IPO.   They gave Damas funds to Dubai Ventures - part of the Dubai Group - to buy a portfolio of Damas shares to meet the minimum "free float" requirements.  This portfolio became a loan in Fiscal 2008.  And now "poof" it's provisioned.  Though management asserts it will do everything to collect the loan.  Since DV is holding highly valuable Damas shares, I guess it will be a matter of a few trades on DFM/NasdaqDubai.

 Other matters.

1. There are AED94.7 million in losses on Discontinued Operations.  A glance at Notes 15, 38 and 39 discloses a rabbit's warren of companies.  It's unclear to me how any lender could keep either an eye or control on his money once it enters a "black box" like this. That's not to say that there was any malfeasance at Damas on this score.  Just that this is a "tricky" situation for an unsecured lender.
2. Damas' Press Release refers to AED1.9 billion in one off expenses and provisions.  I think that's overstated.  Damas appears to be considering net interest expense of AED132 million as a one off expense as well as some of the losses on subsidiaries.
3. Damas is showing AED775.2 as Cash and Banks classified as a Current Asset.  Some AED392 million of this amount is pledged as security for loans (Note 29).  It seems a real stretch to consider these Current Assets.
4. Rescheduling:  There's a bit of cognitive dissonance between the Annual Report MD&A and the Press Release.  Presumably, the Press Release is the later document so we'll use that information on the structure.  The Press Release states there will be three tranches: Tranche 1 an amortising debt.  Tranche 2 a working capital facility probably "revolving" (not reducing).  Tranche 3 a term loan (presumably with no or a very pushed out amortisation schedule).   Note 2 to the Financials discloses that the proposed tenor is 6 years.   And that recovery from the Abdullah Brothers is not required to repay the debt.

Finally, as always with announcement like this, we at Suq Al Mal are on the look out for contributions to distressed debtors' rhetorical spin.  I'm happy to report that Damas has advanced this art significantly.  Here are some of their contributions:

1. A "difficult, if not unfortunate year".  (Chairman's Statement).  AA:  Unfortunate indeed.
2. "Unfortunate in that the problems which the Group now confronts are of its own making, through the failings of the then Board of Directors and, in particular, the actions of the Executive Directors, the Abdullah Brothers". (Chairman's Statement).  AA:  We can probably explain this statement by two facts.  It's true.  And there's a new team with no reputation at stake.
3. Operating performance "reconfirms the value proposition of the Group's core business"  (Chairman's Statement).  And from the MD&A:  "The robustness of the underlying business model was tested under actual stress conditions ..."   AA:  Much better than a "proven business model".
4. "The Group’s difficulties and the continued involvement with the Abdullah Brothers have raised a number of concerns, publicly. While recognising these concerns and putting in place the appropriate governance structure to mitigate against any potential issues, the continued involvement of the Abdullah Brothers is of strategic importance.  Fundamental in this regard is their knowledge of the  industry, in the areas of product design, quality, but more importantly their involvement in the  recovery of accounts receivables and the inventory given on consignment. In their role as Advisors,  the Group will be able to secure a knowledge transfer and an expedited, if not enhanced, recovery of  its receivables and consignments."  AA:  One certainly hopes so.  Wonder what the compensation is?  And if it's cash or reduction in their payable?

Kuwait Stock Exchange Investors' Guide

In case you missed it, the KSE has issued a set of Investors' Guides available here.

Some interesting information for those who use fundamental analysis for their stock selection.  Or want a quick introduction to a Kuwaiti company or sector.

Though like any wise Kuwaiti, I don't use fundamental analysis.  I ask a friend who has a friend who knows what the عراب is buying.  And more importantly when he's selling.  One can make a small fortune that way, though most times one has to start out with a large one.

Abu Dhabi Commercial Bank - AED 306 Million Loss for 1H10

By now you've probably seen the press articles on ADCB's 1H10 results and perhaps as well it's press release and the financials themselves.  The loss was due to the Bank taking an AED1.035 billion provision for its AED6.6 exposure to Dubai World. 

Here are some points that caught my eye.

First, the Financials.

1. Customer Deposits have grown from AED86.3 billion at 31 December 2009 to AED96.8 billion at 30 June 2010.  AED90.1 billion at 31 March 2010.  Unfortunately, there's no note for Customer Deposits so it's not possible to see where the increase primarily came from - government, corporate or retail clients.   Anyone out there with any information, please post.  As well, if  anyone knows, if ADCB is paying above market for funds.
2. Note 2: Bank Deposits - While there is a non trivial AED1.0 billion decrease, the major story here is the shift.  Deposits with banks in the UAE is now 44% versus 33% at 31 December 2009.   A greater proportion of AED deposits?  Helping provide FX funding in the local market.  BTW you'll note that balances with the UAE Central Bank increased by AED700 million roughly the decline in interbanks.
3. Note11:  Interest receivable has increased roughly AED230 million (of which AED147 million was in 1Q10) to AED837 million - some 37.8% over Fiscal Year End 2009's AED607 million.  Looking at Note 14, you'll notice that Interest Payable actually declined 4.0% to AED952 million from AED992 million at FYE09.   Unclear if this is timing differences.  Longer interest periods on loans than the deposits funding them.  Or a sign of some distress.  Something to keep an eye on.

Second, Press Release.

1. Loan to Deposits Ratio.   Yes, the ratio has come down from 135% to 123%.  You'll note it was 151% (! ?) in March 2009.  That's the right trend.  But, sorry to be impolite but a loan to deposits ratio over 100% is not sound banking practice.  In fact it should be lower.
2. "We have taken a more disciplined approach to pricing risk and have significantly enhanced our capabilities in risk management and strengthened controls across the business. As a result of the current economic environment, both corporate and consumer segments continue to experience high levels of stress and therefore we have had to take significant impairments in the first half of 2010.”  And would seem to have some more miles to go.  To be fair it does take time to turn around a big ship.  And changing a corporate culture perhaps even longer.
3. Dubai World Provision - I had understood that the Central Bank of the UAE had asked banks to refrain from provisioning until the restructuring was finalized and they had a chance to study the implications.  Is ADCB pulling a Citibank here?  If you know your banking history (and who doesn't devote lots of time to that interesting topic?),  that question will remind you of the action taken by Citibank to provision for duff sovereign loans in the 1980's.  In effect setting a "standard" for other US banks all of whom (including Citi) had heretofore been pretending that those loans - particularly those to Latin borrowers - were "as good as gold".  Is ADCB getting out in front of the pack so that when other lenders do take the provisions, that Quarter ADCB will be able to report a profit amid a sea of red ink at its competitors?  Or does it have more major pain of its own to take and is trying to spread it out in more manageable chunks?
4. Non Performing Loans:  Increased some AED491 million and the NPL ratio (NPLs to Total Loans) from 5.2% at FYE 09 to 5.4% at 1H10.  That looks good until one notices that the Total Loan portfolio has increased from AED116.6 to AED118.8 billion.  Hopefully, we can assume that none of that AED2.2 billion increase has gone bad yet.  Using total loans at FYE09,  the NPL ratio is 5.8%.  That I think is fairer measure.  
5. Provision Coverage:  ADCB's press release notes that its Provisions to NPLs ratio is 76.7% as of 1H10 versus 67.8% as of FYE09.  That looks good until one notices that the AED1.035 billion provision for Dubai World in included in the Provision total but none of the DW exposure as NPLs.  The latter presumably because DW is not past due on payment.  If we strip the DW provision out, ADCB's Provision Coverage is 61.3% a decrease from FYE09.  It's hard to understand the logic behind ADCB's calculation unless of course it considers the DW exposure "as good as gold".
6. Collateral:  AED2.8 billion at 1H10 versus AED5.5 billion at FYE09.  No explanation for the 50.9% decline.  Valuation changes?  Realisation of collateral to repay loans?  Clients repaid and collateral was returned to them?  All bits of information that would help assess the credit health of ADCB.  The note does mention that much of the collateral for NPLs is real property.  Is that the hint to the reason - further mark downs of property?

As indicated above, some trends to watch on the credit front, though the Bank's main shareholder has supported ADCB from its birth to today whenever it needed funds.  And has the resources to do so again. 

International Investment Group - Releases 2009 Financials in Kuwait 11 Days After Dubai and Bahrain

As you recall, on 18 July IIG released its financials on the DFM and BSE.  Just this Thursday 29 July, it released financials on the KSE.  Announcement in Arabic below.

Perhaps this event was partially responsible for the recent AlQabas article   "Companies Disclose in Foreign Markets Prior to Kuwait Due to Weak Transparency Laws".

One hopes that Kuwaiti investors have access to the Internet or they may be second  in line to receive official announcements of rather material information.

[11:43:26]  مجلس ادارة (المجموعة د) يوصي بعدم توزيع ارباح عن عام 2009‏
يعلن سوق الكويت للأوراق المالية بان شركة المجموعة الدولية للاستثمار
ِ(المجموعة د) قد اعتمد البيانات المالية السنوية للشركة للسنة المالية
المنتهية في 31-12-2009، وفقا لما يلي:‏
ِ1) نتائج أعمال الشركة:‏
البند             السنة المنتهية في 31-12-09   السنة المنتهية في 31-12-08‏
الربح(الخسارة) (د.ك)           (36.613.067)          (21.488.623)‏
ربحية (خسارة)السهم(فلس كويتي)   (82.02)                  (49.40) ‏
اجمالي الموجودات المتداولة     35.153.190            54.615.998‏
اجمالي الموجودات              107.056.935           149.062.604‏
اجمالي المطلوبات المتداولة     83.008.705             30.258.046‏
اجمالي المطلوبات               83.624.358             84.578.526‏
اجمالي حقوق المساهمين        23.432.577             64.484.078‏
بلغ اجمالي الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 6.004.401 د.ك
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 3.050.192 د.ك
علما بأن بنك الكويت المركزي قد وافق على هذه البيانات المالية بتاريخ
ِ13-07-2010.‏
ِ2) التوزيعات المقترحة:‏
قرر مجلس ادارة الشركة عدم توزيع ارباح عن السنه الماليه المنتهيه
في 31-12-2009، علما بان هذه التوصية تخضع لموافقة الجمعية ‏
العموميه و الجهات المختصه .‏
علما بان تقرير مراقبي الحسابات يحتوي على اساس عدم القدرة على ابداء الرأي
التالي :‏
اساس عدم القدرة على ابداء الرأي:‏
كما هو مبين في الايضاحات ارقام (2.1 - 12.5) من هذه البيانات المالية ‏
المجمعة فقد تخلفت المجموعة في الفترة اللاحقة عن سداد بعض ادوات الدين ‏
الاسلامية مما اسفر عن قيام بعض الاطراف الدائنة برفع قضايا ضد المجموعة
كما توقفت المجموعة عن سداد تكاليف التمويل المتعلقة بصكوك اسلامية ‏
بالاضافة الى مخالفة بعض الشروط الاخرى الواردة في اتفاقية الصكوك ، ‏
وقد ادى ما سبق الى ان اعتبرت المجموعة قد تخلفت عن سداد صكوك اسلامية ‏
وذلك وفقا للشروط المنصوص عليها في هذه الاتفاقية .‏
بالاضافة الى ذلك تعاني المجموعة من نقص في السيولة ، كما بلغت صافي ‏
خسائر المجموعة 36.6 مليون د.ك تقريبا عن السنة المنتهية في 31 ديسمبر 2009‏
ِ(21.5 مليون د.ك - 2008) كما تجاوزت الخسائر المتراكمة 75% من رأس مال
الشركة الام كما في 31 ديسمبر 2009 .‏
اقتراح مجلس ادارة الشركة الام وفقا لمتطلبات المادة 171 من قانون الشركات ‏
التجارية دعوة الجمعية العامة للمساهمين للموافقة على الاقتراح الخاص باعادة
هيكلة حقوق الملكية وذلك لاطفاء الخسائر المرحلة وتخفيض رأس المال ‏
ِ(ايضاح 22) كما تقوم المجموعة حاليا على وضع الخطط اللازمة والتفاوض
مع الممولين لاهادة هيكلة ديونها .‏
ان قدرة المجموعة على متابعى اعمالها على اساس مبدأ الاستمرارية تستند
بشكل كبير على انجاز هذه الخطط والمفاوضان بنجاح. لم نتمكن من الوصول ‏
الى ادلة تدقيق موثوق فيها وكافية لتحديد مدى قدرة المجمعة على النجاح في ‏
اعادة هيكلة حقوق الملكية والدين المستحق عليها .‏
ونظرا لجوهرية الامور المذكورة بفقرات اساس عدم القدرة على ابداء الرأي ،
فأننا لانبدي رأي على هذه البيانات المالية المجمعة المرفقة .‏
امور قانونية اخرى :‏
ما تم ذكرة في ايضاح رقم (6) فيما يتعلق بارصدة المرابحات والوكالات المدينة
مع اطراف ذات صلة والتي تتجاوز حد التركز الائتماني المسموح بة وفقا ‏
لتعليمات بنك الكويت المركزي .‏

The Sweet Smell of Err .... Sky Gardens Tower

From The National - the downside of upkeep.  Or perhaps an indication of the quality of construction.

But he has been told by the building’s maintenance staff that the pipes running through the tower have likely sprung a leak, which is allowing sewage odours to permeate through the walls.

The issue has persisted for about nine months and he says there are no plans at the moment to permanently fix the problem.

Next time don't use the cardboard pipe.  It has a short service life.

RTFM - Read the Comments That's Where the Best "Stuff" On This Blog Is

 Copyright Nableezy 

Creative Commons Attribution-Share Alike 3.0 Unported license.

When I started this blog, my goal was to create a forum for discussion and debate of financial matters in the GCC.  The rationale being that no one person has possession of the facts or a monopoly on the correct analysis of those facts.

Right now there are two vigorous exchanges going on in the comments sections.  I'd like to use this post to identify them:

1. The Investment Dar - Central Bank Gets Another Four Months to Ponder
2. Al Gosaibi v Maan AlSanea - Fortis Bank v ADIB - Fortis Drops "Structured" Bombshell
   

Please take a look.  

And more importantly add your own voice to the discussion.  Comments, criticisms, questions.  

In view of the matters to be discussed, I've booked a couple of tables at the Cafe Riche.  Come join the discussion.  Yes, you can still tell a مخبير  by his shoes, or so I am told. I'll be wearing flip-flops.

AlGosaibi v Maan AlSanea - Almost "Fixed"

There has been a remarkable reversal of fortune of late for AHAB.  

First was the decision by Trowers and Hamlins back in June to sue AHAB and which gave what I described as the first indication that the concerned authorities in the GCC were moving to make this messy problem "go away."   And that the Grant Thornton settlement proposal might be seen as a promising vehicle. to achieving that end.  Essentially GT's Plan involves a pooling of assets of the two companies to settle global creditor claims and the dropping of lawsuits between the two parties.  Those lawsuits have been the primary venue for the charges of fraud levied against Mr. AlSanea by AHAB.  Charges as we always note here on Suq Al Mal Mr. AlSanea continues to deny.  Ending the lawsuits probably allows "diplomatic cover" for jurisdictions to quietly let these difficult and embarrassing matters expire.

Yesterday (28 July) Asa Fitch at The National reported the Caymans Court decision to put its proceedings "on ice" to allow the special Saudi committee to make a determination.   I commented that it looked to me like the "fix" was in as this step increased the pressure on AlGosaibi to agree to the Grant Thornton settlement proposal and that:

A similar movement by the New York Supreme Court would, I think, confirm that this is what is happening. 

In what might be a remarkable judicial coincidence, but just maybe  is not,  today (29 June) NY Supreme Court Justice, the Honorable Richard Lowe III issued final disposition rulings effectively terminating the cases he was adjudicating based on "forum non conveniens".  

Frank Kane's article in The National provides some useful information.   But there's a bit more.  Judge Lowe did not just terminate the Mashreqbank cases but also that of AlAhli Bank which did not involve any countersuit by AHAB.

The three cases and their NY Supreme Court reference numbers are:

1. 601650/2009 - Mashreqbank v AHAB to which AHAB had added Mr. AlSanea and Awal Bank as a Third Party Defendants
2. 602171/2009 - Mashreqbank v the Individual Partners of AHAB
3. 602847/2009 Ahli Bank of Kuwait v Mr. AlSanea and Saad Trading Contracting and Financial Services

The decision (some 19 pages ) is Document 134 in Supreme Court Case Reference 601650/2009 which can be accessed at the NY Supreme Court Website  http://iapps.courts.state.ny.us/webcivil/FCASMain.

What's interesting about the decision?

1. First, Judge Lowe ruled that NY courts did have jurisdiction but dismissed the cases on the grounds of forum non conveniens.  Key reasons cited were: (a) availability of other judicial venues for the cases; (b)  presence of key witnesses in the Middle East; (c) local laws govern some key documents. (d) documents in Arabic language and witnesses English language skills, etc.  From the ruling it seems he sees Dubai as the venue for Mashreq's cases (with AHAB then able to raise its claim against Mr. AlSanea in Dubai or Saudi).  And Kuwait as that for AlAhli Bank's case.
2. Second, another significant "bit" of Judge Lowe's rationale for accepting the forum non conveniens argument was that Mashreqbank stated that it was happy to litigate in either NY or Dubai.  And  that in fact Mashreqbank had commenced a lawsuit in Dubai which includes (but is not solely restricted to) the FX transactions which are the subject of NY cases.  See Page 16 of the ruling.   Now, at first blush, this seems a bit surprising.  Why would Mashreqbank incur the not inconsiderable costs of launching a case in New York and then cavalierly toss it away by telling Judge Lowe that it was indifferent to venue?  Perhaps, the answer is to be found in AHAB's defense:  that Mashreq knew the FX transactions were disguised loans and that therefore they were somehow colluding with Mr. AlSanea.  A rather messy situation.  One complicated by AHAB's motion to have the NY Supreme Court compel disclosure under the very strict requirements of NY law.   Perhaps the shift to the more "convenient" judicial venue in Dubai would allow this issue to be dealt with in a more "convenient" way (at least for Mashreq).  And then again perhaps not.  Perhaps it was just a cost cutting measure - Mashreq decided to husband cash by running one instead of two expensive litigations.  And the case in Dubai is for almost twice that in New York.  So there is more "bang" per lawyer "buck" there.  Perhaps it was a belief that justice would be more swift in Dubai.  Perhaps it was another reason entirely.
3. The dismissal of the Ahli case is a bit more concerning - or perhaps should be to BNPP and Fortis who have lawsuits against Abu Dhabi International Bank.  If the Honorable Justice Melvin Schweitzer (who is handling the Fortis and BNPP actions) takes Judge Lowe's ruling as a useful precedent - both banks might wind up  in judicial venues they'd rather not.  NY has a very  large  well reasoned body of case law on letters of credit.  Bahrain would appear to have much less.  At least this could be a conclusion drawn from the Bahraini Court's ruling in ADIB's favor in both actions.  There the Court seemed remarkably unperturbed by the fact that ADIB's case was commenced after both banks had incurred irrevocable payment obligations.  Though to be fair, as I understand it, the Bahrain judgment is not final. 

AHAB does have the right to appeal Judge Lowe's ruling.  Overturning the ruling will I think be as the Japanese say "Possible but very difficult".

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.

Belt Buckles: The New Paradigm of Patriotism

For many years now, we Americans have been able to measure one another's patriotism by the presence or absence of an American flag pin on a lapel.  And the bigger a pin, the more patriotic.  

But perhaps we'd become complacent and so lost sight of the original intent of the Founders.

One man, David H Brooks, has shown that we can not only renew our patriotism but take it to a higher level:  the US$100,000 American flag themed belt buckle shown in the above picture.

Even though this idea was his, David didn't shrink from giving average citizens - at least those who pay taxes - the opportunity to join in making his vision a reality by defraying the cost along with $6 million in other expenditures.

As the NY Times reports:

DHB, which specialized in making body armor used by the military in Iraq and Afghanistan, paid for more than $6 million in personal expenses on behalf of Mr. Brooks, covering items as expensive as luxury cars and as prosaic as party invitations, Ms. Schlegel testified.

Also included were university textbooks for his daughter, pornographic videos for his son, plastic surgery for his wife, a burial plot for his mother, prostitutes for his employees, and, for him, a $100,000 American-flag belt buckle encrusted with rubies, sapphires and diamonds.

The expense-account abuse, the prosecution has said, represented a pittance compared with the $190 million that Mr. Brooks and another top employee are accused of making through a stock fraud scheme in which he falsified information about his company’s performance — including significantly overstating the inventory of bulletproof vests — to inflate the price of the stock before selling his shares in 2004.

Patriotism and family values!

Mr. Brooks appears to be using the Abdullah Brothers' defense.  And I suspect this may all turn out to be a tempest in a teapot.  A failure - if one were to be so uncharitable to use the term "failure" - to properly document some transactions. 

I'm also guessing - but don't know for sure - that the buckle is from Damas' Bur Dubai store.