Global Investment House 1H10 Results: Still Bleeding Not as Fast

GIH announced its results for the first six months of 2010.  The press release was three pages.  Since financial/business performance wasn't that great, a great deal of space was devoted to awards and other "lemonade from lemons" type items.

But, let's let Global speak for itself.

Key points of the results :

• Fee-based businesses (asset management, investment banking and brokerage) generated operating income amounting to KD12.0 million and a profit of KD6.8 million during H1 2010. 
• During H1 2010 losses from principal investments and treasury activities were KD41.1 million, representing a reduction of 49% compared to H1 2009
• During H1 2010 interest expense reduced by 37%
• Global made a second principal prepayment of USD50 million of its restructured debt thereby meeting 46% of the principal repayment obligations due by 10 December 2010
• Overall net loss of KD34.4 million (KD0.028 per share), a 65% reduction over H1 2009 loss of KD98.6 million (KD0.080 per share).

And now to the tafsir.

1. Global's fee based businesses won't be paying too many bills with a net profit of KD6.8 million, particularly when this probably doesn't consider their corporate overhead.
2. The Company notes elsewhere in the press release that the annualized average loss on its principal investments during 1H10 was 12.4% compared to 17.4% in 1H09.  One suspects that the other contestants for PERE Awards 2009 "Middle East and North African Firm of the Year" had records less stellar than these.
3. Interest expense came down largely from the signing of the rescheduling agreement which eliminated the additional penal default margin.
4. On the debt rescheduling front, as noted earlier, Global has a long way to go on the debt repayment front.
5. And proving that net income is truly the bottom line, net income for the period is mentioned last:  a KD34.4 million loss, 65% lower than KD98.6 million for 1H09.  Do firms really think that by burying the bad news investors will overlook it?  Or that by reciting modest and manufactured achievements they can make it look less bad?  And anyone want to bet if there were positive net income that it wouldn't be the very first item right  on the top of the list?

Some additional items:

1. Global continues its drive to rationalize its cost base, cutting general overheads by 15% 1H10 versus 1H09.  As noted these include business travel, promotion, and communication costs - essential expenditures to develop revenue.  
2. NBUQ intends to appeal the Dubai Court of First Instance's judgment in favor of Global.

As always we at Suq Al Mal are on the look out for major contributions to advancing corporate spin.  We were not disappointed today.  

So a very special tip of Abu Arqala's massive tarboush to whoever at Global came up with the phrase "impeccable track record" and used it in conjunction with Global's success in having a US$103 million in assets in its Saudi fund.   Presumably, that track record does not include Al Thouraia Project Management Company  or Saudi Mazaya - as both are now safely interred.   Or Global MENA Financial Assets.  Or maybe there's a local definition of impeccable that I've missed.

Once Global releases its 1H10 financial report expect more comments.

You Said What?: Tomalin Reveals Why There Will Always Be Banking Crisis

Taking a leaf from Charlie Prince's notebook, Michael Tomalin, CEO, of NBAD revealed why there will always be bad loans and banking crises in this article from The National:

“The problem if every bank is name lending and you are not is that it puts you in an awkward position,” Mr Tomalin said.

Dance to the music.  And pay the piper later.

Or perhaps, "But, Mom, all the kids were doing it".

Booz and Company to Assist Central Bank of Kuwait with Bank Stress Tests

AlQabas reports that the CBK has engaged Booz and Company to assist it with stress tests for the banking sector.

The article states that the CBK has taken the stress tests prepared by the banks at face value with no follow-up or consultations.  You might find it suprising but the banks apparently did quite well on their self administered test.  An "A" for all in the middle (or medium) case.  And only a few "remarks" on a bank or two for the worst or severe test.  ! مبروك

Booz and Company will review the banks' financials and the information they provided to the CBK and then design neutral (perhaps a better translation is "unbiased") half yearly and annual tests.   It sounds as though this may be an ongoing program).   Booz's "neutral" (unbiased) test will be a decisive factor in determining whether a bank needs to augment its capital or reserves.

Burgan Bank - KD6.8 Million Loss for First Six Months 2010

Burgan announced its 1H10 results on the KSE this morning.  Arabic text below.

The headline is the loss of KD6.856 million versus a profit of KD11.748 million in 1H09.   No explanation for the loss.

A couple of other points:

1. In case you're wondering the KD100 million or so increase in Shareholders' Equity to KD531.28 million is largely accounted for by the KD100.8 million rights offering BB undertook in 2Q10.  
2. The other bit of information here is that the Central Bank approved Burgan's financials 10 August 10 - which suggests there may have been differences (perhaps "creative") between the CBK and BB over the exact income number to report.

While Burgan participates in the legendary KIPCO Group Shafafiyah program don't hold your breath waiting for a set of quarterly financials.  What you'll get instead is a two-page press release, a large portion of which is occupied by a picture of the Chairman.  By all accounts a splendid looking fellow! Or an investor presentation with a few metrics.  Apparently, the operative theory apparently being that investors in Kuwait can't deal with more than one or two facts which must be presented with lots of colors and pictures.

On that topic, since Burgan's regulator the Central Bank of Kuwait sets the financial reporting "standards" for Kuwaiti banks (I use the term "standards" because AA is always charitable), apparently a view shared by the authorities.

[9:51:28]  بلغت (خسارة) (برقان) (6.8) مليون د.ك لل6 أشهر المنتهية في30-6-10 ‏
يعلن سوق الكويت للأوراق المالية أن مجلس ادارة بنك برقان قد
اعتمد البيانات المالية المرحلية للبنك للفترات المنتهية  في 30-06-2010،
وفقا لما يلي:‏
ِ1) الفترات الحالية:‏
البند      ال3 أشهر المنتهية في 30-06-10    ال6 أشهر المنتهية في 30-06-10‏
الربح (الخسارة)(د.ك)     (8.730.000)                   (6.856.000)‏
ربحية السهم(فلس كويتي)         (7.4)                                (5.7)‏
اجمالي الموجودات المتداولة      -                          2.572.566.000‏
اجمالي الموجودات               -                         4.056.517.000‏
اجمالي المطلوبات المتداولة       -                       3.392.630.000‏
اجمالي المطلوبات                -                         3.525.269.000‏
اجمالي حقوق المساهمين          -                        531.248.000‏
علما بأن بنك الكويت المركزي قد وافق على هذه البيانات المالية بتاريخ ‏
يوم الثلاثاء  الموافق 10-08-2010.‏
بلغ اجماليى الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 4.446‏
د.ك .‏
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 2.756 د.ك .‏
ِ2) الفترات المقارنة:‏
البند      ال3 أشهر المنتهية في 30-06-09    ال6 أشهر المنتهية في 30-06-09‏
الربح(د.ك)               760.000                       11.748.000‏
ربحية السهم(فلس كويتي)     0.7                                      10.9‏
اجمالي الموجودات المتداولة     -                            2.056.457.000‏
اجمالي الموجودات              -                           4.141.082.000‏
اجمالي المطلوبات المتداولة     -                           2.566.220.000‏
اجمالي المطلوبات              -                            3.713.497.000‏
اجمالي حقوق المساهمين       -                            427.585.000‏

رمضان كريم

Courtesy of Copyright Holder Sam Mugraby Photos8.com

Heard at the FT: HP Board Overreacted (?)

My favorite financial newspaper weighed in today on HP's Board's dismissal of Mark Hurd via this comment in the Lex column:

But the safe decision is not always the right one. Mr Hurd was, by most accounts, a superb executive. HP’s shares had outperformed the technology-heavy Nasdaq Composite ninefold since he took over in 2005 and net income grew handsomely. There is no evidence that Mr Hurd cut any ethical or legal corners while presiding over this success. Indeed, his transgressions appear minor enough to have warranted little more than a slap on the wrist at most American companies.

Indeed, one is tempted to say.  Yes, there is a culture of toleration of "mistakes" at most American and most other companies.    Or perhaps a cutting of a corner on a rule.   All as long as the concerned employee is generating the revenue.

After all imposing small minded constraints might limit the creativity and motivation of such corporate high fliers.    Expense rules can be safely ignored.  Dealing limits.  Restrictions on the use of recreational drugs.  How many of out there can recall seeing a "golden" boy or "girl"  on the trading room floor with "talcum powder" on his or her shirt after a trip to the rest room?  Like the athlete on the parallel bars, a little talcum keeps your hands from slipping!

Indeed all minor.  A gentle slap on the wrist and back to revenue generation. 

Of course, for the not so golden or high ranking members of staff,  understanding is a bit more constrained.  And justice more swift.

As it's known out there, checkbook morality:  "If it pays, it plays".

One can always find the small minded (like AA) out there.  Here are couple of more from the FT .

Gulf Finance House Secures Extension of US$100 Million West LB Facility

GFH announced on the BSE today that it had secured an extension of the US$100 million "stub" remaining from the US$300 million West LB syndicated murabaha.

The "new" facility is for a tenor of two years with a further one year extension at GFH's request.  The "profit rate" (interest rate) is reportedly lower.

This helps GFH avoid an immediate crisis as the full US$100 million was due this month.

An interesting question, if the banks have refinanced GFH because it could not pay and have reduced the interest rate, do Paragraphs 58 and 59 of IAS #39 require that the lenders book a provision?  See here for an earlier discussion of the requirements of IAS #39.

The Investment Dar - Musallam at Today's OGM - The Future is Bright

The following is based on AlAmir Yusri's article in the 10 August AlWatan.

Monday (9 August) TID held an ordinary general shareholders' meeting at the request of the MOCI in the words of Badr AlShamary, the representative of the MOIC, the meeting was called "in consideration for the shareholders, to protect the national economy, and in conformity with the Commercial Companies Law."  The Company will be holding its "own" OGM on 26 August.

Some 64.88% of shareholders were present and so there was a quorum.  AlWatan notes that the meeting was a vindication of sorts for the current management and board as not a single shareholder lodged a formal complaint or objection regarding management's or the board's conduct.  One shareholder did raise an objection about the MOCI's conduct with respect to TID.

During the meeting TID's Chairman and Managing Director, Adnan AlMusallam, made the following points:

1. TID is not going to be liquidated.
2. In fact its brightest days are ahead of it, apparently by 2012 if not sooner.
3. It has no "poisoned" assets but rather its assets are real.
4. While they were affected by the crisis, they did not die.  Such assets as Bank Bubyan, Aston Martin, Bank al Bilad, Oqyana and Khabaari are solid.
5. BLOM Bank has joined the restructuring after a conversation with the Company and the CCC - even after winning its court judgment in London.  (There is a critical difference between getting a judgment and getting the cash).
6. Now 83% of the creditors have agreed the restructuring.
7. Good progress is being made with Commercial Bank to come to a friendly resolution of the Bank Boubyan shares problem.
8. The Central Bank of Kuwait handled the crisis -- that's probably the global (small "g") financial crisis -- in the most professional of manners.
9. A small thing like a lawsuit wouldn't disturb our great relationship with the Central Bank.  (You'll recall that TID sued the CBK over what it claimed was unfair treatment concerning its 2008 financials).
10. TID has four month extension of the stay on legal claims against it in Kuwait.  You'll recall the Central Bank asked for an additional four months to decide whether to recommend for or against TID's final entry under the Financial Stability Law.

All in all a very optimistic assessment.  As Adnan noted even during the Iraqi invasion he refused to be pessimistic.  And if you've read the Arabic text closely ( ان شاء الله..والله على ما اقول شهيد ) , you'll have noticed that Adnan not only swore by God but also called Him as a witness.  So it's doubly hard not to take his comments at face value.

And no doubt with good reason.

Those persuaded by his performance will have to wait to buy shares as TID remains suspended on the KSE.

DIFCI to Divest Non Core Assets and Assure Robust Streams of Liquidity

Photo Jimmyjazz Released to Public Domain

 

Today's Gulf News carried a report that DIFCI had decided to get rid of its non core assets.  It has some US$1 billion of them.  Some of which are pictured above.

In the words of Shahli Akram, Acting Managing Director:

"DIFCI may divest certain of its investment portfolio to create robust liquidity streams across the business, whilst maintaining very strong focus on augmenting returns from our core business lines and also creating operational efficiency across the board," he said.

There's a lot of this going around lately.  Sort of like SARS.  The GCC is beginning to look like a US suburb with all the jumble and yard sales going on.  Adnan and  Ms. Maha up in Kuwait -  are selling so many "non core" assets that in three to five years they may have no assets left.  Not a one.  A Pretty fellow in Bahrain with a load of non core assets - real estate focused.  And now even DIFCI.

Ever wonder how a competently managed careful firm gets loaded up with non core assets? 

Well, Abu Arqala has a theory based on his experience at the university.  I had a friend let's call him "Sam".  Sam had a legendary refrigerator.  It all began innocently enough.  A clean refrigerator.  Some food items - fruit, vegetables, etc.  Over time these were augmented with left over pizza, Chinese food..  As new items were added, the old ones were all pushed further and further to the back until a critical mass and pressure sufficient for a chain reaction occurred.  One month thereafter,  some of the fruit had  developed whiskers - stubble to be sure, but growth nonetheless.  At two months, the Chinese food eyes.   At three months the pizza a proto hand or claw.  After 9 months, many swore they could hear vague stirrings from deep within the  refrigerator - nameless unthinkable shapes moving at night.  After 18 months, voices were heard. but in an unknown guttural language.   A new form of  life had been created.  After a while, the door was kept closed.

At the 24 month mark, during one summer, a "roomie" temporarily subletting opened the refrigerator.  A hardy soul not particularly prone to squeamishness he took charge of the situation.  Robust liquidity streams were mopped up from the floor.  And in some cases scraped from the interior.  Most of the non core assets were disposed of, except for one legendary orange with a long black beard that eluded capture.   They say (and who am I to doubt them) that it has until today and that if one listens carefully, its plaintive cries can still be heard at night. 

I'm guessing the same sort of thing happens in the financial world.  One starts with a collection of perfectly good assets.  New assets are added to the portfolio pushing the earlier ones to the back.  As they sit  there, some of them begin to fester.  Soon infecting others,  Before you know it, you're loaded up with non core assets.

One can well imagine how Shahli feels having opened DIFCI's rather large refrigerator.

Gulf Bank: How "Improved" Are Their Financials?

One of our newest readers  raised two interesting questions via our contact page:  

1. He's heard rumors that GB is engaged in restructuring of several large exposures and wondered if I had any insights.
2. Indirectly he asked about the seeming improvement in GB's financials.

Gulf Bank Loan Restructuring

I have no special insight into what's going on at GB.   Perhaps some of our regular readers/commenters - Laocowboy2, The Rageful Cynic, Advocatus, or anyone else out there - may.  If so, please post a comment.

In the interim some speculation. 

Banks restructure loans for a variety of reasons:

1. To agree a repayment schedule with a distressed borrower that provides a reasonable probability of repayment.  The rationale here is to avoid legal proceedings unless absolutely necessary as these generally result in "wastage" of the debtor's estate, particularly in those jurisdictions where creditors' rights are weak.
2. As a pre-emptive strike to keep a loan from falling into the NPL category. 
3. To surgically remove NPLs from the distressed column and transfer them to "restructured" and eventually "performing" loans.  This lowers the total of NPLs and improves the provisions/NPLs ratio.  At FYE09, GB's Specific Provisions covered 43% of NPLs versus 63% a year earlier.  Between FYE08 and FYE09, GB's NPLs increased 138% from KD482.5 million to KD1,148.6 million.  2009 Annual Report here.

The last two can be largely cosmetic - to "manage" problems or at least the appearance of problems.  

Certainly, GB has a sufficient stock of NPLs that it should be busily restructuring away for the substantive first reason mentioned above.  Whether it is engaged in any cosmetic restructuring is not known.

Gulf Bank's Financials - Improved or Not?

Many have noted that for 1H10, GB reported  KD2.1 million in net income versus a loss of KD7.5 million for 1H09.   That certainly looks like an improvement.  But is it?

Two factors were responsible for this apparent improvement:  an increase in the net interest margin of KD11.2 million and an increase of KD22.7 million increase in Operating Income (excluding interest).  Let's take a look at each of them to see where the improvement arises - and if it is due to improvement in the business or to other factors.

The improvement in the net interest margin can I think be explained by three factors.  

1. First, interest expense in 1H09 driven by the aftermath of GB declaring a KD359.5 million loss for FY2008.  If you look at FY2009, GB had total interest expense of some KD119.4 million for the year.  From the comparatives in the 1H10 report, we see that interest expense for the 1H09 was KD72.1 million - 60.4% of the full year total.   Once GB had successfully recapitalized itself, its cost of funds declined in 3Q and 4Q09.  So is the improvement here an improvement in market sentiment due to the raising of KD376 million in new equity? And not a fundamental improvement in the underlying business.
2. Second, pricing increases.  There was an interview with Michel Accad in which he mentioned that GB had repriced (upwards) its facilities.  For some reason, GB no longer breaks out interest income by LOB which would allow an approximation of the gross yield on its loan portfolio.  It stopped with its FYE2009 Annual Report.  Wonder why the change?  With this info we could attempt to quantify the impact of any pricing change between 1H09 and 1H10. to see if indeed  margins had improved.  Using that method for 1H09, we get a gross annualized yield of about 5.6%.  Using this method through 3Q09, the yield is about 5.4%.   If we use the same split between Commercial Banking and Treasury interest as in 2009 (83% as of 1H09 or 84%  for the first nine months of the year 2009) for 1H10,  the 1H10 yield on the loan portfolio is actually lower:  4.9% (1H09 interest split) or 5.0% (Full 3Q09 split).  But that may be an incorrect assumption.  Note to Regulator:  More transparency rather than less is highly desirable.  Note to GB:  Unless you've got something you'd like to hide disclosing this information would be very helpful. Final Note:  This analysis is not conclusive.  The missing step is to see what happened at other Kuwaiti banks'  gross yields to get an idea about the macro environment.
3. Third, as GB continues to aggressively provision for loans (some KD108.5 million so far this year) it reduces its funding cost.  One would expect that the NPLs were already on non accrual so that the provisioning would affect interest expense primarily. One might say that provisioning is inversely related to problems.  On that score, there really doesn't seem to be a fundamental improvement in  the business.

The improvement in Operating Income (excluding Net Interest Margin) is largely explained by "Realised Gains on Disposal of Available for Sale Investments" of KD22 million roughly KD18.2 million over 1H09's earnings for the same category.  A decrease in "Impairment Losses on AFS Investments" of 3.8 million accounts for the rest.

Some observations.

1. Without the AFS asset sale (not a core constituent of GB's commercial banking franchise but a Treasury activity), GB would have recorded an Income Statement loss of KD20 million for 1H10 as compared to the KD7.5 million loss it recorded for the comparable period in 2009.
2. But there's more.  Since GB had already recognized KD20 million of profit on these assets in its fair value reserve (Statement of Comprehensive Income), its Comprehensive Income  for 1H10 was  a KD18.5 million loss versus a KD11.4 million gain for 1H09.  Looking at the Balance Sheet, you'll notice that Shareholders Equity declined KD21 million between FYE09 and 1H10.   And that's the bottom line on financial health - growing equity.  If you're wondering, the extra bit (KD2,5 million) is movement in GB's Treasury Share Reserve.

On a segmental basis, GB's commercial banking division did not make a profit in 2008, 2009, or 1H10.  And I'd note that GB was unable to allocate KD246 million of its 2008 "expenses" to either segment.  Perhaps, they properly belonged as "management overhead"?  

So at this point taking all these factors into consideration, I'd suggest a pause before speaking about "improved" financials.  

There's still a way to go.  To determine when real progress has been made keep your eye focused on:

1. Comprehensive income, looking for a positive number and an increase in Shareholders' Equity from "income" from one period to the next.
2. NPLs and provisions, looking for both to decline.  For provision coverage ratios to increase.
3. Meaningfully positive results in GB's core commercial banking franchise.  As Michel Accad said in part in the 2009 Annual Report in discussing GB's strategy:  "We have redefined our Vision; we seek to dominate the local retail and commercial banking space ..." If commercial banking/retail banking is the key, then GB will be healthy when those businesses are healthy.  Today they're not.

Kuwait FSSA: Snapshot of the Investment Company Sector

This post uses the data in the recent IMF update to its Financial Sector Stability Assessment to look at the Investment Company Sector in Kuwait. Building on that information, we'll do a bit of "back of the envelope" analysis on what distress in that sector means for the economies of other GCC countries.

You can find the earlier post on the Kuwaiti Banking Sector here.

Page 13 of the update gives a breakdown of the assets of Investment Companies in percentage terms.

Asset Category	Percent Total Assets
Cash	7%
Stocks	35%
Bonds	1%
Real Estate	20%
Private Equity	6%
Other	31%

That's somewhat useful. However, the large "Other" category at 31%  hides a lot of details.  

For a more detailed picture, let's turn to the Central Bank of Kuwait's Quarterly Bulletin for March 2010. Figures below are in KD millions and are from Tables 19-1 and 19-4 as of 4Q09.

Asset Category	Conventional	Shari'ah	Total
Cash & Banks	403.3	401.5	804.8
Domestic Loans	808.9	622.6	1,431.5
Domestic Financial Assets	1,925.2	1,753.6	3,678.8
Domestic Non Financial Assets	143.3	376.8	520.1
Foreign Assets	3,821.0	2,675.6	6,496.6
Other	823.0	1,374.4	2,197.4
Total	7,924.7	7,204.5	15,129.2

 

Some observations. 

1. First, you'll notice that the percentages derived from this table don't agree to that from the FSSA. There's no explanation for this.  Presumably, some reclassification of items.  Perhaps, Global's blocked deposit at NBUQ reallocated back from Other Assets to Cash? Plus of course some other assets - domestic and foreign loans to Other etc.
2. Second, foreign assets are 43% of total assets. At a rough exchange rate of KD1=US$3.50, that equates to US$22.7 billion dollars.   Clearly, the activity of Kuwaiti Investment Companies is not just important in Kuwait but elsewhere.
   

Where are those foreign assets?  Are they concentrated? 

The FSSA update has some answers.

1. Stocks, Bonds and Real Estate: 43% Kuwait, 43% Other GCC, Rest of World 14%. 
2. Stocks: 47% Kuwait, 36% Other GCC, Rest of World 17% (7% Emerging Markets, 10% US/Canada, Europe, UK, Asia). 
3. Bonds: 15% Kuwait, 72%  Other GCC, 13% Emerging Markets. 
4. Real Estate: 38% Kuwait, 53% Other GCC, Rest of World 7%.

As the above indicates, Kuwaiti Investment firms have significant exposure to Other GCC markets.  This suggests is that distress in Kuwaiti investment firms will have a direct impact on those markets.  If we use the 43% in stocks, bonds, and real estate (as per the FSSA) as an overall proxy for GCC investment, then very roughly some US$10 billion of demand for assets will be affected  -- primarily in equities and real estate.  Note: Since as mentioned earlier the data in the CBK's Quarterly Bulletin doesn't appear to exactly tally with the FSSA's, there is a bit of approximation in these numbers.  But I'd argue close enough for a directional analysis.   

The impact  - both in Kuwait and other GCC states - will come from distressed companies:

1. Selling assets putting pressure on prices. 
2. Scaling back or abandoning existing projects. 
3. Reducing or eliminating new projects and investments thus constraining future investment flows in these asset classes.

Now to the IMF's conclusions about the Kuwaiti Investment Sector:

1. In its Risk Assessment Matrix (Page 7), the IMF notes the Sector suffers from (a) high leverage, (b) significant dependence on foreign funding, (c) maturity mismatches – long term often illiquid assets financed with short term funds, (d) large exposure to equity and real estate, (e) weak disclosure, and (f) fragmentation of industry. Negligible exposure to European assets.  No real big surprises here.
2. In terms of a severe realization of threats in the next three years, the IMF assigns a high probability (PD) and a medium impact (LGD).  But note this is in terms of impact on the Banking Sector.  The impact on the Investment Sector is much more dire and outlined in the stress test results.  Again this is no surprise.
   

On that latter topic, as it did with the Banks, the IMF stress-tested the Investment Companies.  However, it only tested an 11 member cohort out of the 100 Investment Firms.    It used three scenarios (which differ from those used in the Bank stress tests) outlined in Appendix Table 6 (page 40): a mild case, a moderate case, and a severe case. 

Let's take a look at the results using Table 7 (page 41) and not the summary on Page 22:

1. In the mild case, 3 firms had capital adequacy less than 10%. 
2. In the moderate case, 3 firms had negative capital and 3 more had capital adequacy under 10%. 
3. In the severe case, 7 firms had negative capital and 3 additional firms had capital adequacy below 10%. Recapitalization of these firms (note the 11) would require an outlay equivalent to 2% of GDP.  
4. You'll recall that for the Banks the recap required from the "Severe" scenario was 3.8% of GDP.  However, that was for the entire Bank "universe".  Here the 2% is for 11 out of 100 Investment Companies!
5. Given the distress in the Investment Sector, one expects that the results using the entire universe would be much worse.  And the total recap much much higher.

Gulf Finance House - Obtains Permission to Delay Release of 2Q Financials Until 16 August

GFH announced on the Bahrain Stock Exchange this morning that it had obtained the consent of the "regulatory authorities in Bahrain" to an extension of the time required to present its 2Q10 financial statements.  GFH has up to 16 August to issue the financials.  And since its Board will meet on 15 August to approve the financials, it appears that the release date will be next Sunday or Monday.

No reason was given for the need for the extension which is for a relatively "short" period.

There are two reasons that spring to my mind why such a delay would be required:

1. The extension of the roll-over of the US$100 million stub from the West LB syndicate which comes due this week has not been finally agreed.   If true, this could reflect some hard negotiating on deal terms and pricing.  Or perhaps a slow moving lender "thinking carefully" about its decision.
2. Its external auditors need for more time to complete their review of the 2Q report. This could be related to questions on the value of assets or income.  Equally clearly it could be related to the roll-over and the strength of the comments in their review "opinion" if roll over is or is not achieved.

These are not the only potential causes.

There could be some that are rather benign:

1. Inability to get a Board quorum until then for some reason, 
2. Unavailability of key audit firm personnel.   
3. The need to first finalize Khaleej Commercial Bank's 2Q report.  Though since its Board meets tomorrow the results should be known by now and could be included in GFH's financials for release the next day - Wednesday or Thursday.

However, I suspect these are not the cause but rather it's one of the first two above - which indicates the stress under which GFH is operating.

You Said What? Subervsion Alert: The Bicycle Conspiracy

Communist Bicyclists on the Way to Your Town!

In a saying wrongly attributed to Sinclair Lewis we're told that "When Fascism comes to America it will be wrapped in the flag and carrying a cross".

But have you ever wondered how Collectivism and eventually Communism will come to America?  And perhaps to your own country, if they haven't already?

Well, I certainly have!

One brave man (pictured below) Dan Maes has broken the silence and dared to tell the shocking truth.  It will come on bicycles bearing re-cycling bins! 

Dan Maes, Patriot, Profound Thinker and Proud SUV Driver

If you're faint of heart or a sun-shine patriot read no further.   But if you love your country, read on, brave citizen.   From the Denver Post.

"Republican gubernatorial candidate Dan Maes is warning voters that Denver Mayor John Hickenlooper's policies, particularly his efforts to boost bike riding, are "converting Denver into a United Nations community."

"This is all very well-disguised, but it will be exposed," Maes told about 50 supporters who showed up at a campaign rally last week in Centennial.

Maes said in a later interview that he once thought the mayor's efforts to promote cycling and other environmental initiatives were harmless and well-meaning. Now he realizes "that's exactly the attitude they want you to have."

"This is bigger than it looks like on the surface, and it could threaten our personal freedoms," Maes said.

He added, "These aren't just warm, fuzzy ideas from the mayor. These are very specific strategies that are dictated to us by this United Nations program that mayors have signed on to."

Aldar Properties - S&P Lowers Rating to "Junk"

S&P has lowered Aldar's ratings to BB- from A-.   That's a more than one step change! Outlook is negative.  So S&P's message is a significant negative.

"We understand that despite relatively sound overall supply demand fundamentals in the Abu Dhabi property  market," added Mr. Trask, "Aldar has been significantly affected by spill-over effects from the heavily oversupplied Dubai real estate market, characterized by significant declines in rental and market values."

This is having a negative effect on both the demand for, and the price achieved by, Aldar for the sale of real estate in Abu Dhabi.  Based on the pipeline of new supply both in Abu Dhabi and Dubai, we do not anticipate a reversal of this situation anytime soon. 

Two items worthy of comment:

1. The last sentence "We do not anticipate a reversal of this situation anytime soon."   S&P's ratings action also reflected a revision of their assumption re likely government support.
2. Ascription of Aldar's problems to the "spillover" from Dubai.

 On the negative outlook.

We are also assigning a negative outlook, which reflects our view regarding Aldar's future  profitability and cash flow generation in light of the challenging market conditions.

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