Category Archives: Analysis

Why the cash flow statement matters

November 10, 2017 By in Finance, Analysis Tags: ,

Cash flow for me is the most important financial statement as it can corroborate or invalidate what I see on the income statement. In the last three weeks I’ve looked at the income statements, balance sheet statements, and the link between the two for various companies. Today I will use Shuaa’s Q3 2017 financials to show how the cash flow statement can provide insight into the more famous income statement.

Cash flow basics

A little refresher course in accounting first. Cash flow accounting as a measure of the performance of a company is flawed because it does not reflect the timing of transactions. For example, if a company is paid an annual subscription to provide a weekly magazine, then cash flow accounting would recognise a large income upfront and then the expense of publishing the weekly magazine is recognised about evenly across the year. This can make things look far better than they are. There are other situations where the opposite could happen, or where the effect is on the balance sheet, eg depreciation. Continue reading →

Understanding First Abu Dhabi Bank's Q3 Financials

November 3, 2017 By in Analysis Tags: , , 1 Comment

I often try to provide alternate ways of looking at issues as a way of adding to the dialogue. Two weeks ago earnings season began and in my first article I looked at the income statement of some banks and in a subsequent article I examined the balance sheet of a bank. This week I link the income statement to the balance sheet statement using First Abu Dhabi Bank’s Q3 financials.

Banking Sector Review

Two weeks ago I looked at the first banks to report their Q3 financial performance. The main thing that I was looking at was source and quality of profits and the increase in profits. If profits came from core business, which is lending, then I considered this better quality profits. If the source of profits was due to sources that were difficult to repeat or maintain, such as operating expense efficiencies, large increases in investment or fee income, or a large decrease in the impairment charge, then I considered this lower quality profits, even though they might be important.

Last week I took a look at another bank but this time examining it from my long running worry that banks might be increasing profits by increasing their loans at a time when the return on assets for some was deteriorating. I was concerned about why some banks might be lending more in a more challenging market. Looking at the balance sheet of the bank that I reviewed, ADCB, it was clear that there was a conscious de-risking of the balance sheet by management followed by a balance sheet optimisation strategy that looked like deploying their balance sheet into stable markets.

This week I look at First Abu Dhabi Bank’s Q3 performance. I’m not trying to make an absolute judgment about performance but rather to explore ways in which to study the performance. Also, keep in mind that FAB completed its merger earlier this year and this will have one-off effects. All numbers are quarterly year on year, i.e. comparing Q3 2017 to Q3 2016. Continue reading →

Abu Dhabi Commercial Bank's Q3 financials

October 27, 2017 By in Analysis Tags: , 2 Comments

Following on last week’s article analysing the Q3 financial performance of Dubai Islamic Bank, Union National Bank and Mashreq, on Wednesday I had a look at how the other banks are performing and was pleasantly suprised when I visited the Abu Dhabi Commercial Bank website.

ADCB’s good investor relations

The pleasant surprise was not that ADCB had its financials up; I would expect that given DIB, UNB and Mashreq all managed to. The surprise was that ADCB provided a spreadsheet with its financials. But wait, there’s more. ADCB also provides historical numbers. Astounding, this is true investor relations. For all companies that do this, I sal­ute you. For companies that don’t, please understand that investor relations isn’t just a link on your website to your financial statements.

Dear Securities and Commodities Authority: Please consider requesting all listed companies to provide their financials, including historical, on spreadsheets and make them available on their websites.

ADCB balance sheet strength

Back to ADCB. I’m impressed. Last week, I looked at the income statement and the quality of earnings. This week I’ll look at the balance sheet statement. First some checks. One of the important issues when looking at “deposits and balances due from banks”, which is one of the liquidity pools available to a bank, you need to also look at “due to banks”. If a bank has in the interbank market loaned US$100, this might look good, but if it has borrowed $100 from banks, then the net effect is zero. ADCB has Dh10 billion net due to it in the interbank market. ADCB has a further Dh21bn in cash and on deposit with central banks, usually also considered a high-quality liquidity pool. What does this mean? You have to look at it in terms of the customer deposits of Dh163bn. This means that ADCB’s high-quality liquidity pools are 19 per cent of customer deposits, which is fantastic. But wait, there’s more. Continue reading →

Earnings Quality vs Quantum of Earnings

October 21, 2017 By in Analysis Tags: , 5 Comments

The third quarter (Q3) is over and earnings season has begun as listed companies release their Q3 financials. We’ll take a deep look at these financials, starting with the heart of the economy – the banking sector. My main aim here is to look at the picture that the financials give and try to understand what might be going on in terms of a longer term trend. My focus is the quality of earnings and the direction that earnings are moving in.

I want to take a moment and clarify a few issues. I am looking at earnings and not at creditworthiness, which looks positive given the capital adequacy ratios of these banks. The second point is that I am selecting the larger banks that first released earnings, so selection is not based on financial performance. Indeed, the banks that released earnings first should be applauded for working to provide investors with important transparency and timely provision of information. Continue reading →

Fast asset growth can mask weak margins

September 8, 2017 By in Analysis Tags:

Growth for the sake of growth is the ideology of the cancer cell.

– Edward Abbey

A recent Financial Times (FT) article discussed the “great aviation disrupters of the 21st century” referring to Emirates, Etihad Airways and Qatar Airways. The article was analysing deteriorating performance amongst these three once high performing carriers. Of particular interest are two points: The first is that annual growth in scheduled seats for these carriers ranged from low to mid teens from 2012 to 2016 but that current schedules forecast 2% – 3% for the UAE carriers and an actual drop of 1% for Qatar Airways. The second interesting point is that the UAE carriers are reported to have a large negative impact on P/L. Qatar Airways apparently does not provide the same levels of transparency as the UAE carriers. Perhaps they would benefit from reading my articles on the value of transparency and corporate governance.

Why are these points interesting? Well, growth went from strong to about flat and yet somehow this hit P/L hard. If growth stops, then P/L should match that of the previous year. One argument that the FT article gives is that lower oil prices is impacting domestic outbound business. But this doesn’t explain things as lower oil prices reduce operational costs. Let’s look elsewhere for some insights. Continue reading →

Your health depends on a balanced healthcare playing field

September 4, 2017 By in Economy, Government, Analysis Tags: , , 1 Comment

It is my opinion that one of the greatest moves to support free market capitalism in the UAE is the cancellation for Abu Dhabi Thiqa insurance beneficiaries of the 20% co-pay for treatment at private healthcare facilities.  The 20% co-pay was introduced in June 2016 and at that time there was discussion on the effect on patients.  There was also, however, a massive impact to the economy, but I felt that at that time the personal and social issues should take precedence over the economy. I think that now might be a good time to review that impact of that decision with respect to the economy and the positive effects of the cancellation of the decision.

Why is the co-pay issue important? As a first pass, clearly applying a 20% co-pay to private hospitals would incentivise beneficiaries to choose public hospitals. Money isn’t the only issue for a patient in determining which healthcare facility to visit but in the absence of specialisation issues it is clear that money becomes one of the predominant deciding factors.

The consequence, of course, is material negative impact on the finances of these private hospitals. The effect was quickly felt at three long-term healthcare centres in the Emirate of Abu Dhabi who quickly had their co-pay requirements waived in January 2017,  and the quick government response allowed these institutions to continue providing important healthcare services.

The positive social impact is clear. But what is the positive economic impact? It is the strengthening of the healthcare sector, not because Thiqa is willing to pay for the full cost but because giving private institutions the same economic opportunities as public institutions allows them to not only thrive but to also take risks that only private companies take. Risks such as acquisitions that lead to consolidation in the health care sector and thereby a strengthening of the sector. Continue reading →

A case study on reporting and transparency of company results

September 1, 2017 By in Corporate Governance, Analysis Tags: ,

In April of this year I talked about  some of the puzzling moves at Shuaa Capital, one of the better known investment banks in the region which is headquartered and listed in Dubai. Last month Shuaa released their H1 2017 financial results and there was quite a bit of commentary around these results. This commentary seemed to contradict the behaviour that I outlined in April. So I waited and read through the results, the press releases, the news articles and TV interviews. Now I’m ready to give a more realistic analysis of the results. My analysis will be dual, of the actual performance and of how the performance is reported. The latter is critical, as I have pointed out earlier this year on less than optimal reporting or commentary by First Abu Dhabi Bank, Abu Dhabi Commercial Bank, Emirates NBD, Mashreq Bank, Arabtec and Etisalat but stellar reporting by Dubai’s SWF ICD (all links are to my articles on reporting and transparency by these companies which were published in The National). Continue reading →

Your idea of success is completely wrong

August 22, 2017 By in Management, Analysis Tags: , ,

There is this idea that success is 100% correct decision making. For some people, they understand this to be 90% or even 80% correct decision making. This idea is completely wrong. A success rate of 56%, implying 44% incorrect decisions, is a great result. Here’s why.

Let’s simplify things. Assume that you are the chief executive of a company and that each decision you make has, on average, an equal impact on the company performance. Let’s say that if you make a good decision you increase profit by USD 1 million and if you make a bad decision you decrease profit by USD 1 million.

What does this mean in terms of the company performance? Continue reading →

Chelsea Football Club Innovates Financially

August 4, 2017 By in Credit, Analysis

I just found out that Chelsea Football Club is applying ideas from financial leasing to their football player lending programme.

I was shocked. The analysis is quite interesting. To me at least.

The movie Moneyball, based on the book by the same name, showcased the use of financial ideas in sports, in this particular case baseball. There are two parts to it. The first was picking the right performance indicators and, just as importantly, ignoring well established but ultimately useless indicators. A similar challenge happened with the infamous Black-Scholes equation, which ignored the probability of the price of a financial security rising or falling when computing the price of a derivative on that security.

The second part of Moneyball is to look at the price per unit for the new performance indicators when looking at buying or selling a player. This showed that the market in baseball was inefficient and the first teams to adopt this new pricing mechanism reaped great rewards. In effect what was happening was a weak form of arbitrage. Again, this is similar to traders in the nascent derivatives markets who adopted the Black-Scholes pricing model. Continue reading →

Your stop loss orders aren't guaranteed to protect you

August 4, 2017 By in Trading, Analysis Tags: ,

Speaking of trading, I want to talk about certain trading misconceptions. I recently talked about the liquidity trap that some investors were getting themselves into when investing in illiquid stocks. The issue is not an investment issue but a trading issue that can greatly affect the overall IRR. In discussions about this trading trap some other misconceptions came up and I’d like to address one of them: the stop loss order (SLO). In their most basic form these are orders that you give to your broker to sell a security if it drops below a certain price.

The main misconception with SLOs is that when the price of a security drops it will touch every price on the way down. For example, if you bought shares which are now at Dh20 and you put in a stop loss at 19.8 this will not necessarily trigger a sale at 19.8. One reason is that if the last trade is 20 and the next trade is 19.6 then you’ve passed by 19.8. If your broker actually manages to sell at 19.6 you’ve still lost an extra 1 per cent of your position. But there is no guarantee that your broker can sell at the lower price. I recall in mid-1998 that the UAE markets, then trading over the counter (OTC), had been enjoying a great rally when they suddenly collapsed. I saw an order for the most liquid shares at the time, Emaar Properties, executed at Dh160 a share. The crash started the next day and the buyer immediately tried to sell the position. It took several days before a new buyer was found, at a price of Dh40 a share. That is a 75 per cent loss. Remember, this was not about Emaar, the whole market had crashed. Continue reading →