GFH Buys Backs Shares, Issues Bonus Shares

Last week, Gulf Finance House (GFH) announced that it would recommend distributing bonus shares. That comes on the heels of a share buyback program launched last year. The idea of a share buyback program is that shares of GFH are cheap and so it makes sense for the company to buy them back. The reverse, issuing bonus shares, makes sense for GFH when shares are expensive. So the two are, on the face of it, inconsistent if executed at the same time.

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The UAE’s Equity Market Performance Bank deposits have a place in your portfolio

My last article regarding the effect of rising interest rates on the UAE’s equity markets sparked quite a bit of debate on LinkedIn and got me to thinking about how the equity markets have been performing. So I looked at the year to date (YTD) return for Abu Dhabi’s market at found out it is 9.82% as of today (source Bloomberg). For Dubai’s financial market the YTD return is -12.62% (source Bloomberg). This doesn’t tell me much about the overall equity performance on a national level. Continue reading

Interest rates are a threat to equities The rise of EIBOR

The major theme for equity markets over the last couple of years has been the oil price. That was a valid issue as it affected the fiscal side of the economy tremendously (i.e. government spending).

Various other issues have cropped up in terms of looking at the market, such as the tightening fiscal policy of introducing VAT and the investor trust levels post the Abraaj issues. Fiscal policy will have an impact, Abraaj is really about learning from their mistakes.

But there is another threat, one that is growing, and that is interest rates. The US Federal Reserve (Fed), the central bank of America, has been countering Trump’s loosening fiscal policy of reducing taxes by moving towards a more contractionary monetary policy of increasing interest rates. This makes sense for the US which has a robust economy these days. For us, and other countries pegged to the US dollar and facing a challenging economic environment, increasing rates are a problem. Continue reading

Abraaj’s flawed operating model

A lot has been written recently about Abraaj Capital, the private equity company based in the Dubai International Financial Center. The current focus is around Abraaj’s actions with regards to the potential co-mingling of client funds with its own operating funds. News is updated on a relatively frequent basis about the subject and there is clearly a lot to learn on many fronts. However, it is too early to do a full post-mortem as investigations and legal cases have not come to a conclusion. But there are some things that can be gleaned that could be instructive for investors. The aim of this post is not to judge Abraaj, the courts will do that. The aim is to try to see if there are lessons that can be used by investors to better manage their portfolios. Continue reading

Waha’s lost AED 543 million hedging loss Is borrowing to pay for operations and investments wise?

Waha Capital’s management report for 2017 “[Waha] reported net profit attributable to owners of the Company of AED 425.9 million…” As is my usual approach, I double check the financials. Looking at the bottom of the income statement I see a loss of AED 95m. That’s a difference of over half a billion dirhams. Going up the income statement I find the number that the management uses under “Profit” and the number at the bottom of the income statement is termed “Total comprehensive loss.” The main difference is a loss of AED 543m on some hedges. Now, I confess not to be an expert in accounting but I know quite a bit about investing. Waha’s accountants may be able to persuade their auditors that this classification is correct but Waha’s management should have explained such a large discrepancy to its investors, regardless of what the accounts say. Transparency is the bedrock of good corporate governance and when Waha’s management report does not provide the correct transparency, then there simply cannot be good governance. Waha’s management had a duty to its shareholders to point out the half a billion dirham loss on the hedges and to explain why they where not included in the accounting of the P/L of the company as reported. There might well be a good explanation. But no explanation is not acceptable, especially for an investment company. Continue reading

Breaking down FAB’s full-year numbers for a post-merger picture Loan book reduction, interest expense increase

First Abu Dhabi Bank (FAB), the lender created last year from the coming together of National Bank of Abu Dhabi and First Gulf Bank, released its first set of post-merger annual results on Monday. In this week’s column, I’ll be looking at the bank’s pro-forma statements from both last year and 2016, analysing how well the new institution has been doing thus far.

In 2017, FAB’s loans and advances – the bank’s largest asset component – decreased by about Dh4 billion compared with 2016; this is puzzling, as the usual logic of a merger is to grow your main business line, rather than see it shrink. To be fair, in percentage terms it’s a decrease of just 1 per cent.

The bank’s cash pile increased 12 per cent to Dh138bn from Dh123bn over the period, representing about 21 per cent of the bank’s balance sheet. Since cash yields next to nothing, to have such a large repository is unexpected. Continue reading

Understanding First Abu Dhabi Bank's Q3 Financials The numbers show the bank's management is optimising the balance sheet

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 An example of proactive balance sheet management

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 UAE bank Q3 performance

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

The Investing Edge: The Win / Pay Odds Gap

Investing is too often looked at using a handful of academic models. Successful investing involves thinking about the investment process in as many different ways as possible. This article takes a look at investing using alternative views.

From Betting to Investing

Many of the ideas used by the investment community are adopted from the horse track and casino betting communities. Much of the failure that has dogged the investment community is due to rocket scientist PhDs misunderstanding the successful models of plebeian punters. The use of betting as an example is not an endorsement, just history.

To understand how the securities markets work you have to look no further than the horse bookies. Bookies take bets from the bettors. This is the first point that the public begins to misunderstand how betting, and therefore investing, works.

There are two potential misunderstandings:

  1. Assuming that each horse has a uniform probability of winning, i.e. they are all just as likely to win.
  2. Assuming that the bookie offers one to one payout odds, i.e. pays $1 for each $1 that is bet.

Grasping the significance of these statements is the key to successful investing. The bookie, equivalent to the investment bank or broker, will always make money. Always. They do this because they do not set payout odds depending on which horse they think will win, they set payout odds based on how people bet. Continue reading