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.
Tag Archives: Bank
Security cheques in the UAE on course for extinction
Nothing in this article is to be construed as legal advice. This is an economic analysis of what I see as being possible rational decisions.
What are security cheques?
Let me first explain: a post-dated cheque has traditionally been used in the UAE as a last ditch guarantee in the event that a bank or other party cannot be paid by the person signing the cheque, often in the case of a loan or service rendered or goods supplied, ahead of an expectation of receiving payment in the future at some point. This is because a criminal case could be filed against that person in the event that the cheque is presented and then returned if there are insufficient funds in the account related to it. The ultimate penalty for this in the past was jail, providing a lot of leverage to the party trying to recoup their funds. There are various laws surrounding how a bounced cheque is handled by the legal system but the spirit of the law seems clear to me and that is to stop people from behaving in a fraudulent manner. However, various parties, including banks, company suppliers and vendors as well as individuals such as landlords have used the letter of the law to apply anti-fraud rules to economically distressed companies and persons.
Why do I say this? Well, think of it this way: If the intent of the law was to, for example, jail people who cannot pay back a loan then there would be a law that specifically states that. However, in the absence of a security cheque that bounces, a person who fails to pay back a debt does not necessarily face the same fate as a person who has bounced a cheque and certainly the path to the final legal judgement is much more balanced. This reasoning clearly points to the fact that the law was not meant to punish those in financial distress. It is the spirit of the law that has been twisted and put to use for purposes not intended. I am not a mind reader, but the logic certainly points to these conclusions. Continue reading
Stark SME stats don’t tell the full story
The issue of lending to SMEs in the UAE was discussed at the Middle East Banking Forum in Abu Dhabi on Wednesday, where a number of solutions were raised to tackle a perceived dearth in funding for the country’s small businesses.
Mubarak Rashed Al Mansoori, the governor of the Central Bank of the UAE, said the Bank was working on a multi-pronged solution to the conundrum, one of which is to encourage private equity (PE) investors to take up some of the slack left by the banks.
Important as it is for PE players to participate in the SME sector, it’s worth remembering that their contribution forms a different part of the capital structure for businesses of all sizes. There’s undoubtedly a place for equity investment in SMEs, but that doesn’t mean they won’t need debt as well.
That’s not to say that the Central Bank is looking for solutions in the wrong place. But it’s worth noting that the bank has already done everything in its power to support the SME segment. The banking sector and the SMEs themselves, however, deserve a little more scrutiny. Continue reading
Understanding First Abu Dhabi Bank's Q3 Financials
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
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
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 UAE's banking paradox
In this section I look at the UAE banking system and come to some startling conclusions. It seems that banks are grabbing market share in a market with deteriorating margins and increased risks.
Last week I took a look at Union National Bank’s Q2 financial results. The focus was to look beyond the headline numbers and try to understand the underlying fundamentals and what the core trend might be. This led to the idea of core revenue and expenses, ie interest income from direct lending and debt securities and interest expense of deposits and debt securities. UNB also provides Islamic financing so I added those in as well. This tells us what is happening at the basic banking level and then I look at any out-of-the-ordinary movements in other parts of the business.
Mashreq recently reported Q2 results and announced an increase in profit of 3.4 per cent over Q2 2016. But looking at basic banking, core revenue rose 9.97 per cent whilst core expenses rose 19 per cent. This is not a good sign since if it continues, sooner or later, net core income will become negative. Operating expenses are flat at about 1 per cent so had little impact on changes to net profit. Continue reading
UNB kicks off earnings season
Abu Dhabi lender Union National Bank announced its second-quarter financials. On the face of it things look positive with an increase in net profit of 7.2 per cent relative to the same period last year and that net income from interest and Islamic financing, the core business of a bank, rose 2.6 per cent. However, a quick peek at the underlying fundamentals shows that core revenue from interest and Islamic financing grew 6.4 per cent whilst expenses for interest and Islamic financing grew 13.4 per cent. Core expenses growing faster than core revenue is unsustainable. When you factor in that operating expenses grew by a whopping 21.1 per cent the picture looks less than sterling. The main driver for the increase in net profit is retail fees and recoveries which grew 43.7 per cent, an unsustainable growth rate for this profit line item.
Stay tuned as I take a deep dive into reported second-quarter earnings next week and uncover whether the net profit reported is quality or whether the underlying fundamentals are deteriorating.
Sabah al-Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more on his Twitter feed or for deeper analysis on LinkedIn and al-binali.com.
Fintech's power is in the unbanked and unbankable
In today’s article Katharine Budd, the chief executive and co-founder of Now Money, a Dubai-based fintech start-up, joins me in explaining how fintech works.
To understand this new financial services phenomenon, it is best to start at the very beginning. A very good place to start.
Although you might now be able to operate your bank account from a website or mobile app, the systems that sit behind these online user interfaces have barely changed since they were implemented in the 1970s. The international payment transfer system Swift still runs on the telephone systems. This means that no matter how nice the front-end website your account is on, the transactions displayed are still run off legacy systems, which can lead to legacy issues such as delays in processing transactions and potentially losing the transaction in the system altogether.
So why don’t banks just scrap these legacy systems if they are not able to match modern-day systems? Not that simple. To try and keep up with changes in market demand, these systems have been repeatedly improved upon using incremental upgrades, usually by different IT teams, until they now represent a hodgepodge of sub-systems.
Investing in a system upgrade – which would be expensive, have a material risk of failure and need all other banks to adopt for interoperability purposes – doesn’t look so appealing. This disincentive ensures that customer frustrations continue.
Enter a new breed of start-ups that are innovating where banks are stagnating. The start-ups are cooperating with regulators and cybersecurity experts and developing new technology. These organisations have become know as “fintechs” and their purpose can range from offering customers alternative ways to bank, usually through mobile, to using advanced analytics to provide investment recommendations.
Trust but verify: a deeper dive into the UAE’s latest business news
Etisalat’s preliminary 2016 financial statements are available at the Abu Dhabi Securities Exchange. Earnings per share for 2016 operations? Dh0.97. Proposed dividends per share? Dh0.80. This gives a payout ratio of 82 per cent. Rationally, your payout ratio is high when you do not believe that there are any opportunities to invest in and so return cash generated to the shareholders.
Etisalat’s dividend policy would suggest that it does not see growth opportunities and therefore expects to simply be a yield play. This refers to business operations and not market price movements. Whether Etisalat is being rational in expecting the economy to stagnate, or worse, and is therefore taking a defensive cash position, or on the other hand is in denial and simply continuing to pay a historical dividend even though the payout ratio is high will be revealed by its stated strategy that it presents at the shareholders’ meeting.
If the strategy is defensive, closing certain operations or at least remaining steady, then the stated strategy will be consistent with the dividend strategy. If, on the other hand, Etisalat presents a transformation strategy or even an expansionary strategy, then this will be inconsistent with its dividend policy.
The suspense is unbearable.