Research and Analysis Project - Arab Banking Corp Bahrain

ARAB BANKING CORPORATION FINANCIAL ANALYSIS REPORT
Oxford Brookes University

RESEARCH AND ANALYSIS PROJECT

An Analysis of the Financial Situation of

ARAB BANKING CORPORATION (B.S.C)
(ABC)

PREPARED BY: MUHAMMAD AMMAR AMIN
ACCA Registration # 1076757

MENTOR: AZEEM QASMI (ACCA)

April 01, 2008

(4,939 words)
Page 2/30

Table of Contents

INTRODUCTION............................................................................................................................ 3
REASON FOR CHOOSING TOPIC......................................................................................................... 3
THE COMPANY: .............................................................................................................................. 3
THE ENVIRONMENT: ....................................................................................................................... 4
AIMS AND OBJECTIVES: .................................................................................................................. 6
INFORMATION GATHERING...................................................................................................... 7
TEXT BOOKS: ................................................................................................................................. 7
STUDENT ACCOUNTANTS:............................................................................................................... 7
ANNUAL REPORTS: ......................................................................................................................... 7
MEETINGS...................................................................................................................................... 7
INTERNET....................................................................................................................................... 7
ANALYSIS....................................................................................................................................... 8
ADVANCES..................................................................................................................................... 8
Trend of advances over the years............................................................................................... 8
Segment analysis of advances .................................................................................................... 8
ANALYSIS OF INVESTMENTS............................................................................................................ 9
CAMEL APPROACH.................................................................................................................. 10
Capital Adequacy.................................................................................................................... 10
Asset Quality........................................................................................................................... 10
Advances to funding ratio...................................................................................................................10
Investments to Funding ratio ..............................................................................................................11
MANAGEMENT...................................................................................................................... 11
EARNINGS AND PROFITABILITY ......................................................................................... 12
LIQUIDITY............................................................................................................................. 13
HORIZONTAL ANALYSIS: ....................................................................................................... 14
Table of Comparison............................................................................................................... 14
Descriptive analysis with competitor........................................................................................ 14
CONCLUSION: ............................................................................................................................. 15
APPENDICES ................................................................................................................................ 16
APPENDIX 1 BALANCE SHEET............................................................................................. 16
APPENDIX 2 INCOME STATEMENT..................................................................................... 17
APPENDIX 3 FINANCIAL HIGHLIGHTS............................................................................... 18
APPENDIX 4 RATIOS ............................................................................................................. 18
APPENDIX 5 INDUSTRY ANALYSIS (2006).......................................................................... 19
APPENDIX 6 SELECTED NOTES FROM THE FINANCIAL STATEMENTS............................................... 19
Note 4 & 5 - SECURITIES....................................................................................................... 19
Note 6 - LOANS AND ADVANCES BY INDUSTRIAL SECTOR................................................ 19
APPENDIX 7 FORMULAE FOR RATIOS................................................................................ 20
APPENDIX 8 RATIOS WORKINGS ........................................................................................ 21
KEY SKILLS STATEMENT......................................................................................................... 22
PREPARING FOR THE MEETINGS ..................................................................................................... 23
First Meeting........................................................................................................................ 23
Second Meeting.................................................................................................................. 23
Third Meeting ...................................................................................................................... 23
QUESTIONING......................................................................................................................... 24
LISTENING................................................................................................................................ 24
THE PRESENTATION.............................................................................................................. 25
OUTLINE OF THE PRESENTATION: ................................................................................................ 25
SELF ASSESSMENT OF INTERACTION ........................................................................................... 29
BIBLIOGRAPHY........................................................................................................................... 30
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Introduction

The topic I have selected for this presentation is An analysis of the financial situation
of your choice of organisation.

The financial situation of an organisation is normally the key to its survival. It has
often been observed that organisations forced into liquidation have deteriorating
financial problems rather than low profits.

Reason for choosing topic

Being a finance student, I felt appropriate to base my project on the selected topic as
here I could easily utilise and demonstrate the knowledge acquired through the
course of my studies for ACCA.

I have a variety of reasons for choosing this topic. First of all it will provide me with an
opportunity to carry out the financial analysis of an operating real organization. Since
I am a working professional in Ernst & Young, I believe that an analytical exercise
such as this would be beneficial for me in the working environment, where I am
continuously required to document and analyse variances and patterns in financial
data. Secondly it will also challenge my ability to present and communicate results
effectively. Consequently my interpretation skills of financial ratios will strengthen
further. Lastly, I also possess good analytical skills which I will try to demonstrate in
this report to the best of my abilities. Financial analysis of a company is one of the
better ways through which all of the stakeholders may draw their own conclusions.

I decided to choose a bank for the analysis since I believe that the financial
statements of a commercial bank offer much more data than a normal manufacturing
organization. Consequently, analysing all that data so that it suits the requirements of
all the stakeholders is a challenge.
The Company:
Arab Banking Corporation (ABC) is incorporated in the Kingdom of Bahrain as a joint
stock company with a share capital of US$ 1,000 million. It is now one of the largest
banks in the Kingdom and ranked as number one among the banks in Bahrain for
2006 according to capital (US$ 1,842 million), ahead of Gulf International Bank (US$
1,613 million) and Ahli United Bank (US$ 819 million). Asset wise, ABC was ranked
second behind Gulf International Bank, Bahrain, with assets of US$ 17,588 million.
[Source: Directory of Arab banks and financial institutions, http://www.abfdir.com]
ABC's strategy of diversified growth led to the development of its widespread network
of branches, representative offices, subsidiaries and affiliates in 21 countries around
the world, including most principal international financial centres. The wide range of
its banking products includes the following:
Investment banking products
1. Corporate Finance
2. Equities
3. Debt Capital Markets
4. Placement and Fund Raising
5. Fund Management
Commercial banking products
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6. Syndications
7. Global Project & Structured Finance
8. Corporate Banking & Financial Institutions
9. Trade Finance
Treasury products
10. Foreign Exchange
11. Structured Products
12. Derivatives
13. Investment Management
Retail banking products
14. Consumer Lending
15. Card Services
16. Bank Assurance
17. e-Banking
Islamic banking products
18. Morabaha (Credit Sale)
19. Ijarah (Lease)
20. Ijarah Muntahia Bittamleek (finance lease)
21. Salam Sale (Sale and purchase of goods on deferred delivery)
22. Istisnaa (Sale of goods to a customer)
23. Sukuk (Islamic Bonds)
[Source: Arab Banking Corporation website]
The Environment:
Bahrains banking sector has remained to be a cornerstone in growth of the local
economy. As at December 2006, banking sector assets stood at over US$180 billion,
more than twelve times annual Gross Domestic Product [source: Central Bank of
Bahrain website www.cbb.com]. The Central Bank of Bahrain (CBB) replaced the
Bahrain Monetary Agency (BMA) in September 2006 with the objective to monitor
and enhance the banking sector regulations. Industry growth has been supported by
an open market economy; stable and prudent macro-economic and fiscal policies; a
credible regulatory framework in line with international standards; and a notably
strong and well qualified local workforce. As such, the banking sector is highly
competitive with reasonable prospects for growth.
ABCs major competitors in the conventional banking sector in Bahrain are Gulf
International Bank (GIB) and Ahli United Bank (AUB) sharing 25% and 12% of the
market respectively. Other companies with their respective market shares are
International Banking Corporation (9%), National Bank of Bahrain (6 %), United Gulf
Bank (6%), Shamil Bank of Bahrain (6%), Bank of Bahrain and Kuwait (5%) and
Bahraini Saudi Bank (3%).
[Source: http://www.abfdir.com/toparabbanks.htm]

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Share of Bahrain banking market (Asset wise)
Arab Banking Corporation
26%
Gulf International Bank
33%
Ahli United Bank
20%
International Banking
Corporation
4%
National Bank of Bahrain
6%
United Gulf Bank
2%
Shamil Bank of Bahrain
2%
Bank of Bahrain and Kuwait
6%
Bahraini Saudi Bank
1%
Ahli United Bank
International Banking Corporation
United Gulf Bank
Bahraini Saudi Bank
Share of Bahrain banking market (Capital wise)
Ahli United Bank
12%
International Banking
Corporation
9%
6%
United Gulf Bank
6%
6%
5%
Bahraini Saudi Bank
3%
25%
28%
Ahli United Bank
International Banking Corporation
United Gulf Bank
Bahraini Saudi Bank
Page 6/30
Aims and Objectives:

The aim of this report is to analyse the financial position and performance of ABC primarily on
the basis on its last five years (2003-2007) financial statements. This would be achieved by:

The Vertical Analysis Comparison of the key ratios for ABC over the years
The Horizontal Analysis Comparison of ABCs financial position with the next competing
company operated in the sector, which in this case would be GIB.

The performance of an organization can be measured using a variety of analytical tools. In
order to make a meaningful financial analysis, its results should be assessed over an adequate
period of time (Inter-temporal or trend analysis). However, the results of the organization
taken in isolation of its environment are of no real significance. Therefore, it is important to
consider its position and performance in relation to its competitors (this comparison is generally
known as Cross-Sectional Analysis). It is appropriate to mention here that various non-
financial indicators (like customer goodwill, supplier relationships, risk management, human
capital etc) are of equal importance in assessing the standing of the organization. [Source:
ACCA study text]

The financial risks of a bank are quiet different from any other enterprise. This is due to the fact
that the primary activity of a commercial bank is to serve as a bridge between savers
(depositors) and investors (borrowers). It channels the savings of economy into investment
activities and thereby earns via spread (difference between lending rate and borrowing rate).
Large portion of deposits, invested in loans may result in liquidity problems while large deposits
kept un-utilized will result in mounting costs. An appropriate balance between the two can only
result in profits at the reasonable risk.

Taking into account this special nature of a banks business this analysis also briefly reviews
the position of the bank using the well-known CAMEL approach, which is used by bank
regulators internationally as a measurement tool of the financial condition of a commercial
bank.

The acronym CAMEL stands for:
Capital Adequacy
The capital adequacy ratio of a bank signifies whether a bank is adequately capitalized
keeping in view the risk inherent in its business operations.

Asset Quality
It assesses risk, controllability, adequacy of loan loss reserves, and acceptable earnings.
Investing in an appropriate mix of assets (loans and advances, investments etc) is how a
bank primarily earns a return.

Management
This refers to the ownership structure of the bank and its management style.

Earnings (Profitability)
Earnings determine the ability of a bank to retain capital, support the future growth of
assets, and provide a return to investors. The largest source of income for a bank is net
interest revenue (interest income from lending activity less interest paid on deposits and
debt).

Liquidity and Funding
Funding is what a bank relies upon to grow its business and the asset side of the balance
sheet, beyond what could be accomplished with just equity. Liquidity is what a bank
requires if Funding is interrupted and the bank must still be able to meet certain
obligations.

[Source: Murphy, Hiderbrandt and Thomas, Effective Business Communication. (7th Edition),]
Page 7/30
INFORMATION GATHERING

In order to prepare this report, data was gathered from a variety of sources available. I was
particularly selective for my data sources to avoid any overlapping of the information and
restricted myself to the most relevant and authentic sources. The use of wider sources of
information enabled me to examine the performance of ABC from different angles and give
true relationships to the financial data.
Text Books:

All my study texts for ACCA published by BPP in particular the texts for papers 2.4, 2.5 and
3.7 have been referred to as and when I felt the need for them as these helped me out to set
the baseline for the sort of information I would require to complete the project.

The accountancy books used by me in A-Levels written by Frank Wood and Randall have
also been used at some points in time during the project.
Student Accountants:

The monthly news letter published and circulated by ACCA to all its students and affiliates
have also been of great help to me. In particular the article published in May 2004 How to
approach performance appraisal questions by A.N Allison.
Annual Reports:

The best and the most reliable source of information about any company is its printed annual
report. It not only contains the audited financial statements but also other valuable pieces of
information those could be used to gain an insight of the banks affairs. Published annual
reports for 2007 and 2006 were obtained from ABCs website.
Meetings

I did not have to arrange for any meeting with any of the banks employees but instead
consulted my line managers at Ernst & Young, Bahrain, who provided in-depth knowledge
about the banking sector in general.
Internet

The most useful source in terms of electronic media in the modern era is Internet. Apart from
ABCs website, various websites were referred to gather information about the banking sector
and methods used to analyse a bank. Moreover, sites for various newspapers proved to be a
goldmine for analytical information through press releases, competitor analysis and industry
overviews.
Page 8/30
Industry wise breakup of advances
2007
Other
2%
Trade
4%
Consumer
1%
Government
2%
Mining and quarrying
4%
Construction
6%
Manufacturing
21%
Other services
25%
Financial services
35%
Financial services
Other services
Manufact uring
Construction
Mining and quarrying
Trade
Consumer
Government
Other
ANALYSIS

Advances

Loans and advances constitute the core assets of a bank. The strength of a bank therefore lies
in the diversification of its advances base and their sustained growth.

Trend of advances over the years

The gross loans and advances of ABC have shown
a gradual and sustained increase over the years.
The banking industry in Bahrain as well as the rest
of the Middle East has been developing steadily.
Industry growth in Bahrain has been supported by
an open market economy and recent good fortunes
in the oil industry. The corresponding increase in
liquidity has been reinvested other segments of the
economy.

The only exception in the movement of loans and advances is 2004, when ABC disposed off
all its South and Latin American business. It can be said that the performance of any bank is
dependant on the performance of the region in which it operates. This was done to protect
ABC from the vulnerability of the South American market, increase profitability and to
concentrate on the Middle East and European markets. This is also evident by the fact that
the net asset value also increased from US$ 1.68 to US$ 1.85, confirming that the decrease
in advances was matched with a decrease in deposits.

Segment analysis of advances

This analysis reveals that the exposure
to any individual sector does not exceed
35% of the total loans and advances
portfolio of the bank. It is this
diversification that has enabled the bank
to sustain and increase its advances
level despite the sub-prime crisis in the
US. More than one third of the banks
loans are given to organisations in the
financial sector, where the risk of bad
debts is low. Apart from that, the
booming economy of Bahrain and the
mushrooming construction sector ensure that financings provided to the manufacturing and
construction sector are not only a safe bet, but they also promise good returns.
[Source: ABC Annual accounts 2007]

Gross Advances
6,833
12,329
8,622
15,921
6,012
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
G
r
o
s
s

a
d
v
a
n
c
e
s
Gross Advances 15,921 6,012 6,833 8,622 12,329
2003 2004 2005 2006 2007
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Analysis of investments

An analysis of the investment portfolio is
shown in the table. ABC has invested 55%
of its funds in AAA rated securities, which
reduce the risk it faces on its investments.
While that also means lower returns, it has
proved to be beneficial for ABC keeping in
view the current crisis in the banking
industry. Only 5% of its funds were invested
in hedge funds, which bore the brunt of the
sub-prime hit. The US$ 723 closing balance
for 2007 is net of US$ 299 provisions made
during the year.

[Source: ABC Annual accounts 2007]
Investment Type 2007 2006
AAA rated debt securities

7,609

4,500
AA to A rated debt securities

3,301

1,965
Other debt securities

1,458

690
Other investment grade debt
securities

743

603
Externally managed funds (hedge
funds)

723

716
Equity securities

71

53
Debt securities

14

41
Equities

10

-
Held to maturity - Debt securities
7

17
13,936 8,585
Breakup of investments - 2007
55%
Equities
0% Equity securities
1%
Debt securities
0%
Externally managed funds
5%
Held to maturity - Debt
securities
0%
AA to A rated debt
securities
24%
10%
Other investment grade
debt securities
5%
AA to A rated debt securities
Other investment grade debt securities
Externally managed funds
Equity securities
Debt securities
Equities
Held to maturity - Debt securities
Page 10/30
CAMEL APPROACH

Capital Adequacy

2003 2004 2005 2006 2007
Risk weighted assets (US$ million) 18,051 8,249 10,476 14,107 20,893
Capital base (US$ million) 2,661 1,974 2,089 2,225 3,006
Risk asset ratio (Capital adequacy ratio) 14.7 23.9 19.9 15.8 14.4

The cumulative average growth rate of 26% in risk-weighted assets from 2004 to 2007 is
because the major increase in loans and advances portfolio is on account of disbursement of
loans to private sector, which carries 100% risk weightage.

The decrease in the risk asset ratio should be a cause for concern for the banks management
since it means that there is less capital to cater to the risk of loss of assets. Even though there
has been a steady growth in the earnings of the bank throughout the preceding four years, the
increase in risky assets has been higher.

That, along with the global credit crunch, is one of the reasons that the owners of the bank
have decided to increase its authorised and paid-up share capital by US$ 500 million by way of
a pre-emptive rights offering to existing shareholders.
[Source: http://www.ameinfo.com/151468.html]

Asset Quality

2003 2004 2005 2006 2007
Average shareholders funds as % of total assets 4.92% 11.52% 10.74% 8.91% 6.0%
Total liabilities as a multiple of shareholders funds (times) 17.6 7.0 8.1 9.8 16.4

The quality of a bank's assets hinges on their collectivity during their terms and at maturity.
Some of the useful ratios in this regard are as follows:

The decreasing % reflects that the phenomenal increase in ABCs assets has been funded by
liabilities rather than shareholders funds. This does not portray the performance of the bank
well since it means that while the balance sheet footing has continued to grow, profits are not
being retained in the business. The same conclusion can be reached through the analysis of
total liabilities as a multiple of shareholders funds, which shows an increasing trend from
2004 to 2007.

Advances to funding ratio (Decreasing trend)

2006 2007 Change
Loans and advances 8,622 12,329 43%
Placements with banks and other financial institutions 4,160 5,268 27%
12,782 17,597 38%
Deposits from customers 7,508 10,791 44%
Deposits from banks and other financial institutions 9,070 15,013 66%
16,578 25,804 56%
Advances to funding ratio 0.77 0.68 -12%

The deposits of the bank have increased much more than its gross loans. This is due to the
good liquidity position in the country as a consequence of rising oil prices and more prudent
policy of the bank regarding loans and advances. It is also due to the tighter credit granting
Page 11/30
policies that the bank had to provide for only US$ 230 million as loan loss provisions during the
year, unlike most banks in the world which went into losses during the current year.

Investments to Funding ratio (Increasing trend)

As shown in the table, ABCs
investments in both trading and non-
trading securities have grown at the
same rate as the increase in deposits.
This goes to show that the banks aim
was to maintain the risk profile of its
investment portfolio. Securities being
less risky than loans offered, almost
half the funds were tied up in securities
in both 2006 and 2007.

MANAGEMENT

One of the most important factors behind the performance of financial institutions is sound
management. ABC Group seeks greater diversification in its revenue base primarily through
expansion in the Arab world. Its strategy is based on acquiring or creating new regional
banking platforms while simultaneously expanding its Middle Eastern finance and treasury
capabilities.

2003-2004 marked a turning point for ABC. After conducting a thorough analysis of its
operations in the context of the regional and global banking industry, management of ABC
implemented improvements to its organisational structure, business model and performance
measurement framework. At that time it shed its largest non-core subsidiaries and embarked
on a major organisational restructuring.

The downsizing freed up substantial resources from two highly profitable disposals, providing
a considerable boost to ABCs capital base and laying down the necessary conditions for it to
embark on future expansion. On the other hand, the restructuring shifted the Groups
orientation away from a mainly geographical configuration towards a strictly product-based
structure, designed to stimulate the synergies available from re-focusing Group units on a set
of common goals.

2005 witnessed the implementation of a corporate matrix structure, building on the product
matrix paradigm, covering the key support areas of risk management, information technology
and audit. This additional layering of the matrix structure reinforced the relationship between
Group headquarters and business units. The change represented a move towards a more
centralised institution administratively and a more synergistic Group where all units are made
aware of the work and initiatives of others, of their own contribution to the Group
commonwealth.

At the same time the introduction of a conservative credit culture, assisted by uniformly
applied credit policies and rating techniques throughout the organisation, together with a new
performance-geared executive motivation system, has ensured a continuous improvement of
asset quality.

[Source: Mr. Mohammed H. Layas, Chairman, in his Directors Report 2006]
2006 2007 Change
Trading securities 757 747 -1%
Non Trading securities 7,828 12,890 64%
8,585 13,637 59%
Deposits from customers 7,508 10,791 44%
Deposits from banks and other
financial institutions
9,070 15,013 66%
16,578 25,804 56%
Investments to funding ratio 52% 53% 1%
Page 12/30
Trend in Earnings
0
50
100
150
200
250
300
350
U
S
$

i
n

m
i
l
l
i
o
n
s
Net interest income 158 152 193 249 298
Net profit (loss) for the year 71 109 129 205 149
2003 2004 2005 2006 2007
EARNINGS AND PROFITABILITY

The profit/ (loss) before tax for the five years along with some of the key ratios are
given below:

2003 2004 2005 2006 2007
Writeback/(Provisions for credit losses) (74) 10 14 - (230)
Cost : Income ratio 51% 65% 60% 54% 40%
Net profit (loss) as % of av. shareholders funds 7.9% 3.0% 6.8% 10.3 7.6%
Net profit (loss) as % of av. assets 0.83 4.07 0.81 0.94 0.54
% Dividend cover (times) 1.0 0.4 1.8 2.1 1.5

As shown in the graph, net interest income
for the year 2004 was slightly lower than that
of 2003. This was due to the fact that the
recent downsizing left the bank with only half
its assets. Profitability during that year
improved however, and net profit increased
by 54%, as most of the provisions regarding
doubtful loans and advances were made in
2003 at the time of the disposal of ABCs
South American branches.

Income has since been increasing steadily at a cumulative average growth rate of 18% from
2004 to 2007. The net profit follows the same trend until 2007, when it registers a 27%
decrease compared to 2006. This is due to loan loss provisions made during the year
amounting to US$ 230 million. This is in fact an achievement for the management of ABC that
at a time when Gulf International Bank (ABCs main competitor in Bahrain) reports a loss of
US$ 757 million down from a profit of US$ 256 million in 2006, ABC still manages to earn a net
profit. According to Bahrain's central bank governor Rasheed al-Maraj, a focus on regional
business and efforts to ensure products complied with Islamic law helped shield ABCs Islamic
banking unit from credit-market losses, as Islamic financial institutions do not invest in
mortgage related securities and hedge funds.
[Source: GIB figures taken from GIB Annual accounts 2007]

The decreasing trend of the cost to income ratio provides an encouraging outlook on ABCs
performance. It shows an increasing margin on interest earned through investments,
placements and loans and the interest costs of customers deposits and placements of other
banks with ABC.

Dividend cover also shows an increasing trend during the 2004-2006 periods. However, ABC
has not declared any dividend for 2007 owing to the write-downs and decrease in net profit.
Dividend cover for 2007 has been calculated by taking a notional figure of US$ 100 million (the
same as 2006). I have done this to see the extent to which the net profit would support the
shareholders expectations of dividends (assuming that they would be satisfied with the same
dividend keeping in view the position and performance of the banking sector globally).
Page 13/30
LIQUIDITY

2003 2004 2005 2006 2007
Liquid assets ratio 42.1% 56.4% 57.8% 58.1% 58.8%
Deposits to loans cover (times) 1.6 1.8 2.0 1.9 2.1

The banks liquid assets ratio has been almost the same from 2004 to 2007 with an average
annual growth rate of 1%. Between 2003 and 2004, the sudden increase is due to the disposal
of business units and the sudden inflow of cash.

Deposits to loans cover follows the same trend, with notable increases in 2003-2004,
attributable to discontinuing operations, and in 2006-2007. The recent increase from 1.9 to 2.1
is due to tighter credit granting policies owing to the credit crunch globally.

Page 14/30
HORIZONTAL ANALYSIS:

It is important to analyze any companys performance with a competitor. Comparing a
companys performance with previous year does not use a benchmark to determine whether
the companys results are good or bad. To overcome this problem it is important to compare
ABCs performance with its closest competitor. This introduces an independent yardstick to the
comparison. (Student Accountant, April 2004)

In the case of ABC, the closest bank which can be compared to is Gulf International Bank
(GIB), which had a market share of 33% compared to ABCs 26% in 2006. Please note that
ABC has overtaken GIB as the largest bank asset wise as per 2007 figures. A comparison of
the major indicators for 2007 is presented below.

Table of Comparison

ARAB BANKING CORPORATION (ABC)
COMPARISON TABLE OF ABC WITH A COMPETITOR
Ratios (Per cent)
Profitability
Return on Average Equity 7.57% -37.20%
Return on Average Assets 0.54% -2.77%
Capital
BIS Risk Asset Ratio
- Total 14.39% 12.00%
- Tier 1 10.86% 9.55%
Equity as % of Total Assets 6.01% 7.44%
Asset Quality
Securities as % of Total Assets 41.65% 31.43%
Loans as % of Total Assets 37.65% 42.07%
Liquidity
Liquid Assets Ratio 58.76% 52.81%
Deposits to Loans Cover (times) 2.09 1.77
Gulf
International Bank
Arab Banking
Corporation
2007

[Sources: ABC and GIB Annual accounts 2007]

Descriptive analysis with competitor

Analysing ABC with GIB reveals that ABC has performed well in almost all areas of financial
performance, reasons for which can be extracted from the same table itself.

It is evident that ABC has earned a profit in 2007 whereas GIB has suffered a loss, chiefly due
to loan loss provisions amounting to US$ 966 million. One of the reasons for this may be that
investments in securities make up a greater proportion of ABCs assets compared to loans,
which provides a degree of stability to interest income earned while reducing the risk of the
banks investment portfolio.

Page 15/30
GIB on the other hand had tied up almost 1.3 times the assets held as securities. While this
might have been beneficial in a booming market in shape of higher earnings, this exposed GIB
to the effects of the sub-prime crisis and forced it to recognise close to US$ 1 billion of assets
as doubtful and provide for them in the current years financial statements. Another feature that
protected ABC from the worst of the credit crunch is that it holds more liquid assets than GIB

One notable feature of this comparison is the deposits to loans cover, which is higher for ABC
compared to GIB. This means that ABC has financed a greater portion of its assets through
deposits from customers and financial institutions, rather than financing them through
shareholders funds. While this might have been a cause for concern had the economy been in
recession, it does not hold great significance in the current scenario, when rising oil prices are
providing ample liquidity and funds and banks are competing against each other to get as
much funds from depositors by offering better interest rates than the other.

CONCLUSION:

Having done all the detailed financial analysis both vertical and horizontal it is evident that
ABCs performance as compared to its previous years has been on the better side, ignoring the
effect of loan loss provisions during 2007 (assuming that the sub-prime crisis would have
ended by next year and that measures taken by the management to limit losses bear fruit).

As we are on the conclusion it is worth noting that Moodys had upgraded ABCs deposit
ratings up two notches to A3 while re-evaluating a group of regional and international banks in
the region. [Source: Press release dated April 25, 2007 published on www.ameinfo.com]. Mr.
Ghazi Abdul-Jawad, President & Chief Executive of ABC commented:

'The ratings upgrade from Moody's reflects the continuous improvement in the ratings which we
already received from other international ratings agencies. This important achievement is a
result of the continuous improvement in our financial standing, ABC's profitability and risk
management methodologies.'
[Source: http://www.ameinfo.com/118000.html]

All the ratios calculated reflect sound financial position of the bank. The graph of net interest
income and net profit showed that over the period of last five years the profit has been on the
increasing side. The ratios were categorized into capital adequacy, asset quality, management,
earnings and liquidity. It is worth mentioning that the capital structure of the bank is set to
change, with a planned injection of US$ 500 million through pre-emptive rights shares issue.
This would provide the bank with opportunities of investing the surplus liquidity to further
increase its income earnings.
Page 16/30
APPENDICES

APPENDIX 1 BALANCE SHEET

ARAB BANKING CORPORATION (B.S.C.)
CONSOLIDATED BALANCE SHEET

31 December 2007
All figures in US $ Million
2007 2006
ASSETS

Liquid funds 335 274
Trading securities 747 757
Placements with banks and other financial institutions 5,268 4,160
Non-trading securities 12,890 7,828
Loans and advances 12,329 8,622
Investments in associates 32 32
Interest receivable 392 264
Other assets 621 338
Premises and equipment 130 127
TOTAL ASSETS 32,744 22,402

LIABILITIES

Deposits from customers 10,791 7,508
Deposits from banks and other financial institutions 15,013 9,070
Certificates of deposit 1,063 1,074
Interest payable 341 210
Taxation 73 47
Other liabilities 727 448
Term notes, bonds and other term financing 2,579 1,927
TOTAL LIABILITIES 30,587 20,284

EQUITY

Share capital 1,000 1,000
Reserves 218 456
Retained earnings 649 612

Equity attributable to the shareholders of the parent 1,867 2,068
Minority interests 290 50
TOTAL EQUITY 2,157 2,118
TOTAL LIABILITIES AND EQUITY 32,744 22,402

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APPENDIX 2 INCOME STATEMENT

ARAB BANKING CORPORATION (B.S.C.)
CONSOLIDATED STATEMENT OF INCOME
Year ended 31 December 2007
All figures in US $ Million

2007
2006
OPERATING INCOME

Interest income 1,689 1,232
Interest expense (1,391) (983)
Net interest income 298 249
Other operating income 393 235
Total operating income 691 484
Impairment provisions - net (230) -
NET OPERATING INCOME AFTER PROVISIONS 461 484

OPERATING EXPENSES

Staff 181 177
Premises and equipment 24 25
Other 70 60
Total operating expenses 275 262
PROFIT BEFORE TAXATION 186 222
Taxation on foreign operations (37) (17)
NET PROFIT FOR THE YEAR 149 205
Income attributable to minority interests (24) (3)
INCOME ATTRIBUTABLE TO THE
SHAREHOLDERS OF THE PARENT 125 202

Basic and diluted earnings per share (US$) 0.13 0.20

Page 18/30
APPENDIX 3 FINANCIAL HIGHLIGHTS

Earnings 2003 2004 2005 2006 2007
Other operating income 259 153 159 235 393
Total operating income 417 305 352 484 691
Profit before provisions, tax and minority interests 203 106 141 222 416
Writeback/(Provisions for credit losses) (74) 10 14 - (230)
Profit before tax and minority interests 129 116 155 222 186
Financial Position
Total assets 30,068 14,922 17,588 22,402 32,744
Loans and advances 15,921 6,012 6,833 8,622 12,329
Placements with banks and other financial institutions 6,651 4,305 3,264 4,160 5,268
Trading securities 86 184 593 757 747
Non Trading securities 5,204 3,617 6,003 7,828 12,890
Shareholders funds 1,585 1,852 1,926 2,068 1,867
Capitalisation
Authorised 1,500 1,500 1,500 1,500 1,500
Issued, Subscribed and fully paid-up 1,000 1,000 1,000 1,000 1,000

APPENDIX 4 RATIOS

2003 2004 2005 2006 2007
Profitability
Cost: Income ratio (costs as % of gross operating income) 51% 65% 60% 54% 40%
Net profit (loss) as % of average shareholders funds 7.9% 3.0% 6.8% 10.3% 7.6%
Net profit (loss) as % of average assets 0.83 4.07 0.81 0.94 0.54%
Dividend cover (times) 1.0 0.4 1.8 2.1 1.5
Capital
Risk weighted assets (US$ million) 18,051 8,249 10,476 14,107 20,893
Capital base (US$ million) - Tier 1 2,247 1,295 1,842 1,901 2,268
Capital base (US$ million) - Tier 2 406 677 247 324 738
Risk asset ratio - Tier 1 12.0 15.7 17.6% 13.5% 10.9%
Risk asset ratio - Total 14.7 23.9 19.9% 15.8% 14.4%
Average shareholders funds as % of total assets 4.92% 11.52% 10.74% 8.91% 6.0%
Loans and advances as a multiple of shareholders funds (times) 10.0 3.2 3.5 4.2 6.6
Total liabilities as a multiple of shareholders funds (times) 17.6 7.0 8.1 9.8 16.4
Term financing as multiple of shareholders' funds (times) 1.17 0.99 0.82 0.93 1.38
Assets
Loans and advances as % of total assets 52.9% 40.3% 38.9% 38.5% 37.7%
Securities as % of total assets 17.6% 25.5% 37.5% 38.3% 41.6%
Loan loss provisions as % of gross loans 4.6 7.2 5.6 4.4% 2.6%
Liquidity
Liquid assets ratio 42.1% 56.4% 57.8% 58.1% 58.8%
Deposits to loans cover (times) 1.6 1.8 2.0 1.9 2.1
Share information
Basic Earnings per share $0.12 $0.58 $0.13 $0.20 $0.13
Dividends per share - Cash $0.07 $0.29 $0.07 $0.10 $0.00
Net asset value per share $1.68 $1.85 $1.93 $2.12 $2.16

Page 19/30
APPENDIX 5 INDUSTRY ANALYSIS (2006)

US$ in million
Capital Assets
Arab Banking Corporation 1,842 17,588
Gulf International Bank 1,613 22,857
Ahli United Bank 819 13,872
International Banking Corporation 585 2,403
National Bank of Bahrain 423 3,984
United Gulf Bank 422 1,687
Shamil Bank of Bahrain 365 1,526
Bank of Bahrain and Kuwait 306 3,986
Bahraini Saudi Bank 187 434

Appendix 6 Selected notes from the financial statements
Note 4 & 5 - SECURITIES
All figures in US$ Million
2007 2006
TRADING SECURIIES
Externally managed funds 723 716
Debt securities 14 41
Equities 10 -
747 757
NON-TRADING SECURITIES
AAA rated debt securities 7,609 4,500
AA to A rated debt securities 3,301 1,965
Other investment grade debt securities 743 603
Other debt securities 1,458 690
Equity securities 71 53
13,182 7,811
Held to maturity - Debt securities 7 17
13,189 7,828
Provisions against securities (299) -
12,890 7,828
TOTAL SECURITIES 13,637 8,585
Note 6 - LOANS AND ADVANCES BY INDUSTRIAL SECTOR
2007 2006
Financial services 4,294 3,982
Other services 3,166 2,162
Manufacturing 2,677 1,498
Construction 787 279
Mining and quarrying 478 263
Trade 483 221
Consumer 152 121
Government 303 298
Other 308 179
12,648 9,003
Loan loss provisions (319) (381)
12,329 8,622
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APPENDIX 7 FORMULAE FOR RATIOS
Capital Adequacy

Risk weighted assets
Risk asset ratio - Tier 1 =
Capital base (Tier 1)
Risk weighted assets
Risk asset ratio - Total =
Capital base (Tier 1 + Tier 2)
Average Shareholders funds
Av. shareholders funds to total assets =
Total assets
Loans and advances
Loans to shareholders funds (times) =
Shareholders funds
Total Liabilities
Total liabilities to shareholders funds (times) =
Shareholders funds
Term Notes, Bonds And Other Term Financing
Term financing to shareholders' funds (times) =
Shareholders funds
Asset Quality
Loans and advances
Loans to total assets =
Total assets
Trading + non trading securities
Securities to total assets =
Total assets
Loan Loss Provision
Loan loss provisions to gross loans =
Loans and advances
Earnings (Profitability)
Total operating income
Income ratio =
Total operating expenses
Net profit (loss) for the year
Net profit (loss) to av. shareholders funds =
Average Shareholders funds
Net profit (loss) to av. assets =
Average assets
Dividend cover (times) =
Dividends per share - Cash x No. of shares
Income Attributable To The Shareholders of The Parent
Basic Earnings per share =
Average number of shares
Dividend declared for the year
Dividends per share =
Total assets - Total liabilities
Net asset value per share =
Liquidity and Funding

Liquid assets
Liquid assets ratio =
Total assets
Deposits from customers, banks and other financial institutions
Deposits to loans cover (times) =
Loans and advances

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APPENDIX 8 RATIOS WORKINGS

Page 22/30

Oxford Brookes University
RESEARCH AND ANALYSIS PROJECT

ARAB BANKING CORPORATION B.S.C.
(ABC)

KEY SKILLS STATEMENT

(1,489 words)
Page 23/30
Preparing for the meetings

I initially used the ACCA website to look for information regarding the
project. From there I downloaded guidelines for the research and analysis
project. As per the guidelines I had to conduct three meetings with my mentor. The
selection of the mentor was the first key task for me. This was because one should
have good understanding with his mentor for the best outcome. I chose Mr. Azeem
Qasmi, who is my line manager in Ernst & Young - Bahrain and a member of ACCA.

The three meetings with the mentor were then held as per the requirement of the
project. I spent a lot of time in the preparation before the start of each
meeting. The three meetings are summarised hereunder.

First Meeting
I contacted Mr. Azeem after my office hours and took an appointment for the first
meeting. The first meeting was held in office at 6:00 pm on February 28, 2008. From
the list of the topics in the guideline, I had selected topic # 8 An analysis of
the financial situation of your choice of organization. I had also chosen two
model organisations and discussed the selection with my mentor. He was convinced
of my choice of the topic and advised me to select the organisation. We also
discussed other sources of information available upon which he suggested some
good websites. The meeting ended deciding when and where we would meet again.
My target was to finalise an outline upon which I will require information about the
organisation of my choice. The model which I had to use for the financial analysis
was to be chosen by the second meeting.

Second Meeting
The second meeting was held at Mr. Azeems home at 10:30 am on March 15, 2008.
By the time of the second meeting, I had already collected most of the relevant
information through several sources. Moreover I had calculated the ratios and
presented the key points in bullets to Mr. Azeem, so that he could assess my
progress. I had also written my questions prior to the meeting and knew exactly what
to ask. Before going through my work, Mr. Azeem answered all my questions helping
me out towards successful completion of the project. By the end of the meeting we
were quite positive that the project would be completed within the deadline. We also
decided to meet at the office after office hours for the next time to give a presentation
for the third and final meeting.

Third Meeting
The third meeting was held on March 25, 2008 at 5:30 pm at in our office premises. I
had to make a 10-minute presentation to Mr. Azeem and had rehearsed for it well by
delivering this presentation to my office colleagues before delivering it to my mentor.
It was attended by Mr. Azeem and two other assistant managers from our group who
were also in the office at that time. I was asked various questions by the managers to
ensure that the analysis I had done was consistent with their knowledge of the
banking industry and up-to-date with the latest events. I was able to tackle all the
questions well and provided sufficiently detailed explanations. Apart from the
presentation, this meeting lasted for another 35 minutes. All three of the managers
Page 24/30
gave me input on where and how to improve on the project as well as my
presentation skills.

QUESTIONING

Questioning proved to be an important tool in resolving any confusion during the counselling
process. It also helped me in identifying areas of improvement. In my meetings with Mr.
Azeem, I used to put forward all my problems in the form of simple questions. This process
not only helped me in easily communicating my queries but also made it simpler for him to
understand my confusions and guide me in a structured way.

Various types of questions that I asked from KS during the mentoring process included the
following:

Yes / No type questions, e.g. I have picked this topic for my report on such and such
basis, are you satisfied with this?
Descriptive questions, e.g. how to analyze the liquidity position of a bank?
If / then type questions, e.g. if Libor rates decrease, then should deposits decrease as
well?

During the mentoring process, questioning worked as a two way process. In the second
meeting Mr. Azeem asked me a lot of questions about the technical aspects of the analysis of
the bank, sometimes to test my understanding of the concepts and issues and sometimes to
encourage me to look at things from a new angle. This was a real thought provoking exercise,
which enabled me to further refine my analysis.

I used to jot down the questions that rose in my mind during the period between the meetings
(and even during meetings) and present all the questions to my mentor before the start of the
proceedings. This was appreciated by Mr. Azeem as well as it set the tone for the meeting
and he could also judge the completion status of my project.

I was also at liberty of asking questions during the meeting because Mr. Azeem being a
professional knows the importance of the nature of work I was engaged with. This proved to
be helpful and clarified me lots of things that I could miss.

LISTENING

Listening is a communication tool which I consider to be very important. It is one of the most
important part of communication and plays a vital role in any discussion. During my three
meetings with my mentor I tried to focus and give my full concentration and attention to what
my mentor wanted to convey to me and it was my active listening skills which helped me a lot
in the success of the three meetings.

If there is noise or distortion, the listener may not be able to fully comprehend the message
given by the sender. In our first meeting we were interrupted a number of times due to noise
and distortion. First there was the constant distraction of people coming and going in the
office. Then there were some curious on-lookers who wanted to know what kind of project I
was going for. Therefore, for the second meeting we decided to meet at Mr. Azeems house
so that there was no noise or distortion.

In all the three meetings I stayed fully focused and listened to my mentor very carefully and
attentively which was also appreciated by my mentor at the end of the last meeting. Lastly I
always waited for Mr. Azeem to complete his conversation and never interrupted him while he
was talking. I noted down any questions that arose in my mind while my mentor was
explaining something to me.
Page 25/30

THE PRESENTATION

I made my presentation on Microsoft Power Point. Its completion took around two days and
delivered it on my laptop. On my request two other managers agreed to attend my
presentation. I made sure that the presentation contained only relevant information so that
audience interest can be maintained. I also rehearsed my presentation in front of my office
colleagues gave me tips regarding the delivery of the material. They also appreciated the way
I presented the information and this helped boost my confidence. I also distributed handouts
that included excel sheets on which ratios were calculated by me. This helped the audience a
lot in understanding the financial analysis.

I started off with a brief description of the project, the topic and the companys introduction. I
then touched on the model I used for the analysis of the financial statements then discussed
the summarised results of my analysis.

My mentor prompted the other two managers to ask questions since he already knew a
majority of stuff that I presented. The managers asked me questions regarding my
presentation which developed a healthy question answer session. I was able to answer all the
questions confidently as I had the thorough understanding of the topic, the bank, the
environment and the banking industry in general. I kept my presentation brief, concise and to
the point, but covered all the relevant details and this resulted in a successful presentation.

After the presentation was over my mentor told me what went well and what could have been
improved for my future learning. I also took all of his suggestions in to my notice as these will
help me in giving a better presentation in future. I have provided the outline of the Power
Point presentation on the next two pages.

Outline of the presentation:

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Self assessment of interaction

My interaction with my mentor during the three meetings was generally effective. As I
knew my mentor since a long time, I didnt have much problem in communicating
with him. In the first meeting with my mentor, there were some distractions because
of which I had some problem in understanding Mr. Azeems message. He made sure
that that this did not happen again by having the next meeting at his house.

The channel of communication was always appropriate, be it the power point
presentation, the reminder phone call or sms. Except for aforementioned noises, the
communication was effective. The message was always sent through an appropriate
medium, and it was properly decoded as well. Both Mr. Azeem and I interpreted the
same meaning of the message. My interaction with my peer group and the managers
during the third meeting was also effective. I understood all their questions and gave
them convincing answers. Hence, it was clear that we were thinking on the same
lines.

Lastly all of my queries were clear and Mr. Azeems replies were relevant and
informative. Most of the time his language was simple and style of answering was
such that there was no possibility of misinterpretation. On the whole I feel that
communication with my mentor was successful in achieving my ends.
Noise
Distortion
Distortio
Feedback

Mediu
m
Information
, ideas,
attitudes
Desired
action
Understandi
ng of
message
and
meaning
and/or
Coded
Messag
e
Decode
d
Messag
COMMUNICATION PROCESS

Page 30/30
BIBLIOGRAPHY

Financial Institutions Center Commercial Bank Risk Management:
An Analysis of the Process - By Anthony M. Santomero (The Wharton School,
University Of Pennsylvania)

Murphy, Hiderbrandt and Thomas, Effective Business Communication. (7th
Edition), McGraw Hill Publications.
Annual Reports (2003-2007) Arab Banking Corporation
Annual Reports (2003-2007) Gulf International Bank
http://www.gibonline.com (GIBs Official website)
http://www.arabbanking.com (Arab Banking Corporations Official website)
http://www.abfdir.com (Arab Banking and Finance)
http://www.zawya.com (business related website)
http://www.cbb.gov.bh (Central Bank Of Bahrain)
http://www.bahrainchamber.org.bh (Bahrain Chamber Of Commerce)
http://www.arabianbusiness.com (GCCs top business website)
http://www.bankingtimes.co.uk/bank/business-banking/
http://www.gulf-daily-news.com
http://www.topbusinessnp.com (The Business Time)
Wood, F. (1999) Business Accounting II. Financial Times Prentice Hall
Randall, H. (1996) A Level Accounting. 3
rd
Edition, Letts Educational
Study Text (2005) Paper 2.4 Financial Management and Control. BPP
Study Text (2005) Paper 2.5 Financial Reporting. BPP
Study Text (2007) Paper 3.6 Strategic Financial Management. BPP
Study Text (2007) Paper 3.7 Strategic Financial Management. BPP
ACCA Student Accountant Website.
http://www.accaglobal.com/students/publications/student_accountant/
http://www.accaglobal.com/students/study_exams/qualifications/degree/
Directory of Arab banks and financial institutions, http://www.abfdir.com

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Oxford Brookes University

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