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ABC posts $71m loss after write-down

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Points of Essence:

  • Arab Banking Corporation (ABC) reported a net loss of $71 million for the second quarter of 2008 following the write-down in entirety of its remaining net exposures to collateralized debt obligations (CDOs) of $134 million.
  • This is undertaken in the face of continued deterioration in market values and uncertainties as to their ultimate recoveries.
  • The bank has engaged consultants to conduct an in-depth review of its medium term strategy to cover all aspects of ABC’s operations – the economic and competitive environment.

Manama: Sun, 03 Aug 2008

Bahrain-based Arab Banking Corporation (ABC) has reported a net loss of $71 million for the second quarter of 2008.

This follows the write-down in entirety of its remaining net exposures to collateralized debt obligations (CDOs) of $134 million.

The international wholesale bank said it recorded a total income of $192 million for the quarter in its core business, an increase of 15 per cent over $167 million for the same period last year.

The bank is currently conducting an in-depth review of its medium term strategy, similar to the periodic reviews previously conducted in 1997 and 2003, said Hassan Juma, president and chief executive.

“This review will cover all aspects of ABC’s operations – the economic and competitive environment – the group’s vision of its future role and mission, and in addition, its banking model going forward. ABC will be assisted by external consultants in conducting this review,” he said.

The bank’s interest income at $$106 million was 54 per cent higher than $69 million for the same period last year from increased volume of loans and securities.

Non-interest income, which totaled $86 million was 12 per cent lower than $98 million earned last year, mainly due to the mark to market of the funds of hedge funds portfolio which, in view of the continued uncertainties in the international financial markets, ABC decided to completely exit in March 2008. Revenues from other income sources, including trade finance & forfaiting activities, project finance, Islamic financial services, corporate and retail banking, remain robust.

Operating expenses increased by a nominal eight per cent to US$92 million from US$85 million last year. ABC’s pre-provision cost income ratio for the second quarter of 2008 was 48%, lower than 51% for the same period last year.

In the face of continued deterioration in market values and uncertainties as to their ultimate recoveries, ABC decided to make a clean sweep and write-down in entirety its remaining net exposures to collateralized debt obligations (CDOs) of $134 million. This meant taking a provision of $134 million in the second quarter of 2008 (after writing down 78 per cent of the gross exposures of $614 million at the end of the first quarter of 2008) even though 70 per cent or $434 million is still current with interest payments. After this provision, the overall result was a net loss of $71 million for the quarter.

Consolidated total assets stood at $31.8 billion at the end of June 2008 (2007 year end: $32.7 billion). ABC’s securities’ portfolio, largely comprising highly liquid investment grade FRNs and securities guaranteed by US government agencies, declined to $12.1 billion from $13.6 billion at the end of 2007.

Loans and advances increased to $13.5 billion, up $1.2 billion as the lending portfolio continued to expand to meet customer demand. ABC’s liquidity remains strong, with the liquid assets to deposits ratio at 67 per cent (2007 year end: 72 per cent).

In June 2008 ABC’s share capital was increased through a priority rights issue to existing shareholders of one share for every share held, i.e. 1.0 billion shares at nominal value of $1.00 each and at a premium of $0.11 per share. ABC’s principal shareholders oversubscribed their rights in their pre-existing proportions. The allotment was completed on June 18, 2008, and ownership of ABC now stands as Kuwait Investment Authority 29.7 per cent, Central Bank of Libya 29.5 per cent, Abu Dhabi Investment Authority 27.6 per cent, and other shareholders 13.2 per cent.

At the end of the second quarter, and after provisions, shareholders’ equity stood at $2,154 million. ABC’s capital adequacy ratio at June 30, 2008, calculated on the basis of the Basel II capital adequacy regime with which ABC has been compliant since January 1, 2008, stood at 15.4 per cent, predominantly Tier 1 which totaled 12.8 per cent.

Juma said: “The successful completion of the rights issue is a recognition of the confidence of the shareholders in ABC’s strategy to focus on fulfilling the long-term needs of our clients and the aspirations of our shareholders, despite the ongoing challenging conditions in the financial industry.

“As ABC moves into the second half of 2008, the challenging conditions that impacted financial markets for the past year have continued and deepened. Despite this, increasing core earnings clearly demonstrate the success of our strategy – focusing on the Arab region and its trade flows. Our strengths in wholesale activities in Treasury operations, Islamic financial services and trade and project finance are providing additional income streams, coupled with our retail / SME subsidiaries in the Arab World.

“ABC is currently conducting an in-depth review of its medium term strategy, similar to the periodic reviews previously conducted in 1997 and 2003. This review will cover all aspects of ABC’s operations – the economic and competitive environment – the group’s vision of its future role and mission, and in addition, its banking model going forward. ABC will be assisted by external consultants in conducting this review,” he said. – TradeArabia News Service

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Written by Suapi Shaffaii

August 4, 2008 at 3:18 am

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