ABC Islamic Bank (E.C.) 2000 Financial & Business Analysis "Lower net income due to some restructuring and redirection, but a satisfactory year overall"

Financial Trends

Ownership and Legal Status

ABC Islamic Bank (E.C.) is an exempt joint stock company incorporated in Bahrain in 1985, and is a wholly owned subsidiary of Arab Banking Corporation (B.S.C.). It operated as an investment bank up to 31 December 1997. The Company now engages exclusively in Islamic banking activities. Authorised share capital at 31 December 2000 was US$52.5 million, of which US$42.5 million is issued, subscribed and fully paid.

The Year in Brief

Gross operating income rose by 13.5% to US$13.43 million (1999: US$11.84 million). This income was derived from Murabaha contracts (US$8.71 million), Ijara contracts (US$2.68 million), Managed Murabaha (US$1.18 million) and Investments (US$0.86 million). Total assets decreased by 16.5% to US$194.99 million (1999: US$233.41 million), while net profit decreased by 19.5% to US$3.97 million (1999: US$4.93 million). Return on total assets was marginally lower at 2.0% (1999: 2.1%), while return on average equity decreased to 7.0% (1999: 9.3%). Capital adequacy ratio was 33% (1999: 27%), well above the minimum recommended of 8% of risk-weighted assets expected of international banks.

Out of gross income, US$8.42 million was distributed to unrestricted investment account holders in accordance with contribution of their investment (1999: US$6.46 million). Net income was 6.75% lower at US$5.01 million (1999: US$5.37 million). Within this, other fees and commission income reduced by US$1.1 million reflecting redirection and restructuring activities of the Bank.

Total operating expenses decreased by 4.8% to US$3.242 million (1999: US3.404 million), while the ratio of operating expense to operating income was 44.9% (1999: 40.8%). While operating expenses were well controlled, lower operating income due to reduced fees and commission income resulted in the deteriorated ratio.

Business Highlights

• As part of a strategic redirection, the Bank conducted an evaluation of its overall risk portfolio, resulting in a material reduction of higher risk assets, together with geographically scattered exposures. This resulted in a decline of US$ 37.2 million in total assets, offset by much improved credit quality in overall terms.
  
  
• A strategic equity investment was made in an Islamic Takaful company in Saudi Arabia, on the basis that such business has great potential in Saudi Arabia given a recent directive that all insurance companies in that Country operate on the co-operative system.
  
  
• The Arab world comprised 65% of total assets (1999: 63%), with the increase reflecting deals completed in Lebanon, a strategic target for new business. The concentration to the Arab world is expected to increase further in conformity with the Bank's renewed focus on these economies. Exposures to Europe and the Far East were reduced, to North America unchanged, and to Latin America increased through a Group company. Liabilities and equity comprised 85% from the Arab world, and 15% North America (1999: 91% and 8% respectively).
  
  
• By industry, banks and financial institutions made up 87% of total assets distribution (199: 83%). Exposures in trading and service industry sectors were fully settled during the year. The manufacturing sector increased on account of a Murabaha facility approved for Aluminum Bahrain (ALBA).
  
  
• The two liquidity management vehicles (ABC Clearing Company for short-term money, ABC Islamic Company for short to medium term money) performed well, and have the potential to aggressively market for additional liquidity.