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.
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, ie comparing Q3 2017 to Q3 2016.
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Read more:
UAE banking profit growth driven by non-ordinary factors
The banking paradox
Sabah al-Binali's 1 minute round-up
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The income statement stands out with a 5 per cent drop in net interest income. To understand this I look at the components and see that interest revenue dropped slightly by 0.8 per cent but interest expense increased 9.85 per cent.
What could cause such a big increase in the interest expense? Look at what generates an interest expense and we do that by going to the balance sheet. The main component of this is customer deposits, which is about flat. Looking at the other entries there are three large movements of note. Due to banks dropped 34.8 per cent, repurchase agreements (repos) increased 16.3 per cent and commercial paper (CP) increased 56.1 per cent.
Let me explain what repos and CPs are. A repo is when you sell a security, usually bonds, to another party with an agreement to buy them back for a specified price at a specified time. It is a form of borrowing that is relatively low risk as the collateral is transferred to the ownership of the lender and furthermore the collateral is liquid.
Commercial paper you can think of as similar to a bond with a short tenor, so another form of borrowing. The interbank borrowing (due to banks line item) is usually low cost and extremely short tenor.
The 34.8 per cent drop in cheap, short-term interbank funding was replaced partially with cheap repos but mostly with longer-term CPs. In absolute terms CPs increased Dh7.7 billion. Can this explain the interest expense increase of Dh130 million?
It can if CPs are more expensive than the interbank borrowings by about 1.7 per cent. Not everything is about revenue and expense. Because commercial paper usually has a far longer tenor than interbank borrowings the bank's funding risk has decreased. This needs to be weighed against the expense. And in this market, decreasing risk should be the priority.
Let’s look at what is happening to interest revenue. Remember, just because a number doesn’t change this doesn’t mean that nothing worthwhile is happening. The first place to look at is again the balance sheet and the loans and advances line item which shows a drop of 1.84 per cent.
In expansionary economic times this might be considered a bad thing. But in an economy that is adjusting to the change in oil price, I would argue that this is the smart thing to do. The more important conclusion is that loans and advances, the highest interest earning asset, went down 1.84 per cent but interest income went down only 0.80 per cent.
This indicates that FAB increased the rates it charges, but there might be other explanations. The last step is to understand whether the interest increase is due to a risk increase or better marketing. Given the conservative heritage of FAB, I'm leaning towards the latter explanation.
There is much more to FAB's financials and using some of the ideas you should be able to improve your understanding even more. I have not covered the important cash flow statement but this is simply because I have run out of space. Perhaps in a future article.
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 of his thoughts at al-binali.com
GAC GS8 Specs
Engine: 2.0-litre 4cyl turbo
Power: 248hp at 5,200rpm
Torque: 400Nm at 1,750-4,000rpm
Transmission: 8-speed auto
Fuel consumption: 9.1L/100km
On sale: Now
Price: From Dh149,900
Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
- 400m Olympic running track
- NBA-spec basketball court with auditorium
- 600-seat auditorium
- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
- AR and VR-enabled learning centres
- Disruption Lab and Research Centre for developing entrepreneurial skills
The five new places of worship
Church of South Indian Parish
St Andrew's Church Mussaffah branch
St Andrew's Church Al Ain branch
St John's Baptist Church, Ruwais
Church of the Virgin Mary and St Paul the Apostle, Ruwais
Company%20Profile
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Honeymoonish
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TEACHERS' PAY - WHAT YOU NEED TO KNOW
Pay varies significantly depending on the school, its rating and the curriculum. Here's a rough guide as of January 2021:
- top end schools tend to pay Dh16,000-17,000 a month - plus a monthly housing allowance of up to Dh6,000. These tend to be British curriculum schools rated 'outstanding' or 'very good', followed by American schools
- average salary across curriculums and skill levels is about Dh10,000, recruiters say
- it is becoming more common for schools to provide accommodation, sometimes in an apartment block with other teachers, rather than hand teachers a cash housing allowance
- some strong performing schools have cut back on salaries since the pandemic began, sometimes offering Dh16,000 including the housing allowance, which reflects the slump in rental costs, and sheer demand for jobs
- maths and science teachers are most in demand and some schools will pay up to Dh3,000 more than other teachers in recognition of their technical skills
- at the other end of the market, teachers in some Indian schools, where fees are lower and competition among applicants is intense, can be paid as low as Dh3,000 per month
- in Indian schools, it has also become common for teachers to share residential accommodation, living in a block with colleagues
What are the GCSE grade equivalents?
- Grade 9 = above an A*
- Grade 8 = between grades A* and A
- Grade 7 = grade A
- Grade 6 = just above a grade B
- Grade 5 = between grades B and C
- Grade 4 = grade C
- Grade 3 = between grades D and E
- Grade 2 = between grades E and F
- Grade 1 = between grades F and G
David Haye record
Total fights: 32
Wins: 28
Wins by KO: 26
Losses: 4
THE BIO
Favourite book: ‘Purpose Driven Life’ by Rick Warren
Favourite travel destination: Switzerland
Hobbies: Travelling and following motivational speeches and speakers
Favourite place in UAE: Dubai Museum
Our legal columnist
Name: Yousef Al Bahar
Advocate at Al Bahar & Associate Advocates and Legal Consultants, established in 1994
Education: Mr Al Bahar was born in 1979 and graduated in 2008 from the Judicial Institute. He took after his father, who was one of the first Emirati lawyers
UAE currency: the story behind the money in your pockets
THE CLOWN OF GAZA
Director: Abdulrahman Sabbah
Starring: Alaa Meqdad
Rating: 4/5
BELGIUM%20SQUAD
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Killing of Qassem Suleimani
Our family matters legal consultant
Name: Hassan Mohsen Elhais
Position: legal consultant with Al Rowaad Advocates and Legal Consultants.
What drives subscription retailing?
Once the domain of newspaper home deliveries, subscription model retailing has combined with e-commerce to permeate myriad products and services.
The concept has grown tremendously around the world and is forecast to thrive further, according to UnivDatos Market Insights’ report on recent and predicted trends in the sector.
The global subscription e-commerce market was valued at $13.2 billion (Dh48.5bn) in 2018. It is forecast to touch $478.2bn in 2025, and include the entertainment, fitness, food, cosmetics, baby care and fashion sectors.
The report says subscription-based services currently constitute “a small trend within e-commerce”. The US hosts almost 70 per cent of recurring plan firms, including leaders Dollar Shave Club, Hello Fresh and Netflix. Walmart and Sephora are among longer established retailers entering the space.
UnivDatos cites younger and affluent urbanites as prime subscription targets, with women currently the largest share of end-users.
That’s expected to remain unchanged until 2025, when women will represent a $246.6bn market share, owing to increasing numbers of start-ups targeting women.
Personal care and beauty occupy the largest chunk of the worldwide subscription e-commerce market, with changing lifestyles, work schedules, customisation and convenience among the chief future drivers.
Brahmastra%3A%20Part%20One%20-%20Shiva
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Manchester City transfers:
OUTS
Pablo Zabaleta, Bacary Sagna, Gael Clichy, Willy Caballero and Jesus Navas (all released)
INS
Ederson (Benfica) £34.7m, Bernardo Silva (Monaco) £43m
ON THEIR WAY OUT?
Joe Hart, Eliaquim Mangala, Samir Nasri, Wilfried Bony, Fabian Delph, Nolito and Kelechi Iheanacho
ON THEIR WAY IN?
Dani Alves (Juventus), Alexis Sanchez (Arsenal)
CRICKET%20WORLD%20CUP%20QUALIFIER%2C%20ZIMBABWE%20
%3Cp%3E%3Cstrong%3EUAE%20fixtures%20%20%3C%2Fstrong%3E%3C%2Fp%3E%0A%3Cp%3E%3Cstrong%3EMonday%2C%20June%2019%20%3C%2Fstrong%3E%3C%2Fp%3E%0A%3Cp%3ESri%20Lanka%20v%20UAE%2C%20Queen%E2%80%99s%20Sports%20Club%26nbsp%3B%3C%2Fp%3E%0A%3Cp%3E%3Cstrong%3EWednesday%2C%20June%2021%20%3C%2Fstrong%3E%3C%2Fp%3E%0A%3Cp%3EOman%20v%20UAE%2C%20Bulawayo%20Athletic%20Club%26nbsp%3B%3C%2Fp%3E%0A%3Cp%3E%3Cstrong%3EFriday%2C%20June%2023%3C%2Fstrong%3E%3C%2Fp%3E%0A%3Cp%3EScotland%20v%20UAE%2C%20Bulawayo%20Athletic%20Club%26nbsp%3B%3C%2Fp%3E%0A%3Cp%3E%3Cstrong%3ETuesday%2C%20June%2027%20%3C%2Fstrong%3E%3C%2Fp%3E%0A%3Cp%3EIreland%20v%20UAE%2C%20Bulawayo%20Athletic%20Club%3C%2Fp%3E%0A
The bio
Favourite vegetable: Broccoli
Favourite food: Seafood
Favourite thing to cook: Duck l'orange
Favourite book: Give and Take by Adam Grant, one of his professors at University of Pennsylvania
Favourite place to travel: Home in Kuwait.
Favourite place in the UAE: Al Qudra lakes
The Bio
Favourite place in UAE: Al Rams pearling village
What one book should everyone read: Any book written before electricity was invented. When a writer willingly worked under candlelight, you know he/she had a real passion for their craft
Your favourite type of pearl: All of them. No pearl looks the same and each carries its own unique characteristics, like humans
Best time to swim in the sea: When there is enough light to see beneath the surface
Queen
Nicki Minaj
(Young Money/Cash Money)
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If you go
The flights
There are various ways of getting to the southern Serengeti in Tanzania from the UAE. The exact route and airstrip depends on your overall trip itinerary and which camp you’re staying at.
Flydubai flies direct from Dubai to Kilimanjaro International Airport from Dh1,350 return, including taxes; this can be followed by a short flight from Kilimanjaro to the Serengeti with Coastal Aviation from about US$700 (Dh2,500) return, including taxes. Kenya Airways, Emirates and Etihad offer flights via Nairobi or Dar es Salaam.
UAE currency: the story behind the money in your pockets
