An increase in Loan Loss Provisions, largely related to a major fraud case and Covid-19 impact, created a Net Loss of US$67 Million, Attributable to the Shareholders of the Parent
However, the unprecedented market conditions were weathered with strong balance sheet, robust underlying business revenues and pre-provision profits of $114m
Manama, Bahrain: Bank ABC (Arab Banking Corporation B.S.C.) - Bahrain Bourse Trading Code “ABC” - today announces its results for the first half of 2020.
Bank ABC has faced unprecedented and deeply challenging trading conditions in the first half of 2020. The Group started the year well with a strong balance sheet and good client transaction pipeline as we continued our digital and wholesale bank transformation. However, as H1 progressed, our plans were heavily impacted by the unique combination of COVID 19, collapse in oil prices and consequent economic and market pressures.
Overall for the first half, business and client revenues held up well, while net interest margins were impacted by falling interest rates, and Brazilian Real depreciation created a significant translation impact on revenues from Banco ABC Brasil (“BAB”). Extensive measures were taken on operating expenses to offset the reduction in revenues to some degree so that on an underlying* pre-provision basis, the Group achieved a net result of US$114 million compared to US$133 million in 2019. However, against this, a significant H1 ECL charge of $174m (H1 2019 $21m) largely as a result of a major client fraud, combined with the forward-looking nature of IFRS9, has pushed the Group to a net loss of $67m.
Expanding further on our underlying H1 performance, while there have been many challenges, Bank ABC has demonstrated strength and resilience in a number of key areas:
- Client and transaction revenues have performed well, with many of our units posting total operating income levels of greater than 90% of previous year comparatives.
- Many key wholesale and retail banking clients have been provided with support measures such as payment deferrals extending across approximately US$1 billion of our consolidated loan portfolio.
- Bank ABC’s reputation and standing has allowed us to continue to act as a lead arranger in areas of debt capital markets and syndications on major conventional and Islamic financing transactions with approximately US$12bn of debt origination facilitated in the first half.
- Our payment and digital retail banking capabilities continue to expand, through AFS and our new digital, mobile-only ila Bank launched in Q4 2019, which showed exceptional growth of customer numbers and deposits under management.
- Our overall asset portfolio quality remains solid and our credit underwriting standards are sound, which has been confirmed by extensive client level stress-testing reviews; and the ‘one-off’ nature of client related fraud impacting our ECL has been recognised by our rating agencies such as Standard & Poor in reaffirming our BBB- rating with a stable outlook.
- Bank ABC’s balance sheet is strong with excellent capital and liquidity levels, which have been further bolstered by the retention of the 2019 dividend. On Basel III basis, Group Tier 1 ratio is 16.3% (comprising predominately Core Equity (“CET1”) at 16.0%), LCR is 215% and NSFR is 121%.
Over the rest of 2020, the Group will continue to prioritise measures to restore profitability, while stabilising ECL charges, which will remain the largest single factor impacting Bank ABC results due to the continuing uncertainties being faced.
Bank ABC's Group Chairman, Mr. Saddek Omar El Kaber, commented that “While the Group has reported a net loss, this is an aberration caused by high ECL charges, with a large element comprising a single major client fraud. The Group’s strong balance sheet and effective operating processes are demonstrating our strong capabilities to weather these conditions. Our underlying business in many markets and business lines remain robust, our capital and liquidity levels are strong and our rating has been reaffirmed at investment grade. The Board of directors would like to recognise the dedicated efforts of our employees during this period, and would emphasise Bank ABC’s continuing focus on ensuring their well-being. We also express our thanks for the ongoing support of our regulators, shareholders and other stakeholders, which is critical to navigating the challenges ahead successfully. “
A more detailed summary of 1H Financial Results explained below:
1H 2020 Financial results
- Consolidated net loss attributable to the shareholders of the parent, for the 1H of 2020 was US$67 million, compared to a net profit of US$112 million reported for the same period last year.
- Earnings per share for the period was at US$-0.02, compared to US$0.04 in the previous year.
- Total comprehensive loss attributable to the shareholders of the parent was -US$396 million compared to total comprehensive income of US$159 million reported last year, reflecting the net loss and significant market volatility during 1H 2020 from Brazilian Real depreciation of 26% and unfavourable movements in fair value of debt instruments, compared with a positive FX translation impact in the previous year.
- Equity attributable to the shareholders of the parent at the end of the period was at US$3,637 million, 10% lower compared to the US$4,031 million at the 2019 year-end.
- Total assets stood at US$29.6 billion at the end of the period, 1% lower compared to US$30.1 billion at the 2019 year-end.
- Loans and advances were at US$14.6 billion at the end of the period, compared to US$16.5 billion at the 2019 year-end, a reduction of 11% on a headline basis. However, adjusted for BRL depreciation impact, the Loans and advances were 3% below last year, reflecting weakened demand and a more prioritised asset selection given the credit conditions.
1H 2020 Business Performance
- On a headline basis, total operating income was US$240 million, 45% lower compared to US$437 million reported for the same period last year. However, it should be noted this is before the effect of normalising adjustments due to currency hedges in Banco ABC Brazil and before FX depreciation. On an underlying basis,* total operating income was at US$389 million for the period, approximately 90% of US$434 million for the same period last year, reflecting resilience across most of our markets and business lines
- Net interest income was US$252 million, 10% lower against US$279 million reported for the same period last year, after absorbing the impact of declining interest rates and FX depreciation.
- Operating expenses were at US$247 million, 4% lower than US$257 million for the same period last year. Cost savings initiatives have been undertaken, while reprioritising the continuing investments into the Group’s digital transformation and strategic initiatives.
- On an underlying* pre-provision basis (adjusting for FX, tax and other factors), the Group achieved a net result of US$114 million compared to US$133 million in 2019.
- Impairment charges (ECL) for the period were US$174 million compared to US$21 million reported for the same period last year. The sharp increase in ECL arising from application of IFRS 9 to the portfolio under the stressed macroeconomic conditions was exacerbated by a major client fraud relating to KBBO group companies including NMC. These have affected many banks in the region, and while the situation is complex and still developing, it is becoming apparent that there are sophisticated schemes and systematic high-level collusion to defraud banks, mislead auditors and obfuscate significant undeclared debt levels.
- Leaving aside fraud related elements, Stage 3 ECL charges remain well contained and in line with our past experience. An increased ECL charge on Stage 1 and 2 is also in line with industry trends taking into account COVID 19 conditions given the forward-looking nature of IFRS9.
- The ratio of impaired loans to gross loans was at 4.7% compared to 2019 year-end levels of 3.7%, the increase largely attributable to the fraud cases noted above. The ratio normalises to 3.8%, when long-standing legacy fully provided loans are adjusted for
- Notwithstanding the conditions, the Group’s overall asset portfolio quality remains solid and our underwriting standards are sound. This has been recognised by our rating agencies such as S&P, which after their detailed annual review process has reaffirmed Bank ABC’s BBB- rating with a stable outlook.
- Deposits were at US$20.2 billion, compared to the levels of US$21.0 billion at 2019 year-end, the reduction primarily attributable to the BRL depreciation referred above. Despite the prevailing conditions during 1H 2020, our deposit experience remained steady underscoring the confidence of our clients. Our efforts to diversify and improve the quality of our deposit base continue.
- Liquidity ratios are strong with LCR and NSFR at 215% and 121% respectively with comfortable buffer and liquid assets to deposits ratio healthy at 54% improved from 51% at 2019 year-end.
- Capital Ratios strong: CET1 at 16.0%, Tier 1 at 16.3% and total capital adequacy ratio (CAR) 17.3%.
Bank ABC is a leading player in the region’s banking industry and provides innovative wholesale financial products and services that include corporate banking, trade finance, project and structured finance, syndications, treasury products and Islamic banking. It also provides retail banking services through its network of retail banks in Jordan, Egypt, Tunisia and Algeria and through its new mobile-only bank in Bahrain.
The full set of the financial statements and the press release are available on Bahrain Bourse’ and Bank ABC website.
Mr. Saddek Omar El Kaber