Rasmala Regulatory News (RMA)

26 Feb 2009 07:00



26 February 2009 

Results for the year ended 31 December 2008

The Board of the European Islamic Investment Bank plc is pleased to announce its audited results for the year ended 31 December 2008.

Highlights:

Total Operating Income increased to £13.2m (2007: £13.0m)

Group profit before impairment allowances growing from £2.6m to £4.7m (82%)

Strong capital base - £163m - 680% of minimum regulatory requirement

Maintained high level of liquidity - net liquid assets over deposits of +48%, materially higher than regulatory one month minimum of -5%

61% of assets have maturities of less than 12 months

Revaluation of property portfolio, resulted in an impairment provision of £14.7m

Prudent approach to provisioning - £3.7m provision against an individual murabaha financing 

Consolidated loss after tax of £14.8m (2007: loss £4.5m)

Core operations continue to trade profitably

Cost to income ratio (excluding provisions) reduced from 80% to 64% 

Private Equity and Corporate Advisory business launched during the year, undertook first investment in DiamondCorp Plc

Awarded title of European Bank of the year for 2008 by Islamic Business and Finance

EIIB's capital base and liquidity strength mean it is well positioned for challenges for 2009 and beyond

For further information, please contact:

EIIB plc Tel: +44 (0) 20 7847 9900

John Weguelin, Chief Executive Officer

Keith McLeod, Finance Director

Evolution Securities  Tel: +44 (0) 20 7071 4300

Chris Sim

Fishburn Hedges Tel: +44 (0) 20 7839 4321

Michelle James

Andrew Marshall

 CHAIRMAN'S STATEMENT

In the name of Allah, the Most Gracious, the Most Merciful

To the shareholders of the European Islamic Investment Bank plc

I am pleased to present to our shareholders, the European Islamic Investment Bank plc's (EIIB) results for 2008.

Without question 2008 has been one of the most dramatic and challenging years global financial markets have ever experienced. The impact of the sub-prime crises and the subsequent credit crunch has evolved into a significant and serious global recession. It is apparent that all economies and markets are or will be impacted by the effects of the recession but what is not yet clear is how long and how deep the recession will be.

EIIB has had a challenging year. The Bank has not been immune from the effects of the turmoil in the global financial markets although I am glad to say that being an Islamic bank has ensured we have avoided many of the problems to which some other institutions have been exposed. Unfortunately the well documented decline in the UK Commercial Real Estate market in the second half of 2008, and the prudent decision to provision for another murabaha obligation has resulted in an overall loss of £14.8m for the full year.

The overall loss is disappointing, however management's conservative approach to risk management, capital preservation and liquidity management means the Bank's core businesses have been profitable and the Bank is in a well capitalised and liquid position to take advantage of opportunities in the coming year.

Highlights for the year include the establishment of a Private Equity and Corporate Advisory business with the first investment by this business, the purchase of a substantial stake in a diamond production company, and the successful completion of a substantial syndication. 

I remain confident that the EIIB business model is robust and that the Bank will continue to contribute to the overall development of the Islamic Finance market in London. However we constantly review strategy to ensure it is aligned with market conditions and now is such a time when we should be aware of changes taking place in the global financial markets and be prepared to take advantage of the opportunities that these changes will offer.

Adnan Ahmed Yousif

Chairman

CHIEF EXECUTIVE'S STATEMENT

BUSINESS OVERVIEW

Unquestionably 2008 was an extraordinary year for global financial markets, characterised by unprecedented turmoil, declines in asset values, drying up of credit, a crisis of confidence, and the onset of a global recession. The Islamic Banking market in general was not immune from many of these events and the impact of the global downturn.

EIIB operating income for 2008 increased from £13.0m to £13.2m (2%) during the year, with core pre tax profitability (excluding provisions relating to the Property Portfolio and murabaha) growing from £2.6m to £4.7m (82%). Careful management of EIIB's cost base during the year saw EIIB's expenses decline by 18% from £10.4m to £8.5m. 

Our strong capital base of £163m which is 680% of the minimum regulatory requirement and high level of liquidity with net liquid assets over customer deposits of +48% which is materially higher than the regulatory minimum of -5% means that the Bank is well positioned for capital and liquidity requirements in the current environment and reflects management's cautious approach to risk management and to positioning the Bank for opportunities in the future.

Unfortunately the overall results for the Group have been impacted by the decline in the commercial real estate market in the UK. It has been well documented in the media that the UK's Commercial Property Sector has suffered a severe decline with the IPD Index of UK Property declining by 18% during the second half of 2008 (22% decline for the full year 2008). EIIB commissioned a valuation of the Group's property portfolio and based on this valuation took the view that it was prudent to take an impairment provision of £14.7m on the portfolio. 

In keeping with our careful and prudent approach, management continually reviews EIIB's asset portfolio to assess the performance and recoverability of each financing. This is particularly important in the current economic climate. The circumstances of one particular obligor are such that the ultimate recovery of the full amount of the financing (made under a murabaha agreement) is in doubt. Whilst we are actively working with the obligor to resolve this situation, we believe that an impairment provision of £3.75m is appropriate at this time. These events have unfortunately resulted in a loss for the year of £14.8m after tax, however other than the two items noted above, EIIB's core operations continued to trade profitably. 

Despite this disappointing result the strong capital base, cautious approach to risk, and highly liquid balance sheet place the bank in a strong position to take advantage of opportunities arising as a result of the current unprecedented economic environment.

During the course of 2008, management refocused EIIB's business to concentrate on three key areas; Treasury and Capital Markets, Private Equity and Corporate Advisory, and Real Estate.

Treasury and Capital Markets achieved a satisfactory result for the year, particularly given the negative sentiment and low volumes which affected the global debt markets during 2008. Capital markets transactions were subdued with total sukuk issuance declining globally from $32.3bn in 2007 to $14.8bn in 2008. International sukuk issuance declined year on year from $16.3bn to $6.1bn.

During the year we arranged a $70m syndication for a major Saudi conglomerate, which successfully closed during August. We remain committed to the Treasury and Capital Markets business, which we view as fundamental to the success of EIIB's business model.

Private Equity and Corporate Advisory was launched during 2008 when EIIB recruited a small but highly regarded Private Equity team. The current upheaval in world markets, plus the lack of leverage finance for traditional Private Equity houses has resulted in a strong pipeline of potential deals for the team. In November, after careful research, EIIB undertook its first investment, buying a material stake in DiamondCorp Plc, an AIM, and Johannesburg Stock Exchange, listed diamond producer. We believe that the DiamondCorp acquisition demonstrates EIIB's ability to source and execute alternative equity deals and that the current environment will afford the Bank the opportunity to carefully deploy further capital in this direction as and when further potential deals become available.

As mentioned earlier the UK real estate market has suffered a rapid decline as a result of the credit crunch. The overall drop in property values is almost 30% from their peak in 2007, yields have moved out significantly, and the volume of transactions has decreased with distressed sellers entering the market. Fears that the value of property company assets would be driven down by lack of debt financing were compounded in the final quarter of the year by the impact of the recession on tenant risk and rental income. The Bank made no real estate investments during the year however as an asset class real estate remains interesting and with the increase in yields and decline in the value of sterling it will, at an appropriate moment, present an investment opportunity.

During 2008 we signed a Heads of Terms agreement with Robeco to form a partnership to develop a range of Sharia'a compliant wealth or asset management products. After careful consideration of the opportunities, risks and rewards, especially in the environment at the time and for the foreseeable future, we agreed that formalising the partnership would not be in the best interest of either party, and hence negotiations were terminated.

Our people are a key asset for EIIB. They come from a wide variety of backgrounds and have extensive and varied experience in both Sharia'a and traditional financial services. We are proud of their knowledge and commitment. Our remuneration and promotion structures recognise and encourage long term contribution and success, and align the employees' interests with those of the Bank. 

We are delighted that EIIB was awarded the title of European Bank of the Year for 2008 by Islamic Business and Finance, recognising the key role the Bank has played in the development of the Islamic Banking in Europe. The Bank has actively participated in promoting the development and growth of Islamic Finance in the UK, in the discussions around a possible UK Government Sukuk and in promoting London as a centre for Islamic Finance and we remain committed to participating in these activities. 

Looking forward 2009 will be another challenging year for all financial institutions, however I am convinced that with EIIB's committed and highly skilled team, its strong capital base, prudent approach to risk management, and focus on maintaining a high level of liquidity means that as a Bank we are well positioned to move quickly to take advantage of opportunities as and when they arise.

Finally, on behalf of management and staff I would like to thank our Board of Directors for their continued support and guidance and express our gratitude to our shareholders for their support and patience during these difficult times.

______________________________

John Weguelin

Chief Executive Officer

OPERATING AND FINANCIAL REVIEW

INTRODUCTION

The Directors present the Operating and Financial Review for 2008, having followed the framework set out in the Accounting Standards Board's Reporting Statement: Operating and Financial Review as a guide to best practice, the Directors believe they have discharged their responsibilities under Section 417 of the Companies Act 2006 to provide a balanced and comprehensive review of the development and performance of the business.

EIIB'S OBJECTIVES AND MARKET ENVIRONMENT

EIIB was the first independent Sharia'a compliant Islamic investment bank to be authorised by the Financial Services Authority (FSA). Having received its authorisation on 8 March 2006 the Bank is listed in the UK on the Alternative Investment Market within the London Stock Exchange. 

The Bank was established to bridge the gap between the financial markets of the Islamic world and those of western and OECD territories. It delivers a range of innovative products and services across multiple asset classes to the Islamic wholesale, institutional, and high net worth individual markets. EIIB originates investment opportunities in Western Europe and the UK for placement with institutional and high net worth investors primarily, though not exclusively, in the Middle East. The Bank's competitive positioning is significantly enhanced by its base in the pre-eminent global financial centre, London.

The key principles of Islamic banking are derived from the Quran and are based on the avoidance of:

Interest 

Uncertainty

Speculation

Unjust enrichment or unfair exploitation

The Bank's Sharia'a Supervisory Board comprising eminent Islamic scholars is tasked with ensuring that all products are structured to reflect these principles.

BUSINESS OBJECTIVES

The Directors have organised the operations of the Bank into three business units:

TREASURY AND CAPITAL MARKETS

EIIB's Treasury engages in foreign exchange spot and the Islamic equivalent of forward foreign exchange markets and promotes liquidity in the Islamic money markets. The unit manages the short and medium term liquidity profile of the Bank within the guidelines laid down by the Financial Services Authority and the Bank's Asset and Liability Committee. In addition to being involved in Islamic interbank commodity murabaha and wakala money markets, it seeks to build a sustainable base of third party deposits by establishing direct relationships. 

The Capital Markets unit's remit covers a range of activities including, but not limited to, term financing, sukuk and structured trade finance. It is involved in all aspects of the product value chain, including origination, structuring, underwriting and distribution. The Bank invests in mandated financing issues and develops and maintains an active secondary market in such issues. 

PRIVATE EQUITY AND CORPORATE ADVISORY

EIIB's Private Equity and Corporate Advisory Team ('PECA') operates a private equity investment business and provides advisory services to the Bank's clients. PECA sources opportunities to invest in both private and stock exchange listed companies and invests in businesses that meet the criteria set by the Bank's Board Executive Committee. PECA's investment remit is to source transactions primarily from outside of the Gulf Co-operation Council countries and, whilst that remit is global, PECA focuses on investment opportunities within Europe, the Middle East and Africa.

Investee companies are sought that are revenue producing, recession resistant and have good prospects of generating significant upside within a target period of two to four years.

PECA works closely with EIIB's institutional shareholders and other Middle East based institutions and, typically, PECA invites investor clients of the Bank to invest in its deals, either as co-investors or on a syndicate basis.

PECA is also responsible for monitoring and managing EIIB's private equity investments and handling the timing and process of exit from the investments.

REAL ESTATE

EIIB's Real Estate unit targets bespoke investment and acquisition opportunities for the Bank's clients, as well as managing the existing proprietary real estate investments.

BUSINESS STRATEGY AND RESULTS

2008 was an exceptionally challenging year for all financial institutions. The overriding themes of depressed asset prices and lack of confidence resulted in very low transaction volumes in both the traditional and Islamic capital markets. Despite this EIIB executed, as a mandated lead arranger, a $70m syndication for a major Saudi conglomerate, which successfully closed in August 2008. Low profit rates in the sukuk, murabaha and wakala markets reflected the low returns being generated in the traditional debt markets around the world.

EIIB's results at the consolidated level reflect a loss of £14.8m after tax. As notified to the market in the preliminary trading statement, the loss reflects two specific items (listed below) and the adverse trading environment.

EIIB makes term financing facilities available to borrowers under a number of Sharia'a compliant structures. Prior to committing any financing, EIIB undertakes rigorous credit and risk assessment of the obligor. The current severe economic downturn has resulted in a significant pressure on the profitability and cashflow of an obligor. Whilst EIIB management is committed to working with the obligor to resolve the situation, the Directors believe that a provision of £3.75m on this exposure is appropriate at this time.

A Private Equity and Corporate Advisory business was launched during the year, with the intention of establishing EIIB as a participant in mid-sized Private Equity deals with GCC investors and European corporates. A rigorous evaluation process is undertaken before committing to an investment. In November EIIB invested in DiamondCorp Plc, a diamond production company listed on AIM and the Johannesburg Stock Exchange. The Directors believe that DiamondCorp represents an ideal opportunity for long term value creation. The current financial turmoil and constrained funding environment provides favorable conditions for EIIB'S Private Equity business model. The Directors anticipate that further advantageous deals will result from the substantial deal pipeline. 

The latter part of 2008 saw a significant reduction in volume of investment transactions as a result of the market uncertainty and the continuing effects of the global economic downturn. The institutional commercial property market led by out of town retail and city offices has had a major correction since the onset of the credit crunch, showing a drop in capital growth of (30.8%) and (29.2%) respectively since December 2007. Investors remain hesitant as further drops in capital values are anticipated during 2009. In addition investor financing is difficult to source and although interest rates have decreased significantly over the current year the higher margins, reduced finance to value ratios together with the lack of confidence has led to a hiatus in activity. We believe there will be opportunities to acquire prime assets with secure long-term income at depressed market prices during 2009.

PEOPLE

A significant differentiating factor for our business has been our ability to attract quality staff from the London market. The Directors believe that the Bank has a competitive remuneration structure, which will enable EIIB to retain and attract staff of the highest calibre.

OPERATIONAL

The Bank has built an operational infrastructure that is robust and scaleable. The Directors are confident that the controls around these systems and processes are effective in protecting and safeguarding the Bank's assets. EIIB's Internal Audit department, under the direction of the Board's Audit Committee, is responsible for working with management to identify and quantify risk, provide independent appraisals of systems of internal control, add value to business initiatives and support development of a sound control culture throughout the Bank.

RISKS

EIIB is exposed to market risk in relation to its proprietary investments, counterparty risk from transactions with third parties, particularly money market transactions, liquidity risk from liquidity mismatches and operational risk.

The Bank's measured approach to risk is documented in the risk policy. Under this policy risk is monitored on a daily basis. 

KEY PERFORMANCE INDICATORS

The Board are of the view that management should build the business while tracking performance against indicators such as return on equity ('ROE'), staff turnover and efficiency. As business activities further develop, the Bank will benchmark these key performance indicators ('KPI's') against international Islamic banking institutions. The Bank does not consider it meaningful at this point to disclose numerical targets and performance indicators.

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008 (audited)

CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2008 (audited)

John Weguelin Keith McLeod

Chief Executive Officer Finance Director

 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 

31 DECEMBER 2008 (audited)

The above consolidated statement of changes in equity also represents the statement of changes in equity for the Company.

CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008 (audited)

1 Segmental information

The Bank manages its activities primarily by class of business and the risks and returns are affected predominantly by differences in the products and services provided. As set out in the Operating and Financial Review, during the course of 2008, management refocused EIIB's business to concentrate on three key areas: Treasury and Capital Markets, Real Estate and Private Equity and Corporate Advisory.

Primary reporting segment - Operating businesses

The Treasury and Capital Markets unit became fully active in April 2006 following FSA authorisation. The majority of the cost base, and the assets and liabilities of the Bank have been deployed in support of that business unit. Asset management business transactions held at the end of 2007 were transferred to the Real Estate division after its inception in 2008. Private Equity and Corporate Advisory was launched during 2008 when EIIB recruited the Private Equity team who did their first deal in November 2008. 

Primary reporting segment - Operating businesses

Secondary reporting segment - Geographical

2 Income from financing and investing activities

3 Returns to financial institutions and customers

4 Foreign exchange gains 

5 Trading income

6 Property portfolio

The Bank has an interest in an asset management special purpose vehicle, EIIB Pan-European Islamic Real Estate Fund (the Fund), which holds a UK commercial real estate property portfolio through its investment in The House Limited (THL). The Fund was established on 22 November 2006, and the property portfolio was acquired on 18 April 2007. The acquisition of the properties was financed by a financial institution on a murabaha basis and the Bank via a bridging facility. The Bank owns 100% of the management shares in the Fund, there being no other equity shares in issue. In turn the Fund owns 100% of the equity shares of THL, the company which owns the properties. Both the Fund and THL are registered in the Cayman Islands. As a result of the nature of the relationship between the Bank and the Fund, the requirements of IAS 27 and Standard Interpretation Committee (SIC) 12 stipulate that the results of the Fund and the underlying property portfolio should be consolidated with those of the Bank. The property portfolio and the related funding are therefore included in the Bank's consolidated balance sheet.

At acquisition THL had assets of £58,968,092 and liabilities of £50,083,429. The initial intention of the Fund was to sell its property portfolio, and hence it was accounted for in line with the requirements of IFRS 5 and carried at fair value less cost to sell at 31 December 2007 in the Bank's financial statements. The Fund reassessed its intention during 2008, in light of market conditions, and as at 30 June 2008 decided to hold the portfolio for long term revenue generation and capital appreciation. Accordingly the Bank classified the property portfolio as investment properties and accounted for under IAS 40. The Bank has a Real Estate division that assists in the administration of the property portfolio.

The Operating expenses of the property fund in 2007 relate principally to the acquisition of the property portfolio and the establishment costs of the Fund. 

In accordance with the requirements of IAS 40, the investment properties are carried at original cost less depreciation. At each reporting date an assessment is made of whether there is any indication that the Investment properties are impaired. If any such indication exists, the Group estimates the recoverable amount of the asset and the impairment loss if any. The recoverable amount of an asset is the higher of its fair value less cost to sell, and its value in use. Value in use is the present value of future cash flows from the assets discounted at a rate that reflects market returns adjusted for risks specific to the assets. If the recoverable amount of an asset is less than its carrying value, an impairment loss is recognised immediately in profit or loss and the carrying value of the asset reduced by the amount of the loss. The value in use of the property portfolio as at 31 December 2008 was £38,699,245.

An external valuation was conducted by CB Richard Ellis Ltd on 20 October 2008 which valued the properties at £38,160,000. Having taken external advice, the Directors are of the view, based on market yields and economic returns of the properties, that the fair value has subsequently declined by a further 5% to £36,252,000 by the end of December 2008. 

As the Company has provided junior financing to THL via the Fund, an impairment provision of £14,285,451 (2007: £7,301,737) has been included in the Company's own balance sheet.

  The following items in the income statement and balance sheet relate to the Fund and THL:

* Murabaha returns on due to  financial institutions.

**  Depreciation is calculated on building cost less residual value on a straight-line basis over 15 years

*** In 2007, the property portfolio was accounted for under IFRS 5. Included in the amount is £255,833 which has been treated as depreciation in line with the requirements of IAS 40.