Two years ago, Dubai Islamic Bank (DIB) was a significant player in the global market for arranging Sukuk deals. However, DIB’s deal pipeline slowed as the Middle East was caught in the whirlwind of the global financial crisis, and the bank, once a rising star, has seen its investment banking business shrink in the aftermath.
While the bank has maintained profitability through the lean years, its financials do show some chinks. As the Middle East faces a tougher operating environment, can DIB return to growth or will it have to settle for a new normal?
Fall from grace
According to Dealogic data, DIB ranked 12th for global Sukuk book running in 2007, with five deals amounting to US$722 million. The following year, DIB placed seventh with four deals, while DIB Pakistan ranked 32nd with two deals. Its six deals managed in 2008 totalled US$821 million.
By the time 2009 rolled around, DIB and DIB Pakistan were managing half the number of deals from the previous year, with deal value also decreasing to US$426 million, before its pipeline dried up in 2010.
Unsurprisingly, DIB’s rise and fall coincided with the global boom years and the subsequent crisis, with its financials following the same trajectory.
Its 2008 financial statements show net profit plunging 31.08% to AED1.73 billion (US$471.07 million) from 2007 on lower income and higher impairment losses.
Sixteen point three percent of its total equity was also wiped out to AED8.93 billion (US$2.43 billion) during the year, mainly due to an AED888.71 million (US$241.96 million) fair value loss.
Meanwhile, although continuing to grow until 2008, DIB saw its income from commissions, fees and foreign exchange start to shrink in 2009. From 2008 to 2010, this income has fallen 21.22% to AED687.03 million (US$187.05 million) on lower deal flow.
“DIB had a dominant position in Sukuk issuances when most of the Sukuk being issued was in the GCC. However, since the market withered, the bank has been in a less strong position. In addition, they ran into management problems in a number of their non-core operations, and I believe Millenium Private Equity, DIB’s corporate finance arm, was one of those areas,” observed a Dubai-based analyst.
“For the last few years, DIB has been focusing on dealing with the after-effects of too many poorly regulated deals, especially property deals, and has focused less on developing areas such as its corporate finance operations,” the analyst told Islamic Finance news.
On the mend
To its credit, DIB has remained profitable. A point to note is that in 2009, DIB consciously refocused on its domestic retail banking operations in a move to harness “the next wave of growth in the UAE economy”, as it said in its annual report for that year.
However, institutional and corporate services would remain a key objective, it maintained.
The shift has helped buffer a slower investment banking environment, with DIB succeeding in growing total assets to AED90.14 billion (US$24.54 billion) last year. This replenished its asset base, which fell to AED84.3 billion (US$22.95 billion) in 2009 from AED85.03 billion (US$23.15 billion) in 2008.
Its refocused efforts are also expected to be boosted by its acquisition of Islamic mortgage provider Tamweel PJSC late last year, in a US$102 million bailout of the ailing home financier.
DIB said the acquisition contributed to AED6.1 million (US$1.66 million) to its 2010 net profit.
Its financing portfolio is also on the mend and at AED57.17 billion (USX) in 2010, Islamic financing and investing assets have exceeded its peak of AED52.66 billion (US$15.57 billion) in 2008. Its Islamic financing and investing assets had fallen to AED49.92 billion (US$13.59 billion) in 2009.
Furthermore, it has also rebuilt its equity base to a pre-crisis level of AED10.53 billion (US$2.87 billion) in 2010.
Notwithstanding its gains, DIB’s bottom line has been on a declining trend since 2008. Last year, it reported a net profit of AED812.63 million, down 32.84% and 53.03% from 2009 and 2008, respectively.
In its latest results for the first quarter 2011, profit amounted to AED233.68 million (US$63.62 million), while commission, fees and foreign exchange income totalled AED165.66 million (US$45.1 million). Total assets stood at AED100.4 billion (US$27.34 billion) and total equity amounted to AED9.81 billion (US$2.67 billion).
A new challenge
As competition gets stiffer and with corporate and institutional deals harder to come by than before the financial crisis, DIB’s new focus on retail banking could pay off.
However, what will become of its investment banking operations? Could the bank capitalize on this year’s expected recovery in the Sukuk market?
“As the Sukuk markets recovers in the GCC, DIB should be a beneficiary, but I believe this time around they will find it difficult to get to the same level of dominance. HSBC Amanah has always been a competitor, but it has arguably strengthened its operations, while there is also a lot more competition from the dedicated Islamic banks such as Abu Dhabi Islamic Bank, or perhaps even Hilal Bank,” said the Dubai-based analyst.
With its new strategy towards domestic retail banking, perhaps DIB is in search of a new status quo. Its bottom line may be shrinking, but perhaps this marks a more realistic and sustainable level of profitability.