Barely a year since the European Islamic Investment Bank (EIIB) embarked on a new business strategy in response to flagging profits from the global financial crisis, there is speculation that the bank’s outlook is in doubt once again following the entry of HBG Holdings as its largest shareholder.
Islamic Finance news understands that HBG has not prioritized discussions with management on the bank’s strategy. It is also speculated that the departure of Subhi Benkhadra, who was EIIB’s CEO, was a result of misunderstandings between HBG and the bank’s management.
HBG, a UK-based private equity and fund management firm with offices in Dubai and Saudi Arabia, has increased its stake to around 15% in EIIB since it first bought around 13% of the bank at an undisclosed price in the middle of this year.
Trouble at the top?
According to a source, HBG has yet to outline clear business plans and a direction for the bank. Two directors, George Morton and Salman Abbasi, have resigned from the bank’s board, and another director, Yusef Abu Khadra, reportedly chose not to stand for re-election due to a conflict with the new shareholder.
The bank has also seen the appointment of Zulfi-Caar Hydari, CEO of HBG, and Michael Toxvaerd, the chief investment officer of the private equity firm, to its board of directors.
Islamic Finance news has also learnt that EIIB’s merger and acquisition plans, through which it has been eyeing expansion in Bahrain, have been put on hold as a result of the uncertain atmosphere at the bank.
EIIB declined to comment when queried on Benkhadra’s departure and on the impact HBG’s entry has had on the bank’s operations. However, it highlighted the bank’s record result for the first half of 2011, “which reflects the bank’s ability to source and develop successful private equity investments and the hard work of EIIB’s dedicated staff”.
It also said that: “The market environment remains extremely challenging for all banks, however with our strong liquidity and capital position, EIIB is well-positioned to capitalize on any opportunities which may arise.”
HBG did not respond to requests for comment.
Trying for a turnaround
Benkhadra was appointed as CEO at EIIB in March last year to help reverse the bank’s fortunes after it was almost brought to its knees by the financial crisis. The announcement of his exit, on the 16th June 2011, came a little over a week prior to the bank’s announcement of record profits in the first half of this year, following four straight years of losses from 2007 through to 2010.
The bank has now realigned its strategy to focus on three core businesses within Islamic markets: namely investment management, banking and financial services.
In June this year, the bank chose to relocate some personnel from its UK headquarters to Bahrain, in an effort to move closer to its target Islamic markets. The relocated staff comprised those from the bank’s private equity and capital markets businesses, while it also made some real estate hires.
When announcing Benkhadra’s departure, EIIB said that the day-to-day operations of the bank would be overseen by Keith McLeod, its finance director and deputy CEO, and the remaining management team, who will also be assisted and supported by the bank’s board.
Finding value
It is speculated that HBG does not have a long-term view with regard to its interest in EIIB, as its objective as a private equity firm is primarily to increase the value of assets to achieve a profitable exit.
According to its profile, HBG serves high net worth private and institutional clients in the GCC. Its four business lines comprise quoted equity, unquoted equity, real estate and strategic advisory.
At the time of HBG’s acquisition of EIIB, which is listed on the London Stock Exchange’s Alternative Investments Market (AIM), Toxvaerd said that: “This strategic stake in EIIB is in keeping with our objective of investing in undervalued AIM-listed companies. We believe there is significant upside potential in this business and we hope to play an active role in unlocking value.”
HBG may have yet to see significant capital gains from its entry into EIIB. As at the 30th September, the bank’s share price stood at GBP2.80 (US$4.34) compared to GBP3.07 (US$4.76) at the time of acquisition.
However, the bank has fared better in improving its financial position. For the six months to the 30th June, it reported a record net income of GBP11.8 million (US$18.3 million) compared to a loss of GBP2.2 million (US$3.41 million) a year earlier and GBP5.92 million (US$9.18 million) at the end of 2010, mainly due to a gain from its disposal of oil and gas properties. It also recorded a GBP3.2 million (US$4.96 million) profit from the reversal of previous impairments.
EIIB’s financials have clearly perked up since suffering the impact of the last financial crisis. It remains to be seen whether its new shareholders can maintain the bank’s upward momentum or if their entry has resulted in further uncertainty for the bank. — EB