In possibly the swiftest recovery seen by a Middle East bank impacted by the recent financial crisis, Bahrain-based Unicorn Investment Bank returned to a profit of US$1.97 million in the first quarter ended the 31st March 2011. This comes just three months after it recorded its first annual net loss last year, of US$229.5 million, as income shrank from reduced deal flow.
Like many banks in the region, Unicorn could not withstand the effects of the financial fallout. However, with first quarter profit more than double that of the same period last year, how did the bank get itself back on track so quickly, and is it a sustainable growth path?
Plugging the leaks
The bank did not respond to questions sent by Islamic Finance news, but a change in its leadership last year, which saw Ikbal Daredia appointed as acting CEO following the departure of then-CEO Majid Al Sayed Bader Al-Refai in August, could have played a key role in its turnaround. Al-Refai is said to have left due to disagreements with the board over the bank’s strategy, while Daredia is also the bank’s global head of capital markets, institutional banking and treasury. According to its 2010 annual report, the management reshuffle was “in the best interests of the bank as it re-aligns its strategy.”
Top on Unicorn’s list to strengthen its position was cost cutting, and expenses almost halved to US$11.15 million in the first quarter 2011 from the same period in 2010. This contributed the most to Unicorn’s financial recovery. However, it seems that’s where the good news ends.
False cheer
With total income of US$8.49 million in the first quarter still less than the US$21.13 million proceeds recorded a year earlier, core income contributed little to the bank’s return to profitability.
Additionally, without a US$4.62 million profit from assets held-for-sale, Unicorn would still be in the red with a US$2.66 million net loss. The profit includes a US$2.9 million gain from its disposal of US-based Sun Well Services Incorporated, following a plan to exit the US.
Related party support
With a business significantly reliant on the support of principal related parties associated to members of the bank’s board, including Dar Al-Arkan and Kingdom Installment Company (KIC), the jury is still out as to whether the bank is set for success or failure.
“The principal related parties have provided approximately US$298.7 million of gross income, which varied between 21% and 97% of Unicorn’s total revenue over the last seven years,” it acknowledged in its annual report.
While this helped buffer the past few years’ slower business activity, is its reliance on related parties a boon or a bane? For example, between 2009 and 2010, the bank canceled US$20 million-worth of receivables from KIC, which in 2008 provided the receivables as a guarantee against a reduction in value of Dar Al-Arkan shares. Unicorn received the shares in consideration for advisory services.
“As part of this arrangement, the Central Bank of Bahrain required KIC to account for this in their financial statements as a provision. In the context of the overall shareholder support that Unicorn has received, it agreed to release KIC of its obligation under the guarantee during 2010,” said Unicorn.
Does this mean that Unicorn can only rely on its related parties until the going gets tough?
Silver lining
Perhaps a promising feature of Unicorn’s business is an improved outlook for its subsidiaries, which are present in Malaysia, Turkey and Saudi Arabia. Unicorn also has a GCC Takaful business and is the founder and largest shareholder of Pakistan’s Dawood Islamic Bank.
Although lower in the first quarter of 2011 at US$1.39 million from US$1.46 million in the previous corresponding period, Unicorn’s share of profit of associates grew significantly to US$6.79 million in 2010 from a loss of US$3.66 million in 2009.
Unicorn sees Saudi Arabia, where it owns Unicorn Capital Saudi Arabia, as a core element of its long-term strategy. Its business this year includes mandates for Sukuk, restructuring and M&A, while it also expects to launch its GCC brokerage business in the second half of 2011.
Meanwhile, Unicorn said Unicorn International Islamic Bank Malaysia will continue building its treasury and corporate banking products and is working towards establishing an asset management company. However, the bank will need to put in more elbow grease to achieve its lofty ambitions. Last year, it aimed for around US$400 million-worth of business, but its financing to corporate customers only reached US$123 million.
In Turkey, which it also sees as a key international market and where it set up Unicorn Capital Turkey in 2007, the bank expects to leverage the country’s strong economy and exposure to growing investor appetite for emerging markets to attract more investments from the GCC.
On the cards
Subject to regulatory approval, the bank’s plans this year include a US$200 million rights issue of 200 million shares, a conversion of an existing US$50.46 million subordinated Murabahah into equity shares of US$1 each — necessary to offset a reduced equity of US$199.67 million — and interestingly, a name change to Bank Al-Khair.
If successful, Unicorn may well transform itself inside and out by the end of this year, but only time will tell if it can achieve sustainable growth or if it will need longer to emerge as a stronger institution.