Focused on financing the business flows between Europe and the Arab world - Bank … · 2008-03-24 · Of the Bank’s principal product groups, Trade & Commodity Finance & Financial

ABC International Bank plc

Annual Report 2004

Focused on financing the business flowsbetween Europe and the Arab world

Algeria

United Kingdom

Sweden

Spain

TurkeyGermany

France

Italy

Tunisia

Libya Egypt

Jordan

Bahrain

Abu Dhabi

Iran

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+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +

2 Directors’ Report

4 Board of Directors

6 Business Review

13 Statement of Directors’ Responsibilities in Respect of the Financial Statements

13 Independent Auditors’ Report

14 Profit and Loss Account

15 Balance Sheet

16 Notes to the Accounts

35 ABCIB Group Network

36 Management Structure

Inside Directory of ABC Group OfficesBack Cover

1


ABC International Bank plc Annual Report 2004

ABC International Bank plc (“ABCIB“) was established in 1991 as

a wholly-owned UK subsidiary of Arab Banking Corporation (BSC)

Bahrain (“ABC”). Today, as then, the principal thrust of ABCIB’s

strategy is to increase the ABC Group’s share of trade finance and

investment between Europe and the MENA region. ABCIB’s core

business comprises trade and commodity finance, project, export

and structured finance, Islamic asset management and treasury

services. ABCIB is headquartered in London with branches in

Paris, Frankfurt and Milan, has marketing offices in the

North of England (Rossendale), Madrid and Stockholm and has

recently added an office in Istanbul to its network.


2

Directors’ Report


Farhat Omer Ekdara Chairman

On behalf of the Board I am pleased to present the Annual Report and audited accountsof ABCIB for the year ended 31st December 2004.

On 1st January 2004 the Bank acquired legal ownership and control of the business of ABC-Daus & Co GmbH in Frankfurt, and the ABC Milan branch from Arab Banking Corporation (BSC),to create a four-branch bank within the ABCIB Group, includingthe Bank’s existing branches in London and Paris. This wider platform in Europe, together with the Bank’s marketing officesestablished in the North of England (Rossendale), Madrid andStockholm, and most recently in Istanbul, represents a significantstep forward in the achievement of the ABC Group’s objective ofestablishing a fully integrated European bank.

During 2004 the world economy showed remarkable resilience in the face ofrenewed geopolitical uncertainties, historically high oil prices and dollar weakness. Assisted by a still relatively benign low interest rate environment anda strong underlying growth momentum, indications are that global GDP hasexpanded by around 5% in real terms over the year - a near 30-year high.

Growth in world trade has, if anything, been even more impressive,with the OECD, for example, recently estimating a substantial 9.5%expansion in the year. In terms of the Bank’s main geographicalareas of activity the Middle East and North Africa (“MENA”) regionpositively surged, with the exceptionally strong performance of the region’s oil producers having positive knock-on effects even for the region’s net oil importers. However the European economy,with the possible exception of the UK, exhibited somewhat slowergrowth during the year, although improving as the year progressed.This robust global economic performance undoubtedly provides astrong underpinning to prospects for 2005, with current forecasts for global output and trade growth, at 4.3% and 9.0% respectively,at only modestly less elevated levels than experienced in 2004.

With little near-term prospects for a significant drop in oil prices,continuing MENA region fiscal and current account surpluses willremain strong drivers of regional growth and seem set, once again, to generate substantial increases in infrastructure, project and general import spending. Broad global and regional economictrends thus seem set to provide a continuing positive operatingenvironment for the Bank’s activities in 2005.

In 2004, ABCIB reported a net profit of £6.4 million comparedto £8.6 million in 2003. Total operating income stood at £39.5 million, compared with £32.4 million at the end of 2003 before theEuropean integration, of which 60% related to interest income andthe balance to fee and commission income. Total administrativeexpenses stood at £33.2 million compared with £26.6 million in2003.

Of the Bank’s principal product groups, Trade & CommodityFinance & Financial Institutions contributed £16 million in operating income, Project & Structured Finance £10 million, IslamicAsset Management £3 million and Treasury £3 million. Incomeattributable to Head Office operations and investment and capitalcontributed an additional £7 million.

During 2004, as part of a global initiative by the ABC Group,ABCIB introduced a new matrix structure for the management of its products. Within the ABC Group, ABCIB has now been assignedspecific responsibility for marketing and relationship managementnot only in Europe, but also in a select group of countries in the Arab world, including North Africa, the Levant and Turkey where the trade flows are largely oriented towards Europe. The matrix structure was also introduced for the Treasury functionwith parallel Treasury Hubs being established in Bahrain andLondon. The local treasury functions which previously operated outof Milan and Frankfurt were closed in the second half of 2004 and are now conducted out of the London Treasury Hub.

The enlarged base of operations and activities, and the adoption of matrix management, enabled ABCIB to initiate a reviewof its internal resources to centralise essential support services inLondon. Whilst this has increased overall costs in the short term,benefits will be evident in 2005 and beyond.

Against a competitive economic background ABCIB has continued to increase its client base and its market share of trade andproject finance between Europe and the MENA region. Its success isillustrated by the industry awards made to the ABC Group which arereferred to in the Business Review of the Chief Executive Officer(”CEO”) on page 6. With the benefits of the new matrix structure within the ABC Group as a whole, ABCIB has greatly enhanced its

presence as a major player within the MENA region and substantiallyexpanded its role and responsibility as the European flagship of the ABC Group.

As at 1st January 2004 the nominal capital of the Bank wasincreased by the issue of 32,296,000 new shares of £1 each as payment in kind for the business and assets of ABC Milan. Paymentfor the business and assets of ABC-Daus was made in cash. Althoughthe Board approved an increase of US$30 million in its SubordinatedTier II Capital on 19th December 2003, the anticipated asset growthof the Bank at that time did not materialise and thus the need for such an increase did not arise. However ABCIB concluded a successful US$100 million three year syndicated loan facility with Bayerische Landesbank to meet its medium term liquidity and funding needs.

At the end of 2004, ABCIB’s Risk Asset Ratio stood at 17.61%calculated on the basis of risk weighted assets of £1.2 billion. This compares with a Risk Asset Ratio of 21.1% at the end of 2003immediately before the European integration. In fact the proformabalance sheet of the Bank stood at £1.65 billion as at 1st January2004 (immediately after the integration) and grew over the year by21% to stand at £1.9 billion by end of the year.

A summary of the overall business strategy for 2005 is set outin the CEO’s Business Review.

As at 31st December 2004, following restructuring and recruiting the additional skills required to support the activities of the enlarged Bank, the overall headcount of permanent employees in the enlarged Group (excluding Directors) increased to226 from a total of 133 as at the end of 2003.

The Bank did not declare a dividend for the period. There wasalso a nil dividend in 2003.

None of the Directors had an interest in shares of ABCIB during 2004, and no option to purchase shares has been granted toany Director.

Charitable Donations amounting to £32,805 have been accruedand will be paid in respect of 2004. It is the Bank’s policy to pay its suppliers within the agreed period from the date of the invoice.

On behalf of the Board, I would like to thank all the staff fortheir considerable efforts in developing the underlying business and management of the Bank during a time of radical change in the first full year of the enlarged ABCIB Group. This has required acloser integration of the new marketing teams, the implementationof a common IT platform across Europe, and the centralisation of the treasury function in London.

This progress is a significant achievement and places the Bankin a much more favourable and cost effective position to meet the challenges and opportunities that present themselves in theyear ahead.

Farhat O. EkdaraChairman 11th February 2005

3


With the benefits of the new matrixstructure within the ABC Group as awhole, ABCIB has greatly enhanced its presence as a major player withinthe MENA region and substantiallyexpanded its role and responsibility as the European flagship of the ABC Group.

Within the ABC Group, ABCIB has nowbeen assigned specific responsibilityfor marketing and relationship management not only in Europe, but also in a select group of countriesin the Arab world, including North Africa, the Levant and Turkey where the trade flows are largely oriented towards Europe.

4

FARHAT OMER EKDARAChairman

Deputy GovernorCentral Bank of Libya

DirectorArab Banking Corporation (BSC)

TERENCE JOHN STONE OBE, FCA *

Director

Middle East ChairmanInternational Financial Services London

Director Middle East Association

Director Arab-British Chamber of Commerce

Formerly a Senior Partner Ernst & Young

HILAL MISHARI AL MUTAIRIDirector

Deputy ChairmanArab Banking Corporation (BSC)

Vice Chairman Kuwait Chamber of Commerce & Industry

DirectorKuwait Investment Authority

Former Minister of Trade & IndustryGovernment of the State of Kuwait

KHALIFA MOHAMMED AL-KINDIDirector

Deputy ChairmanArab Banking Corporation (BSC)

Deputy Managing DirectorAbu Dhabi Investment Authority

DirectorAbu Dhabi Aviation

DirectorInternational Petroleum Investment Company, Abu Dhabi

DirectorTabreed, Abu Dhabi

ABDULMAGID A BREISHDirector(formerly Managing Director & CEO up to 20th December 2002)

Deputy Chief Executive & Chief Banking OfficerArab Banking Corporation (BSC)

ChairmanABC Islamic Bank (EC)

DirectorBanco ABC Brasil SA

STANISLAS M YASSUKOVICH CBE *Deputy Chairman

ChairmanHenderson Euro-Trust plc

ChairmanManek Investment Management Limited

ChairmanPark Place Capital Limited

ChairmanCayzer Continuation PCC Limited

Former Chairman Merrill Lynch Europe & Middle-East

Former Deputy ChairmanLondon Stock Exchange

JEAN S DEFLASSIEUXDirector

Honorary ChairmanCrédit Lyonnais Paris

Honorary Chairman & DirectorMONACREDIT

Honorary ChairmanBanque AIG

Executive ChairmanEuropean League for Economic Co-operation(France)

Délégué GénéralALPAZUR-NRJ Broadcasting

HASSAN ALI JUMA *Director

Managing DirectorNational Bank of Bahrain

DirectorArab Banking Corporation (BSC)

ChairmanBahrain Telecommunication Co

DAVID A BOWEN-JONESCorporate Secretary

* Member of Audit Committee

Board of Directors



FARHAT OMER EKDARA STANISLAS M YASSUKOVICH CBE *

TERENCE JOHN STONE OBE, FCA * JEAN S DEFLASSIEUX KHALIFA MOHAMMED AL-KINDI

HILAL MISHARI AL MUTAIRI HASSAN ALI JUMA * ABDULMAGID A BREISH

+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +

+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +

5

6

Business Review


Michael Duval Chief Executive Officer

OverviewFor ABCIB, 2004 has been a year of fundamental and ongoingchange. Within a short timeframe, the Bank has successfully managed a major expansion from its former two-branch structurein London and Paris, to that of a fully integrated pan-Europeanbanking operation with two offices in the UK (London andRossendale, in the North of England) branches in Paris, Frankfurtand Milan and marketing offices in Stockholm, Madrid and, from early 2005, Istanbul.

At the same time the Bank has introduced a radically new product-led matrixmanagement structure focusing on its MENA markets.

The introduction of matrix management required changes in business practice, the most significant of which has been the creation of marketing teams fromacross the European network to develop and deliver the Bank’s growing portfolioof financial products to its client base. The financial products are centred on theBank’s four principal areas of activity, namely, Trade and Commodity Finance,Project and Structured Finance, Islamic Banking and Treasury.

Libya Egypt

Jordan

Bahrain

Abu Dhabi

Iran

7


Algeria

ABCIB ABC (BSC)

London

RossendaleStockholm

Madrid

Frankfurt

ParisMilan

Istanbul

Tunisia

The “Arab world focus” strategyintroduced at ABC Group level in2003 continued to have an impacton revenues in 2004 as ABCIB tooksteps to adjust its asset base tocome into line.

The “Arab world focus” strategy introduced at ABC Group levelin 2003 continued to have an impact on revenues in 2004 as ABCIB took steps to adjust its asset base to come intoline. The disposal of non-Arab world assets in the secondarymarket (including some that were on the books of ABC’s former Frankfurt and Milan units), and the decision not torenew certain high yielding facilities in the European powerand telecoms sectors resulted in the Bank’s balance sheetshrinking to £1.6 billion at its lowest point. Subsequently, andthanks to the concerted efforts of the Bank’s marketing staff,the asset base grew to a healthy £1.9 billion by year end.

During the course of the year ABCIB initiated a review of its support operations with a view to creating a morestreamlined and efficient structure. In the last quarter of theyear local treasury operations in Frankfurt and Milan weretransferred to the central London Treasury Hub. The London,Paris and Frankfurt branches of ABCIB now all share the sameIT software platform for transaction processing. During 2004 a project was initiated to migrate the Milan branch onto thesame software system. Completion is expected in 2005.

Under the matrix management structure, the Bank not only draws on the skills of marketing officers across its European network but also the whole of the ABC Group within the MENA region. This has already resulted in a morecomprehensive and efficient penetration of ABCIB’s newly designated geographical areas of responsibility in the Arabworld, as well as its own European market.

With ABCIB’s growing reputation as a Bank specialising in trade financing and investment flows between Europe and the Arab world it was particularly gratifying during 2004 for ABCIB to be nominated by a number of European exportclients as their “bank of choice“ for MENA region business.

In terms of financial performance the £6.4 million net profit generated by the Bank in 2004, whilst somewhat disappointing, should be considered against this background of challenging change management and its associated costs.

Review of the Balance SheetAs at 31st December 2004, loans and advances to banks totalled £695.3 million, representing 36.3% of ABCIB’s totalassets, compared to 23.2% in 2003. Loans and advances to non-bank customers totalled £896.4 million representing 46.8% of total assets, compared with 53.7% in 2003. Total assetsamounted to £1,915 million compared with £1,237 million at the end of 2003.

As at 31st December 2004, ABCIB’s total outstanding portfolio of loans and advances to banks and customers beforeprovisions had increased by 64.5% up to £1,621 million,compared with £985 million at the end of 2003. Of this total,£1,098 million was for maturities of up to one year, comparedwith a figure of £562 million for 2003, representing an increaseof 96%.

ABCIB’s total risk asset portfolio at year-end included the following sectors and percentage exposures: the financial sector52%; energy (oil and gas), water, telecommunications and other utilities 15%; and sovereign exposure, including export credit agencies, 14%. The balance of exposures was well spreadbetween other sectors of the market including manufacturing,commodity trading, construction, property and motor vehicles.

The geographic risk was divided mainly between WesternEurope 64% and the MENA region 27% - the balance beingwidely spread.

ABCIB’s balance sheet continues to be managed prudently.At the end of 2004 the Bank’s short-term facilities to customersof the Bank (repayable within two years) stood at 80% of thetotal portfolio.

8

Business UnitsFollowing the European integration, the Bank’s business is nowcarried out from its branches in London, Paris, Milan and Frankfurtand comprises the following four product areas:

1 Trade & Commodity Finance and Financial InstitutionsThe Trade Finance Product Group is now represented in all fourbranches and the four satellite offices. Its marketing efforts areprincipally directed towards European exporter and commodityfinance customers and Arab world customers, both corporatesand financial institutions. The comprehensive approach to marketing is complemented by a wide portfolio of financial products and specialised client support services, which has led toimprovements in product delivery and service levels to both the import and export sides of trade flows between Europe andthe MENA region. Many of the Bank’s European exporters andcommodity trader clients now regard ABCIB as their principalbank in respect of their activities in the Arab world countries.

In the MENA countries the Bank is regarded as a major correspondent bank in respect of documentary letters of creditand guarantees as well as being a substantial provider of directfacilities to major Arab world corporates. This focused approachhas led to the achievement of some notable milestones. For anumber of its international exporter clients the unit has nowfinanced in excess of US$100 million of Arab world trade flows, and in one particular case, has reached a commitment of US$1 billion of trade finance receivables. Whilst product focusand regional expertise has firmly established ABCIB as a leading Arab world trade finance bank the unit is diverse both in terms ofits financing techniques and the industry sectors that it supports. The trade flows financed range from all essential commoditiesand raw materials through to end-user manufactured and capitalgoods. Contract bonding, documentary letters of credit, forfaiting,commodity finance, receivables financing, insurance backedfinance and Islamic banking are regularly deployed to tailorfinancing to clients’ requirements and product development.

Delivery is backed by fully qualified operations personneldedicated to providing high quality documentary support. In linewith ABCIB’s general business philosophy, the distribution of assets continues to play an important role in terms of bothportfolio and country limit management and as a source of additional income.

During 2004 the unit integrated European trade finance specialists from across the network. The new satellite officesestablished in the North of England, Madrid and most recentlyIstanbul have been modelled on and are expected to emulate the success achieved in the Nordic markets by ourStockholm office.

This has been a successful year both in terms of restructuring and expansion.

Finally, it is worth noting that the success of ABCIB’s TradeFinance product group was a major contributory factor in the ABC Group receiving the following awards in 2004: Best RegionalBank – Middle East and North Africa (Trade Finance Magazine);Best Trade Finance Bank in the Middle East (Trade and ForfaitingReview); and Best Trade Finance Bank – Middle East and Africa (Emerging Markets Magazine).

2 Project & Structured FinanceThe replacement and reduction of assets which occurred duringthe year as a result of significant run-off or disposals of projectloans has created a particular challenge. In line with ABC’s strategy the unit is developing new sources of high quality transactions from the Arab world with acceptable structures and acceptable returns. By way of illustration the €290 million“Tunisiana” telecoms transaction during 2004 to finance the second GSM network in Tunisia (a core market) was concluded in September 2004 following close co-ordination between staff in London and Paris, as well as Bahrain. ABCIB, as one of theMandated Lead Arrangers of this financing, actively worked increating a structure which involved ECA cover from France and Germany whilst securing a key domestic security and funding role for ABC Tunisie. The unit has further developed itsexpertise in the ship finance market and infrastructure financingto position itself for future growth in these sectors, which it is confident will lead to increases in portfolio assets over 2005 and beyond.

3 Islamic Financial Services This activity forms part of the ABC Group’s overall Global IslamicBanking Product. Islamic Asset Management (“IAM”) in London, is the international manager of assets in accordance with Shari’a law. IAM also offers alburaq, the new brand of retail Islamic financial products being made available to BritishMuslims, which includes home finance. During 2004, IAM originated, distributed and managed portfolios of internationaltrade, equipment leasing and real estate assets.


Trade & Commodity Finance andFinancial Insitutions were a major contributory factor in the ABC Groupreceiving the following awards in2004: Best Regional Bank – Middle East and North Africa (Trade Finance Magazine); Best TradeFinance Bank in the Middle East(Trade and Forfaiting Review); and Best Trade Finance Bank – Middle East and Africa (EmergingMarkets Magazine).

Projected & Structured Financehas further developed its expertise in the ship finance market and infrastructure financing to positionitself for future growth in these sectors, which it is confident will lead to increases in portfolio assetsover 2005 and beyond.

Business Review

IAM offers the following specialist product lines:

Leasing: IAM funded the acquisition of more than US$40 millionof equipment leased to investment grade US companies for periods of between 3 and 5 years during the year and transferredUS$35 million of these leases into two separate managed portfolios now financed by external Islamic investors, for whichIAM receives ongoing fee income. IAM continues to manage similar leasing portfolios that were put in place for its investorbase in 2002 and 2003 and to work closely with its colleagues at ABC Islamic Bank in providing lease portfolios for ABC IslamicBank’s own funds. During 2005 this business will develop intoABC’s MENA region markets and form a valuable tool in supportof capital equipment exports and project and structured financeinitiatives.

Real Estate: In addition to its continuing role as investment manager of the Al Bait UK Real Estate Fund (in collaboration with Global Securities House of Kuwait), IAM has also managed a unique Istisn’a financing tool for the development and redevelopment of residential housing and other projects with a gross development value close to £100 million. Two of the schemes were completed ahead of schedule during the lastmonths of 2004, and further substantial projects are in thepipeline for 2005.

Trade & Commodities: A number of Murabaha transactions were concluded including a significant US$80 million revolvingsyndicated facility for a major North European investment gradeindustrial company. This transaction illustrates the way in whichthe commodity finance skills of ABCIB, and the distribution skillsof ABC Islamic Bank can be successfully married together usingthe expertise of the IAM team.

alburaq: Following a successful launch in 2003, the alburaqbrand of retail Islamic products aimed at Britain’s 1.8 millionMuslims, is now in the UK high street with a competitive“Diminishing Musharika” home financing programme. A jointventure distribution agreement with Bristol & West plc has beensigned up to give easier access for clients at competitive rates.This offering is also available to overseas nationals seeking to

purchase homes in the UK. alburaq embarked on its first mainstream media advertising campaign for Islamic products and services in the UK, including billboard and television campaigns. Details can be accessed at www.alburaq.co.uk. The alburaq team continues to play an active role in the Bank of England Working Group and the UK Government Treasury’s consultation committee, both set up to enable the wider availability of Islamic financial services in the community. The team is also pursuing strategies in the UK with the Office ofThe Deputy Prime Minister in the area of social and key workerhousing. The next steps for the alburaq offering are to leverageoff ABC’s expertise in Shari’a-compliant product structuring and asset management by entering into strategic alliances with other major UK names in specialist product lines and tolaunch an expanded range of Shari’a-compliant consumer financeand commercial products in 2005.

In 2005, further synergies with ABC Islamic Bank in Bahrainand other ABC group entities will accelerate the development of Shari’a-compliant products for the benefit of clients and shareholders alike.

4 TreasuryThe unit undertakes the management of all exposures in foreignexchange, money markets, interest rate derivatives and fixedincome products. Additionally, it is responsible for investing theBank’s own capital, as well as ensuring that medium-term borrowing is maintained at a level sufficient to ensure a prudentlevel of liquidity.

Liquidity is maintained at levels well in excess of the FSA’sminimum requirements with liquidity between one week and a month standing at 22.47%. The standalone Treasury functionswhich previously operated out of Milan and Frankfurt brancheshave now been closed with all Treasury functions being carried out in London facilitating a more efficient management of positions. Market risk is managed and controlled primarily by using Value at Risk (”VaR”) methodology. A targeted callingprogramme, with the Bank’s European and MENA based counterparties, has resulted in maintaining and to some extent enhancing its liability base.


Islamic Financial Services activity forms part of the ABC Group’soverall Global Islamic BankingProduct. Islamic Asset Management(“IAM”) in London, is the international manager of assets inaccordance with Shari’a law. IAM also offers alburaq, the newbrand of retail Islamic financial products being made available toBritish Muslims, which includes home finance.

TreasuryThe unit undertakes the management of all exposures in foreign exchange, money markets,interest rate derivatives and fixedincome products.

9

10


Governance CommitteesThe Executive Committee (“EXCOM”) is the highest-level decision-making committee of the Bank below the Board ofDirectors. It is made up of the senior management of the Bank and branches and is chaired by the CEO. The Assets andLiabilities Committee (“ALCO”) and the Information TechnologySteering Committee (“ITSC”) report to EXCOM, which in turnreports directly to the Board of Directors. ALCO is chaired by the CEO and meets monthly, and on an ad hoc basis when necessary. ALCO focuses on the funding of the Bank’s assets, liquidity, interest rates, trading risks and the investment of theBank’s capital. The ITSC, chaired by the Chief Operating Officer,oversees the implementation of the Bank’s new core systemsand its ancillary software needs for communications and systemenhancements.

The Audit Committee (described in more detail below)reports directly to the Board of Directors. The CompensationCommittee comprises the Chairman and two other non-executiveDirectors of the Board and is responsible for the review of compensation policy generally, and the overall remuneration of the senior management of the Bank.

Risk ManagementCredit risk is managed by the Credit Committee of ABCIB (”IBCC”), which also reviews risk concentration to individual borrowers/counterparties, industry sectors, countries, regionsand products. The IBCC is chaired by the Head of RiskManagement, and its members include the CEO, the Chief Credit & Risk Officer ABC Group and the Deputy CEO. The creditdecisions of the IBCC are overseen by the Board. There is also a Risk Management Committee, chaired by the Head of RiskManagement, which reviews all aspects of risk managementthroughout the bank, including market risk and operational risk.In 2005 it is proposed to create a Risk Committee of the Board,composed of a small number of board members, possessing requisite knowledge in the area of risk, with the role of high level oversight of risk issues. This will include setting and reviewing risk policies and procedures, establishing the annualrisk strategy and risk appetite within which business strategy and objectives will be set, agreeing the desired level of capitalallocation to risk, return expectations and asset allocation parameters principally in terms of country, industry, ratings and tenor. It will also set market risk and trading limits and

parameters for investment portfolios and trading and delegateauthority to senior management to conduct business within theterms of the risk strategy.

Credit RiskABCIB’s credit policies and procedures govern all aspects of thecredit risk process and provide a framework for credit riskapproval and control.

All credit applications submitted by the Bank’s branches arereviewed by the Risk Management Department in London and approved (or otherwise) by the IBCC and, if required, by the Board of Directors. Applications which are in excess of ABCIB’s delegated discretionary limits are referred to the Chief Credit & Risk Officer at ABC’s Head Office in Bahrain for approval by the Head Office Credit Committee or by the ABCGroup Board. All limits (including those for banks and sovereign entities) are reviewed at least annually. The review processincludes an assessment of all relevant risk factors.

The treatment of large exposures and the provisioning of badand doubtful loans are governed respectively by ABCIB’s LargeExposure Policy Statement and its Credit Risk Provisioning Policy,both of which have been approved by the Board of ABCIB.

Where monies are contractually past due, (i.e. seven days inthe case of principal amounts, and 30 days for interest and othersums), or where there is otherwise doubt that such monies will be received by ABCIB, all loans to that customer are auto-matically placed on a non-accrual basis unless a specific exemption is given by the IBCC. In addition, any interest chargedto such borrowers, but not paid, is written back and not taken into the Bank’s profit and loss account.

There have been no new impaired exposures during the yearand significant progress was made on existing impairments, themost important of which is the Enron/Mahonia exposure ofwhich US$11.6 million has been fully provided.

The quality of ABCIB’s risk portfolio has improved over theyear as action has been taken to sell loan exposures of weakercredit risks, and the Bank has declined to participate in the refinancing of some existing loans. Whilst the weighted averagerisk rating for the Bank’s commercial banking risk portfolio has remained around a level equivalent to low investment grade, new shorter-term trade finance exposures have beenreplacing longer term debt commitments. In the European market generally, there is more competition for risk assets and,

Business Review

Breakdown of Earnings Assets by Region -2004PERCENTAGE (FIGURES FOR 2003 IN BRACKETS)

55.9% 29.5% 7.8% 3.6% 3.1%

(58.4%)

WesternEurope

(28.2%)

MENA

(2.8%)

Asia

(9.3%)

North andLatin America

(1.3%)

Others

11

consequently pricing has been under pressure. Corporates aremore self-confident in bringing debt transactions to market, andthe banking sector seems eager to provide liquidity. Against thisbackground, the Bank has been vigilant against any weakeningof its credit and pricing standards.

ABCIB’s non-performing loans have declined sharply from£44.7 million at the end of 2003 to a figure of £29.3 million at the end of 2004. Specific provisions at year-end covered 86% of non-performing debt.

ABCIB’s management believes that it has adopted prudentpolicies and procedures in building up the necessary reservesagainst possible losses on its asset portfolio. Specific provisionsare recognised when the exposure is classified as impaired or losses are expected to arise. Additionally, ABCIB maintains ageneral provision, which recognises the risks inherent in all lending and other banking activities. As at 31st December 2004,the Bank increased its general provisions by £0.5 million representing a coverage of 0.6% (2003: 0.6%) of performing customer loans.

Market Risk, Operational Risk and Other RiskThe risk management system “RiskWatch” supports the trackingof currency and interest rate exposures on a real-time basis. Bothsystems are managed in London and monitored on a global basisby ABC Bahrain. Treasury also has the benefit of VaR analysis in conjunction with Bahrain.

The Head of Risk Management, the Treasurer and InternalControl review the level of market risk during each day. All treasury counterparty risks are monitored on a real-time basis.Treasury operations are governed by the Trading Book PolicyStatement, which has been approved by the Board and the FSA.

Derivative Instruments are used by the Bank as hedgesagainst the risk of treasury losses arising out of mismatches inmaturities, interest rates and currencies of its asset and liabilitybase. Contracts for futures, forward rate agreements, and interestrate and currency swap agreements are most commonly used to this effect. Any open positions are relatively small and arerevalued on a regular basis. Trading on the spot and forward foreign exchange markets is primarily client driven. Proprietarytrading is kept within a modest VaR limit and other market riskparameters, determined by ALCO.

Increasing emphasis is being placed on the management ofoperational risk in preparation for the coming Basel II regulatoryrequirements. Operational risk is managed on a day-to-day basis by the Bank’s internal support functions and is subject to review by the Risk Management Department. There has been an increased focus in 2004 and operational events arerecorded and analysed to ensure lessons are learned and controlsimproved where necessary. ABCIB has commenced a formalisedapproach to the management of operational risk and a draftOperational Risk Framework document has been prepared andshown to the FSA. Plans are in place to roll out the framework in2005. Documentary and legal risk is managed by the effectiveuse of ABCIB’s internal and external counsel.

Auditing and Portfolio ReviewThe Audit Committee meets at least four times a year and provides an independent assessment of ABCIB’s accounting policies, controls and procedures. Such assessment is in line with best practice and the policies and practices adopted by the banking industry in general, as well as those required by the FSA. The Audit Committee is chaired by Mr Stanislas MYassukovich, the Deputy Chairman of the Board. Other membersof the Committee are Mr Terence Stone (FCA) and Mr Hassan A Juma, who are both non-executive Directors of the Board. Mr Hassan A Juma is also a member of the main ABC Group Boardand the ABC Group Audit Committee. ABCIB has an establishedindependent internal audit function with the Head of InternalAudit reporting direct to the Chairman of the Audit Committee.The Audit Committee monitors and controls the focus of theBank’s risk-based audit approach. As part of the audit process, key risk areas are reviewed and reassessed on a regular basis. Such areas include the loan portfolio, the credit process, IT systems and support functions. Where necessary, this work isundertaken in co-ordination with ABC Group Audit and externalspecialists. ABCIB’s external auditors, Ernst & Young LLP, evaluatethe control environment of ABCIB and also examine the loan portfolio in detail at the end of the third quarter of every year, as part of their standard external audit procedures.


Maturity Profile of Total Loans£ THOUSANDS

2003 2004

1,200,000

1,000,000

800,000

600,000

400,000

200,000

0

Long Term Short Term

Total Operating Income£ THOUSANDS

2001 2002 20042003

45,000

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0

Interest Income Fees & Commissions Other

12


Business Review

ComplianceThe Chief Compliance Officer and Money Laundering ReportingOfficer of the Bank reports to EXCOM and, on an on-going basis,monitors all aspects of compliance with regulatory requirementsof the FSA and the Financial Services and Markets Act 2000 andother relevant laws and regulations. This responsibility now covers the Bank’s operations in London and its branches in Paris,Frankfurt and Milan.

The Year AheadWith the recent radical changes to ABCIB’s operational structurenow largely completed and new management and businessdevelopment processes becoming increasingly embedded, the major factors affecting future business performance are anticipated to be largely external.

The business confidence and resultant levels of activity of ABCIB’s European exporter and corporate client base will continue to be strongly influenced by political stability factors and economic performance in the MENA region. The short-termeconomic prognosis for the region continues to be strongly positive, with windfall gains from buoyant oil prices. This hasenabled MENA producers to relax past budgetary constraints oninfrastructure development, and other project and import spending to the advantage of European exporters and serviceproviders to the region. Indeed, the current strength of oil priceshas already led to a marked increase in personal consumption in these countries, and ABCIB is at the forefront of providingEuropean exporters with a full range of tools to finance the export of consumer goods, particularly in the automotive andtelecoms sectors. Such benefits have not been limited to the oil producers themselves, since high oil revenues in those countries have boosted aid and investment flows to the non-oilproducers in the MENA region, again with positive knock-oneffects for European exports. This trend is expected to continuethroughout 2005.

With the ongoing expansion of the EU and the recent decision to start accession talks with Turkey, possibilities for anexpanded European exporter and corporate client base are alsosubstantial and ABCIB’s recent establishment of a marketingoffice in Istanbul offers considerable potential to expand its share of the Turkish market in the future.

The Bank is now well on the way to repositioning itself in the European market, and the anticipated commercial benefits of the increased focus, synergies, economies of scale and organisational restructuring which the Bank has undertaken, willbegin to impact revenues and profitability positively during 2005.

As mentioned in last year’s report, I am conscious of thepotential hazards of ambitious growth and major change.Together with my very capable senior management team, I shall continue to ensure that, whilst continuing to implementplans to reduce operational support costs, the Bank has the necessary control and oversight mechanisms in place to managethe enlarged group on a sound and prudential basis.

In summary, 2005 will be an extremely busy, challenging,but exciting year. I am confident that everyone in our pan-European network is relishing the opportunity to demonstratetheir individual and collective abilities to make the enlargedABCIB a great success.

Michael DuvalChief Executive Officer 11th February 2005

With the recent radical changes to ABCIB’s operational structure now largely completed and new management and business development processes becomingincreasingly embedded, the majorfactors affecting future business performance are anticipated to be largely external.

The Bank is now well on the way torepositioning itself in the Europeanmarket, and the anticipated commercial benefits of the increasedfocus, synergies, economies of scaleand organisational restructuringwhich the Bank has undertaken, will begin to impact revenues andprofitability positively during 2005.

Documents

Focused on financing the business flows between Europe and the Arab world - Bank … · 2008-03-24 · Of the Bank’s principal product groups, Trade & Commodity Finance & Financial