Arab Banking Corporation announces third quarter results and the realignment of its banking model

It also announced that its banking model is being realigned to focus on rapidly building a significant Universal Banking business in North Africa and the Levant to enhance revenue generation capabilities to counteract increasing competition and streamline its integrated relationship-led Wholesale Banking business in the GCC, Europe and North America.

ABC's operating results over the past three years vividly illustrate the achievements arising from the Group's focus on trade flows and projects in the Arab region. ABC's strengths in trade, project, corporate and Islamic finance have ably serviced the current business expansion in the region, whilst the development of retail, SME and commercial banking activities in the niche markets across North Africa and in Jordan continue to improve earnings capabilities.

Total income for the third quarter of $148m was 19% higher than the $124m reported for the same period last year (excluding an exceptional gain of $90m in July 2007 from the IPO at ABC's subsidiary, Banco ABC Brasil).

Interest income at $118m was significantly higher than $82m for the same period last year from increased volume of loans. Non interest income totalled $30m compared with the $42m earned last year (excluding the gain from the Banco ABC Brasil IPO) mainly due to the mark to market of the trading securities portfolios.

Operating expenses totalled $89m for the quarter compared with the total of $66m for the same period last year, as there has been an increase in the number of employees to cater for increasing retail customer demand, and increases in staff variable compensation. ABC's pre-provision cost income ratio for the third quarter of 2008 was 60%, compared with 53% for the same period last year (excluding the gain from Banco ABC Brasil's IPO).

During the quarter specific impairment provisions totalling $184m were made to take into account the significant market dislocations which resulted in the failure of major banks such as Lehman and Washington Mutual. Apart from specific impairment provisions, in line with ABC's conservative provisioning policy, an additional collective impairment provision of $50m was also taken in view of the recent rapid deterioration in credit markets. After these provisions, the overall result was a net loss of US$194 million for the third quarter of 2008.

On a year to date basis at the end of the third quarter total income amounted to $467m, 9% ahead of the $429m reported for the year to September 2007 (excluding an exceptional gain of $90m in July 2007 from the IPO at ABC's subsidiary, Banco ABC Brasil).

Interest income for the year to September totalled $316m, substantially ahead of the $216m for the same period last year, arising mainly from increased loan volumes. Non interest income totalled $151m compared with the $213m earned over the same period last year (excluding the gain from the Banco ABC Brasil IPO) mainly from the mark to market of the trading securities portfolios and the funds of hedge funds portfolio, which ABC decided to exit in the first quarter of 2008.

Operating expenses totalled $268m for the year to September compared with the $214m for the same period last year, as there has been an increase in the number of employees to cater for increasing retail customer demand, and increases in staff variable compensation. ABC's pre-provision cost income ratio for the year to September was 57%, compared with 50% for the same period last year (excluding the gain from the Banco ABC Brasil's IPO).

Impairment provisions for the year to September amounted to $974m, made up of $234m in the third quarter and $740m for the first half of the year (mainly from the $733m to fully provide for exposures to structured investment vehicles (SIVs) and collateralized debt obligations (CDOs), even though 70% or over $400m of CDOs are still current with interest payments). After these provisions, the overall result for the year to September was a net loss of $852m.

Shareholders' equity at 30 September 2008 stood at $1,774m compared with the total of $1,867m in December 2007. ABC's capital base remains strong and at 30 September 2008 ABC's capital adequacy ratio, calculated on the basis of the Basel II capital adequacy regime (with which ABC has been compliant since 1st January 2008) stood at 15.6%, predominantly Tier 1, which totalled 12.5%.

ABC's liquidity remains strong, with the liquid assets to deposits ratio at 65%, compared with 72% at the 2007 year end. ABC's securities portfolio comprises largely of highly liquid investment grade FRNs and securities guaranteed by US government agencies.

ABC is quite comfortable with its current liquidity situation, and, to ensure that ample funding is available, have been running a daily cash position averaging over $1bn that is being placed in the overnight interbank market. ABC's Minimum Liquidity Guideline has been comfortably exceeded over the last several months despite the global inter-bank market effectively drying up. This has been possible due to the Group's ability to repo its high quality securities portfolio at competitive rates.

Loans and advances increased to $13.2bn from $12.3bn in December 2007, as the lending portfolio continued to expand to meet customer demand. Consolidated total assets stood at $30.4bn at the end of September 2008 compared with end 2007 figure of $32.7bn.

Mr. Hassan Juma, President & Chief Executive of ABC, said:

"ABC has largely concluded the in-depth review of its medium term strategy begun in May, and is now poised to focus efforts on implementing new initiatives to increase revenue generation capabilities. Our banking model is being realigned to focus on international Wholesale Banking and Universal Banking across North Africa and the Levant, incorporating into our traditional activities a new emphasis on revenue growth from relationship banking and retail activities. At the same time, our shareholders continue to demonstrate their confidence in ABC's future prospects. Despite the difficult environment, the continuing increase of earnings clearly demonstrates the success of our strategy over the past few years focusing on the Arab region and its trade flows. Our strengths in Wholesale Banking activities are complemented by rapidly growing revenues from our Universal Banking subsidiaries in the Arab World and our new initiatives will further increase our presence and role in the growth of the MENA region."