Why this UK subsidiary of Abu Dhabi Islamic Bank PJSC has lost money in every year of operation
Posted 7 March 2020
Over the last year, I have devoted some of my monthly columns in the magazine "Islamic Finance News" to reviewing the financial history of the UK's Islamic banks.
In order of publication, these can be found at the links below:
I devoted my February 2020 column to the most recently established Islamic bank in the UK, which is ADIB (UK) Ltd, a wholly owned subsidiary of Abu Dhabi Islamic Bank PJSC. This completes the sad story of the loss-making history of the UK's Islamic banks. You can read my article below.
In the optimistic years leading up to the global financial crisis, five Islamic banks were established in the UK. In previous articles I have reviewed their dismal financial results.
The sixth UK Islamic bank is slightly different. ADIB (UK) Ltd opened in 2012, a few years later than the others. However, that has made no difference to its performance compared with its predecessors.
ADIB (UK) is a wholly owned subsidiary of Abu Dhabi Islamic Bank PJSC. By Islamic banking standards, this is a reasonable sized bank, with 31 December 2018 total equity equivalent to US $ 4.8 billion. The accounts state that ADIB (UK)’s goals are to serve ADIB Group priority, high net worth and corporate customers. One cannot tell from reading the accounts whether it has developed any significant independent customer base.
Reading the accounts, unlike some of the other UK Islamic banks, there is no sign of any material impairment losses from taking on customers who prove to be poor credit risk. Despite that, as shown by the results table, the bank has consistently lost money.
Year ended 31 December |
Profit (loss) after tax £'m |
Year end shareholders funds £'m |
Year end total assets £'m |
Year end customer financings before impairments £'m |
Liability to customers £'m |
Share capital increase during year £'m |
2012 |
(2.5) |
7.5 |
68.0 |
0.0 |
13.0 |
10.0 |
2013 |
(2.3) |
27.6 |
81.6 |
7.0 |
21.0 |
21.9 |
2014 |
(3.7) |
23.6 |
94.0 |
15.9 |
26.5 |
0.0 |
2015 |
(4.0) |
45.3 |
75.6 |
0.0 |
28.0 |
26.1 |
2016 |
(4.0) |
41.5 |
156.9 |
71.0 |
37.2 |
0.0 |
2017 |
(3.3) |
37.9 |
149.3 |
77.9 |
30.8 |
0.0 |
2018 |
(2.1) |
32.3 |
223.4 |
153.7 |
41.6 |
0.0 |
Total |
(21.9) |
|
|
|
Total |
58.0 |
NOTE: In 2018 the accounts do not split the £41.6m liability between the amount owed to banks and the amount owed to customers.
The consistency of the results, with small losses every year, is striking. Each year net financing income has failed to cover its operating costs. The figures show that the business activities have been sub-scale.
In relation to its equity, it has attracted relatively small levels of customer deposits. On the asset side of its balance sheet, customer financings have always been relatively low as a proportion of total assets, with the balance of the assets comprising sukuk holdings and inter-bank placements.
Given the low interest rate environment following the global financial crisis, the margin between what ADIB (UK) earns on its assets and what it pays on its customer deposits has been insufficient to cover its operating costs. The losses have not been dramatic, due to the successful avoidance of material impairment losses, but they have been steady.
The key statistic to look at is shareholders funds as a percentage of total assets, without risk-weighting the assets. Shareholders funds have been as high as 60%, and even by 2018 had fallen to only 14%. With these being non-risk-weighted numbers, the figures are far too high. Banks cannot make money this way unless they have very significant income from fee earning services.
The other factor which stands out when reading the results is management stability, or rather the lack of it. When a bank has regular changes of management, as with European Islamic Investment Bank, one expects to find significant losses. (Sadly, management stability does not guarantee profitability, as with Bank of London and the Middle East.)
Reported at 31 December |
Chief Executive Officer |
Chief Operating Officer / Chief Financial Officer |
2012 |
Edwin Manning |
Kishan Medimi |
2013 |
None stated |
Kishan Medimi |
2014 |
Stuart Taylor appointed and resigned early next year |
None stated |
2015 |
Masarrat Husain |
Keith McLeod |
2016 |
Masarrat Husain |
Keith McLeod |
2017 |
Bruno Martorano |
Keith McLeod |
2018 |
Bruno Martorano but resigned early 2019 |
Keith McLeod |
[For space reasons, my Islamic Finance News column did not list the management, but I have added the table above.] In the seven years I reviewed, I found four chief executives, and a year when no chief executive was named. This suggests that the parent company was dissatisfied by ADIB (UK)’s performance. However changing personnel is not a solution unless one can also change the strategy.
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