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Like many small new banks, QIB (UK) has lost money. However as well as being small, it also had a risky strategy, since reversed after major losses. It may now be over-concentrated in real estate.
Posted 11 November 2019
I have previously reviewed the historic financial results of three Islamic banks:
All three of the above were set up as independent entities, not owned by a parent company. For my November column in the magazine "Islamic Finance News", I reviewed the financial history of a very different entity which has always been a wholly owned subsidiary.
You can read it below.
QIB (UK) plc is a UK Islamic bank. Unlike the three Islamic banks I have reviewed previously which were set up as independent entities with a spread of shareholders, QIB UK is the wholly owned subsidiary of Qatar Islamic Bank.
As previously, this column is based entirely on the published accounts and contains no private knowledge.
It was once commonplace for foreign banks to set up UK branches. However, UK regulators have become very reluctant to permit new UK branches. Instead, they require the foreign bank to incorporate a UK subsidiary, independently regulated by the UK, with independent non-executive directors alongside management who may have come from the overseas parent.
There is always an inevitable tension between the regulatory and taxation requirements that the UK subsidiary operates independently, with all transactions with its foreign parent on arm’s-length terms, and the business reality that the UK subsidiary is the creature of its parent.
QIB UK became operational in 2007, although that year was spent getting started. In the table, I have summarised its historical results.
Historical results of QIB (UK) plc |
||||
Year ended 31 December |
Profit (loss) after tax GBP million |
Year end shareholders funds GBP million |
Share capital increase during year GBP million |
Return on average of opening and closing equity % |
2007 |
(2.80) |
0.00 |
0.00 |
N/A |
2008 |
(2.40) |
19.80 |
25.00 |
(24.2) |
2009 |
(1.70) |
18.10 |
(9.0) |
|
2010 |
(1.20) |
16.90 |
(6.9) |
|
2011 |
0.10 |
17.00 |
0.6 |
|
2012 |
(3.40) |
13.90 |
(22.0) |
|
2013 |
(15.70) |
16.40 |
19.00 |
(103.6) |
2014 |
1.30 |
30.50 |
12.50 |
5.5 |
2015 |
2.50 |
55.60 |
23.10 |
5.8 |
2016 |
(3.10) |
51.90 |
(5.8) |
|
2017 |
1.70 |
60.10 |
6.20 |
3.0 |
2018 |
3.70 |
62.80 |
6.0 |
|
Total |
(21.00) |
85.80 |
||
The overall story is lamentable. Since operations started, the parent company has injected GBP 85.8 million into QIB UK. Of this, GBP 21 million has been lost.
The loss in 2007 was predictable, since costs were unavoidably incurred when negligible banking business was being undertaken. However, the losses continued year by year, culminating in a stupendous loss in 2013.
The 2013 accounts explain that QIB UK had built up a significant portfolio of financings to development stage SME businesses which were proving non-viable, and had also taken equity stakes in those businesses. Impairment losses on those financings plus write-downs of the equity stakes were the bulk of the loss.
This accumulation of high-risk activity illustrates the business challenges faced by small new investment banks. They lack the deal flow of larger and more established competitors, which tempts them to take on risky customers. The temptation to seek higher, and therefore riskier, returns is increased by their small size which makes it harder to spread their fixed overheads.
In recent years, QIB UK appears to have stabilised.
While the 2018 return on equity of 6% is not brilliant, given the generally difficult banking environment it can be regarded as respectable. The 2018 accounts show that most of QIB UK’s customer financings are relatively short-term financings of real estate transactions with little over five years maturity. However, I believe that poses its own risk of the bank becoming overexposed to real estate.
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