Qatari Investment Bank & Shareholders’ Motivation to Invest

The access to financial information placed in annual reports of a Qatari Investment Bank (QIB), involving the different periods, facilitates evaluation of its equity share and interpretation of value. Comprehension about these supports key decisions, such as-

• retention or disinvestment of bank’s equity shares
• acquisition of its equity shares at current market price from secondary market

?Such decisions are aided by analysis of ratios, such as profitability, liquidity, debt, efficiency and price. Further, the interpretation of annual reports makes it possible to decipher the bank’s objectives and extent to which they conform to shareholders’ personal objectives to increase –

• earning per share (EPS)
• dividend
• capital gains i.e., difference between market value and book value of equity
• equity value

?Finally, the review of annual reports of the bank allows shareholders to find out how its performance, risk, returns, value and sustainability in the prevailing global economic condition are impacted by the costs of the following-

• ?equity
• fixed and time deposits
• debenture
• borrowing

?The standpoints of stalwarts are considered to review QIB’s financial statements during a specific period, making it possible to analyse the factors and adopt informed investment decisions in its equity shares. The following measures are utilized to ascertain them-

• ?conformity to International Financial Reporting Standards (IFRS) and authenticity of reporting about the bank’s activities
• agreement to Basel III
• assessment of wealth and value creation

Conformity to IFRS: A thorough review of the details in www.ifrs.com and annual reports (point 2, 3, 4 and 5) for the period (XXXX-XXXX) highlight QIB’s adherence to accounting standards. This enunciates its policy to report honestly financial performance denoted by 18.77% growth of profit during the period. Such reporting honesty makes it plausible to gauge quality of measures to-

• Create wealth: The theoretical standpoints propounded by Institute of Management Accountants explain the relevance of financial accounting information dissemination to shareholders. It is necessary to educate them about the measures undertaken by a bank, like QIB, to create wealth annually. It assumes heightened relevance when a bank is listed in stock exchange. Movement of its prices in the exchange has serious ramification. As residual owners they have a right to know about such movements including dividend declared and paid, equity shares issued and allotted, preferential allotment and bonus shares. According to the views of stalwarts when such information is reviewed in conjunction with historical information incorporated in annual reports, their abilities to decipher the underlying reasons for wealth erosion and wealth creation are elevated. This implies that collective analysis of information allows them to gauge the prospect of future earnings in terms of Net Present Value (NPV). In case of positive NPV, the prospect of future dividends is assured. This encourages the market to react positively, pushing upward market price of equity and elevating capital gains.?? ??
• ?Manage and control credit, market, operations, customer investment management, interest rate and liquidity risks: The inability to set judicious benchmarks and conform to them is visible. Notwithstanding such flaws, the bank demonstrates adequate success in maintaining healthy capital adequacy ratio, required by Basel III-

The competence of the bank to surpass the benchmark set allows shareholders to repose faith in its cash, asset, liability and services management practices. Such perception is influenced by authenticity of information placed in annual reports for the periods. It leads them to invest in equity share to earn higher rate return exemplified by high Earning Per Share (EPS)-

• Elevate value: Relating the theories of stalwarts to the details presented by Institute of Management Accountants clarifies why shareholders need to have access to annual reports. It is required to assess how a bank like QIB proposes to create value by circumventing the challenges in current environment. Further it allows them to gauge the following, considered key to shareholder value creation -

1. The initiative of the bank to utilize Financial and operational drivers to minimize risk and maximize profit
2. The commitment of management team to evaluate the differences in available techniques. Such evaluation is considered important to strengthen resource utilization, cost control and margin
3. The drive of teams in the bank to educate all (shareholders and management) about the necessity to focus on shareholder value creation
4. The resolve of top management to configure all activities including management of resources and liabilities keeping in mind shareholder benefits. They are deemed necessary to control loss of money and productivity ???

?The data in Table-1, sourced from Balance Sheets during the period, manifest QIB’s success to create value for shareholders, represented by revenue earned in excess of cost paid to earn such revenue. Sustained generation profit guarantees dividend payments, indicating the bank’s ability to create higher order value. This is aided by sustained growth in different geographies and uninterrupted profit generation.

The dividend payment history during the period motivates shareholders not only to retain existing holding but also to invest and acquire bank’s shares from the markets. The drive to initiate such actions stems from the belief that dividend earned compensates adequately for the risks undertaken.

Finally, it may be said that standardized reporting practice of QIB demonstrates commitment to comply with the rules promulgated by Accounting Standards Board and public stock exchanges and regulators across the globe, reinforcing the reliability of results reported. This encourages shareholders to repose faith in QIB’s commitment to deliver results and invest.

Financial Objectives of QIB & Personal Objectives

Financial objectives of a bank provide the roadmap required to develop and nourish services, employ complementary business architecture and utilize financial tools (forecast and budget). According to the inferences drawn by stalwarts, to be purposeful a bank needs to attach top priority to financial objectives, comprising of profitability, liquidity, stability and sustainability. Awareness about objectives helps a discerning shareholder to understand their significance from the viewpoint of financial forecasting, profit planning and resource budgeting. These provide the founding pillars of decisive actions to create value (profit, dividend and capital gains) for shareholders.

A review of QIB’s annual reports for the period, documents related to investor relations and corporate communications hosted in the website indicates that the bank is guided by the following financial objectives-

• Profitability: The bank seeks to improve revenue inflow and control cost to sustain year-on-year profitability. The commitment to harness profit generation objective is visible in Table 1. It is clear that 18.77% growth of profit during the period is contributed by decisive actions to minimize operating cost by 9.56% and control the growth of fund acquisition cost by 3.05%.

?It is relevant to note that the focus on profitability is guided by the bank’s commitment to deliver value to the shareholders. This is represented by the growth of dividend payment (18.84%) during the peeriod. To sustain such excellence, the bank expanded operations in different geographies to exploit new opportunities, improve cash position and mitigate the impact of economic upheavals in the Middle East & North Africa (MENA).

Finally, the bank’s resolve to be the leader in the MENA, Central Asia and South East Asia is commendable, implying that it aims hedge risk and improve margin. To realize such financial objectives, it employs all resources optimally to diversify, compete, grow and compensate the shareholders for the trust reposed and risk undertaken to invest. Prioritization of these is visible when the following are considered-

1. Growth of ‘Earning Per Share’ by 19.26% during the period
2. Elevation of ‘Price Earnings Ratio’ by? 9.74:1 in a year

• Liquidity: ?This is central to QIB’s financial objectives. It becomes clear when the annual reports for the period are reviewed. The strategists engaged in it are guided by corporate management practices, strengthening sustainability and enrichment of image. The elevation of these is attributed to its commitment to meet short-term and long-term financial obligations, represented by the bank’s initiative hold current asset (QR 112,691,457,000) in excess of current liabilities (QR 109,172,197,000) and hold 48% liquid assets vis a vis short-term obligations to pay in a year. Such initiatives are pursued to avoid payment default, bad loans, bad investment in transactions, rating downgrade and consequent hardening of capital cost. They make it possible for the bank to-

1. ?keep cost of capital in control (6.08%)
2. mitigate operating leverage
3. improve margin
4. transfer residual profit to ‘reserve & surplus’ in compliance with regulatory guidelines
5. elevate net-worth (QR 59,507,608,000)
6. foster operating earnings by 10.07%

They signal the outcome of QIB’s motivation to give credence to liquidity objective. This guides teams in it to improve net cash-in-flow, enriching its reputation in the market. The elevation of this impacts positively market value of its equity, contributing to the wealth of shareholders.

• Solvency & Financial Stability: QIB attaches top priority to such objectives to manage debt optimally to fund investment activities and generate revenue without jeopardizing its future. The focus on the objectives can be understood when accounting information for the period and data in Table 2 are reviewed. They help to find out how the bank aims to control over reliance on debt fund, mitigating risk and improving solvency. These make it possible for the bank to honour all short-term and long-term commitments, including payment of dividend.

?The motivation of the bank to cover 88% of the debts (short and long term) by assets demonstrates its commitment to secure debt related liabilities and eradicate risk of default, noted in Table 2. The resolve to give credence to such objectives is reinforced when data in the table is used to calculate Interest Coverage Ratio. The outcome explains the bank’s abilities to pay interest and tax even if overall profit plummets due to regional and global economic weaknesses.

They illustrate the outcome of QIB’s motivation to give credence to solvency and stability objectives.

In view of the above, I note an alignment between shareholders’ personal objectives and financial objectives of QIB. Before investing net income, they seek to ensure that that money is deployed for investment in a bank that guarantees safety, dividend payment and capital gains.

I recognize that investment in equity share of QIB must be judiciously considered.

Notwithstanding the above, the impacts of these can be controlled if judicious practices in conformity to regulatory guidelines are adopted for example, implementation of Basel III and maintenance CAR [16.3% (XXXX), 16.2% (XXXX) and 15.6% (XXXX)] in excess of benchmark set. Adherence to this improves solvency and sustainability of the bank, implying that the teams will switch resources in safe instruments, like government bonds, treasury bills and certificate of deposit of banks. Such informed decisions make it possible to attain performance excellence, illustrated by growth of profitability by 18.77%, dividend payment (18.84%) and intrinsic worth of equity share in market (capital gain). Hence, I can say that the bank’s commitment to practice safety as an objective multiplies earnings and wealth of shareholders.

I see a clear link between shareholders’ focus on balanced earning and bank’s initiative to improve solvency. The convergence between these two occurs when QIB uses conscious choice to disinvest risky asset (junk bond) and deploy available fund in safe assets (government bond). Such risk management practices protect their wealth. As a result, I endorse the bank’s strategic initiative to attain balanced results in a weak market. Its success in securing shareholders’ wealth is legendary. This emboldens its goodwill in the MENA, elevating its rating (AAA) and market value. The elevation of this magnifies per value of equity. ?

Hence, I stand by the bank’s strategic focus on solvency through safe practices, minimizing the chances of capital erosion.

Ratio Analysis and bank’s share prices

The accounting data in Table 1 and 2, pertaining to the period are utilized to process financial ratios and review them. Noted stalwarts recommend such actions. These enable a shareholder to understand QIB’s abilities to –

• ?sustain profit generation from banking operations. Return on Equity (ROE) and profit margin ratios are used to determine it
• ?meet obligations in the short term, for example one year. Current ratio, acid test ratio and working capital gap ratio are utilized to ascertain it?
• assess the risk arising from the use of debt capital. Structural ratios and coverage ratios are analysed to comprehend it
• measure how efficiently assets are deployed to sell services. Debtors turnover, average collection period and total asset turnover are utilized to assess it
• indicate how equity stock is reviewed experts in capital market. Price earnings ratio and market value to book value ratio are calculated to understand it

The shareholders seek to interpret critically the above to take investment or disinvestment decision. This allows them to develop an efficient portfolio, hedge risk and multiply ROI-

• ?Profitability Ratio: It is feasible to assess the final result from banking operations of QIB when data in Table 1 are analysed from the viewpoint of stalwarts. They recommend the analysis of profit margin ratios and rate of return ratios. The former is useful in ascertaining association between profit and sales. The latter helps to determine the relationship between profit and investment.

The Gross Profit Margin Ratio represents the availability of sufficient margin after paying for interest expenses, commission and fee during the period. The retention pattern of such margin signals QIB’s abilities to manage efficiently core banking operations, generate profit and pay dividend.

When the results are linked to the standpoint of stalwarts and analysed, the relevance of the Net Profit Margin Ratio becomes clear. It explains how much earning is available (percentage of sales) for dividend payment to shareholders. Sustained growth of net earning (contributed by efficient management of banking operations, administration, services sales, funding and tax payment) makes it possible for QIB to assure dividend payment to them.

A review of stalwarts explains the utility of Return on Total Assets. The results justify QIB’s dynamism to invest capital and sustain generation of satisfactory return (19%). This makes it feasible to distribute dividend seen in Table 1.

The results when related to the theories of stalwarts indicate why it is beneficial to invest in QIB’s equity though a marginal decrease in return (2%) is noted in XXXX compared to XXXX. Inspite of such outcome, its overall ability to improve earnings of shareholders is commendable. The earnings improvement stems from proficiency to manage debt-equity, average of cost of debt and tax payment liability judiciously.

Awareness about information discussed above motivates shareholders to invest further, acquire the bank’s equity share from the market, accentuate income (dividend) and enjoy capital gains, denoted by the difference between market value and book value.?

• Liquidity Ratio: It is possible to ascertain QIB’s abilities to meet current liabilities when data in Table 2 and Balance Sheets (XXXX & XXXX) are analysed in conjunction with stawarts. He states that a bank’s financial soundness to meet current obligations can be judged by interpreting critically the relationship between current assets and current liabilities. The former represents avenues for paying short term liabilities that are expected to mature in 12 months. Hence, he recommends that a shareholder should ?analyse current ratio and cash ratio.

The relevance of Current Ratio can be understood when the theoretical standpoints of stalwarts is reviewed critically in association with the data in Balance Sheet for the period XXXX-XXXX. In XXXX, QIB relies on optimum investment of short-term resources in assets with short-term maturity, generate returns and repay short-term commitments. Such a strategy impacted adversely the Current Ratio (.79:1). In XXXX the ratio improved significantly (1.03:1), illustrating the bank’s abilities to honour current liabilities. This is due to competence to convert assets into cash in the operating cycle and utilize such cash to pay current liabilities, signaling its solvency. Despite this, the bank needs to retain 25% margin of current assets as margin from long-term sources, attaining benchmark ratio.?

The essence of Cash Ratio can be comprehended when the standpoints of stalwarts and data in Balance Sheet for the period XXXX-XXXX are combined and analysed. The Cash Ratio (.73:1) in 2014 represents QIB’s preference to maintain higher level of liquidity. It resists borrowing at short notice. In XXXX such a strategy changed dramatically. It drives the bank to borrow money at short notice (.48:1) and invest productively to improve earnings by 18.77%. This makes it possible to repay short-term debts and pay year-end dividend to equity shareholders, evident in Table 1.

Access to information discussed above allows shareholders to decipher QIB’s sustainability vis a vis other banks in the market, meriting investment in its equity to elevate personal wealth.?

Leverage Ratio

Receiving accounting information for the period XXXX-XXXX and data in Table 2 makes it feasible for QIB’s equity shareholders to understand how debt is used to finance investment activities and generate revenue. The stalwarts endorse analysis of such information to find out to how the usage of debt influences risk. In this context, they recommend analysis of debt-equity ratio, debt-asset ratio and interest coverage ratio. Their indepth assessment helps shareholders to realize the sources utilized by the bank to honour debt servicing commitments.

The importance of Debt-equity Ratio can be comprehended when the views of stalwarts is reviewed in conjunction with the data in Table 2 for the period cited in the table. It is apparent that QIB relies heavily on contribution of creditors vis a vis shareholders, surpassing benchmark set (2:1). Alteration of this is necessary to circumvent ‘debt trap’, extend higher protection to creditors and improve sustainability in a depressed market, contributed by global economic slowdown.

The importance of Debt-asset Ratio can be understood when the researches of stalwarts and data in Table 2 are combined and analysed. It indicates that 88% of all debts (short-term and long-term) are covered by assets, implying that all debt related liabilities are secured and there is minimum risk of repayment default. ?

A review of the standpoints of the stalwarts clarifies the importance of Interest Coverage Ratio. The results manifest QIB’s comfort in paying interest and this is not impacted by tax payment liability. Further, high Interest Coverage Ratio implies that it will have no difficulty in honouring interest payment commitment even if overall profit plummets substantially due to global economic weakness.

The information noted above highlights QIB’s financial soundness. This merits investment in its equity and foster earnings of shareholders.

Valuation Ratio

A review of accounting information for the period XXXX-XXXX in conjunction with the details in the website becomes necessary to ascertain the perceived value of equity of QIB in the market. Stalwarts justify such an analysis to determine combined influence of risk and return, defining the quality of its performance. In view of this they endorse the usage of Price-earnings Ratio.

The summary measure (Price-earnings Ratio) of 9.74 explains that QIB’s -

·???·?????growth prospect in diverse geographies is high

·???????? risk characteristics is low

·???????? shareholder orientation is satisfactory

·???????? corporate image in different geographies is well established

·???????? degree of liquidity is sound??????

?Access to information allows shareholders to decipher QIB’s abilities to excel and commitment to build value, meriting investment in its equity. ??

Capital Structure and the bank’s sustainability

The stalwarts explain capital structure represents the sources, avenues and financial instruments used to source fund, invest it to acquire assets, utilize them optimally to generate revenue and payback to investors. Their interpretation makes it possible to understand how a firm, like a bank, secures fund by using the following sources-

Further analysis of standpoints of stalwarts explains the importance capital structure from the viewpoint of delivering value (dividend and capital gains) to shareholders. They explain why their benefits are impacted by capital structure. They state that value building and benefit delivery are correlated cost of capital, bankruptcy risk and profitability-

1)????? Cost of equity and preference capital and impact: The stalwarts note that a bank prefers to raise long-term fund or perpetual fund by floating shares and accommodate shareholders as its owners. They state that such fund is not free. Dividend paid to shareholders and floatation cost absorbed form cost of share capital (equity and preference). They note that cost of such fund becomes prohibitive. This is due to accounting convention that deters absorption of dividend in profit & loss account, though floatation cost is charged in the account. The scope account for the expense minimizes tax payment liability, resulting in saving.

On the other hand, over reliance on equity and preference capital may result in dilution of holding and higher payout to satiate shareholders’ demands. Such outcomes result in loss of ownership and cash out condition. ????????

2)????? Cost of debt: The stalwarts state that a bank raises short-term and long-term fund by borrowing. To avail of this, the parties (bank and lender) are required to agree on repayment terms, including payment of fixed or floating interest. This is the cost of debt or borrowing. Such cost is debited in profit & loss account, reducing the liability to pay tax and elevating the prospect of saving. The advocacy for borrowing as a cheap source of financing is influenced by them. On the other hand, over exploitation of borrowing to finance asset acquisition may lead to overheating and bankruptcy, leading to collapse of a bank. ?????

In view of the above, adoption of optimum capital structure is recommended. They state that its optimization culminates in capital cost minimization, magnifying the spread between revenue and cost. The elevation of such spread improves marginal efficiency of capital, elevating profit and maximizing wealth of shareholders.?

The views of stalwarts interpreted above are utilized to analyse the capital structure of QIB-

It is noticeable from the above that the bank-

·???????? Relies on borrowing, such as 98% (XXXX) and 94% (XXXX), vis a vis equity to finance asset acquisition and profit generation (after payment of interest, tax and dividend), like 2.4% during the years. Such profitability is primarily contributed by relatively low cost of debt -

1)????? 7.22% in XXXX

2)????? 6.88% in XXXX

?·???????? In view of the above, high usage of debt is advocated. This is attributed to the control of weighted average cost of capital -

1)????? 3.03% in XXXX

2)????? 6.08% in XXXX ????

Such performance excellence leads to the conclusion that the bank retains resource and expertise needed to innovate highly customized services for high net-worth investors, establish competitive lead, deliver value to stakeholders and create wealth for shareholders by circumventing prevailing economic challenges, characterized by the following-

1)????? Economic contraction influenced by earning inadequacy, high unemployment, disinterest to spend, poor demand for goods and services, and collapse of companies

2)????? Inadequate growth of gross domestic product and net national product influenced by low consumption of commodities, utilization of fossil fuel and energy, and off-take of industrial growth?????????????????????????????????????????????

3)????? Volatility in stock and currency markets, erosion of demand in real estate and housing market ?

Hold the bank’s shares or disinvest them or buy more

I will not only retain existing holding but also buy more equity share from the market. The decision is related to QIB’s dynamism to-

·???????? Access diverse territories, customize services, mine new opportunities and sustain revenue accrual

·???????? Avoid deployment of uniform products and services in all geographies, mitigating the risk of their failure and enriching shareholder value

·???????? Reduce over dependence on oil economies to secure cash-flows and sustain the growth of P/E Ratio

·???????? Attach priority to risk and return trade-off, making it possible to switch out of risky holdings and deploy cash in risk free products

·???????? Promote stakeholder orientation, improving image of the bank, enriching value of its equity and accentuating capital gains