Fimbank plc had long been warning that 2014 was turning out to be a very challenging year. At the time of the publication of the financial statements as at June 30, 2014, various impairment charges were taken totalling $10.2 million and the directors emphasised some particular impairments in the factoring portfolios of the Russian and Indian factoring companies.
Fimbank had increased its participation in these two factoring joint ventures in early 2014, in order to exercise increased control in each of these entities following the entry of two new institutional shareholders into the Fimbank Group, United Gulf Bank and Burgan Bank (both part of the Kipco Group of Kuwait). Fimbank increased its stake to 80 per cent in Russia and 79 per cent in India.
Moreover, in the Interim Directors’ Statement published on November 17, 2014, while Fimbank indicated that its operating results in the main entities and some of the factoring ventures were healthy, it warned that the “impairment situation is materially challenging” as new unquantified impairments were identified across the group during the second half while no progress was achieved on the recovery efforts of previous impairments.
Similar warnings were also given by chairman John Grech in his message to shareholders in the first newsletter published in January 2015.
Moreover, on January 26, 2015, the international credit rating agency Fitch downgraded Fimbank’s rating to ‘BB-’ after it confirmed that severe impairments were suffered, particularly in Russia and India. Fitch indicated that a reversal of this downgrade would only materialise if there was a substantial recovery of the performance and asset quality of the group sustained by evidence of improved risk controls.
Despite the various warning signs over previous months, the extent of the overall loss during 2014 was probably a shock to many observers. Fimbank convened a meeting for financial analysts last week soon after the publication of the financial statements. Apart from Grech, the newly appointed ad interim CEO Simon Lay, CFO Marcel Cassar and the CEO of Burgan Bank Eduaordo Eguren were also present for the meeting. Eguren emphasised the strong support being given to the bank by the two large institutional shareholders owning 80.92 per cent of Fimbank, United Gulf Bank and Burgan Bank, which both form part of the Kipco Group of Kuwait.
Although operating income grew by 47 per cent to $49.2 million, the Fimbank Group reported a pre-tax loss of $53.43 million in 2014 compared to the $6.4 million pre-tax loss in 2013.
Operating expenses grew by 31.1 per cent to $39.77 million (largely due to the consolidation of three factoring companies during the year) while net impairment losses surged to $50.7 million from $6.5 million in 2013. These impairments mainly relate to the factoring books of the Russian and Indian subsidiaries as well as an $8.9 million downward revision in the goodwill relating to the group’s investment in the Russian and Indian joint-ventures including the additional investment made during the first half of the year.
It may be confusing for some of Fimbank’s shareholders to understand the developments with respect to the subsidiary in Russia. Although in the first half of 2014, Fimbank acquired a majority stake in CIS Factors (Russia), the directors decided to close down this factoring company by the end of the year. Eguren explained that although this decision was very painful, the situation in Russia had changed dramatically in a short period of time and “what was initially an attractive market became a major risk due to the political environment”. The CEO of Burgan Bank indicated that although Russia was the biggest commodity market and was attractive if the right partners were involved, the prevailing political and economic environment was not conducive for profitable business activities to take place and this was not expected to improve for some years.
Management needs to then ensure that an adequate return on equity is being achieved
The most disappointing news for Fimbank’s shareholders was the situation in India, which accounted for a large part of the impairments during 2014. Although the Indian market is still an attractive one, Fimbank’s chairman referred to lack of controls in place while the CEO of Burgan reported that some transactions were not within the pre-agreed risk parameters. The top management of the Indian company has since been replaced and new control procedures have been implemented.
While Fimbank’s top executives all claimed that a lot of important lessons were learnt from the developments in 2014, they all spoke with increased conviction on the future prospects of the group. Both Fimbank’s chairman and the CEO of Burgan Bank highlighted the ability of Lay to “turnaround situations” in his previous working experiences, especially with the operation in London which returned to profits immediately after Fimbank acquired full control many years ago.
Lay noted that although the circumstances are extremely challenging, the immediate focus was to implement a turnaround strategy to bring the group back to a profitable situation in the shortest time possible. Although he failed to provide actual figures in this respect, the CEO indicated that management was forecasting an overall return to profits as from the current financial year ending December 31, 2015. With respect to the future strategy, he explained that the business model would not be changing but there would be a modification in the direction, with a focus on consolidation and a strict emphasis on the oversight of the individual performances of the respective subsidiaries.
Burgan Bank CEO Eguren claimed that although the business model has very attractive features, the group was expanding too rapidly and mistakes were made in the implementation. Eguren noted that the task ahead is not an impossible one and the two institutional shareholders –Burgan Bank and United Gulf Bank – are fully committed to assisting Fimbank in the immediate future.
During the presentation, Cassar provided an overview of some key financial ratios. Despite the sizeable losses incurred in 2014, it was surprising to see that the capital structure is still robust with a Tier 1 ratio of 13.3 per cent. Notwithstanding this, Fimbank’s top executives indicated that the second rights issue was still on the cards although the timing is as yet unknown. The additional capital to be raised in the future rights issue would be required to assist Fimbank implement its strategy going forward, which still entails seeking growth once the necessary managerial changes are undertaken and the turnaround in current operations is evident. The CEO of Burgan stressed that given the current infrastructure, the aim was to generate more volumes as this would be the only way to bring down the excessive cost-to-income ratio to within the norm across the banking industry. The rights issue would therefore assist the group achieve the desired increase in business activity in the years ahead.
Following the horrific results during 2014, the bold claims of a quick turnaround and a return to profits as from 2015, it would be necessary for Fimbank to provide more regular communications to the market and possibly also publish some key financial figures on a quarterly basis to reassure shareholders that the annus horribilis is truly behind them and the future is more encouraging.
At a later stage, once the turnaround is evident, management needs to then ensure that an adequate return on equity is being achieved and other key performance indicators are also in line with the rest of the banking industry, most notably a more efficient cost to income ratio which has been too excessive for far too long.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd (RFC) is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2015 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.
Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.