EIIB – Closing The Value Gap

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% of AUM, AUM, EIIB, European Islamic Investment Bank, frontier markets, GCC countries, Investor Relations, Islamic finance, MENA, NAV discount, Norges, Rasmala Holdings, share buyback, Sharia'a, Zak Hydari

In mid-April, I realized it was a full year since I’d last posted about European Islamic Investment Bank (EIIB:LN). No real neglect on my part (EIIB is now a Top 3 holding for me), but simply an undimmed confidence in their underlying story & intrinsic value. A fresh write-up made sense (esp. with 2012 final results due for release), as I suspected EIIB would be a brand new & interesting stock for a lot of (more recent) readers. [The stock actually rallied +15% in the week after my post].

The results speak for themselves, and received an enthusiastic reception from current & prospective shareholders. [EIIB shares are now up +27% since my last post]. These are the first set of results to properly illustrate EIIB’s new asset management strategy, its operational turn-around & progress to date, and the exciting potential of the MENA region. Again, see my prior post, but I definitely encourage you to read the full set of results – or even better, the entire annual report! Let’s divide the rest of this post into four sections:

Highlights:

– Assets under Management (AUM) increased +53% to $922 million, including a mandate win from Norway’s sovereign wealth fund

– EIIB & Rasmala staff/operating expense costs were basically halved – ahead of forecast, with some further efficiencies targeted for 2013

– Underlying business operating near-breakeven (GBP 0.6 mio pre-tax loss, exc. write-downs & discontinued ops.)

– A reduced GBP 13.3 mio in legacy assets targeted for an orderly exit

– Balance sheet risk continues to reduce, with 75%+ of assets invested in cash, deposits & fixed income, and liabilities limited to 25% of total assets

– Wholesale strategy confirmed, with new distribution agreements signed & existing relationships deepened. Re-iterated $3 billion AUM target by 2016

Also, this commitment from the CEO particularly grabbed my attention:

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EIIB…Ex-Bank – Love It!

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Arab Spring, asset managers, AUM, banks, de-leveraging, DiamondCorp, EIIB, European Islamic Investment Bank, frontier markets, GCC countries, HBG Holdings, inflation, Islamic finance, John Burbank, MENA, NAV discount, oil, Rasmala Holdings, real assets, Saudi Arabia, Sharia'a, TBTF, Zak Hydari

I have a long-standing aversion to banks. To me, they represent the perfect collision of two really bad ideas:

i) Regular investment in bonds & loans – a strategy offering little prospect of capital gain, but which will (quite often) attempt to wipe out your capital. And the paltry yield you earn offers little compensation. I’ve never understood how people ever find this ridiculously biased risk/reward proposition attractive.

ii) The answer lies in leverage, I guess… Another terrible idea, but this is the incredible solution people usually seize upon to juice low returns. And it usually works just long enough for everybody to forget how savagely leverage can impact liquidity & solvency, when things take an inevitable turn for the worse.

Banks, of course, take this bad marriage to its ultimate & ludicrous extremity. [And require even more leverage to overcome the drag of their cost:income ratios]. But consider the private & public incentives – why wouldn’t they?! When times are good, leverage multiplies profits…which multiplies bonuses! And leverage makes it far easier to reach that ideal bank status: TBTF, where the taxpayer’s forced to pay for your mistakes (& bonuses).