European Islamic Investment Bank plc
("EIIB" or the "Company")
Letter to Shareholders
EIIB announces that it has today posted a letter to Shareholders in the Company. The full text of this letter follows:
A little over eight months into my new role at EIIB (the "Bank") and as we approach year end, I would like to share with you my thoughts on our achievements this year, the challenges we face and my outlook for the future of the Bank. In doing so, I hope to address some of the uncertainties and questions that many of you have expressed to members of management, the Board of Directors and to other shareholders, and to clarify what is being done to tackle the low current value of the Bank's share price.
In the wake of several years of financial losses and a steep decline in the share price, the Bank's situation by 2009 was already extremely disappointing to shareholders and clearly unsustainable. The Board of Directors, of which I was already a non-executive member at that time, was faced with a stark choice; to determine a plausible new vision/strategy for the Bank that had realistic prospects of success to replace an original strategy that had clearly failed, or to conclude that Islamic investment banking was not a viable proposition, wind the Bank up and return remaining capital to shareholders. In December 2009, the Board concluded that the latter would be an inherently incorrect view and that a radically new and credible strategy could indeed be envisaged and successfully implemented.
This new strategy is one that I was personally involved in shaping, and was subsequently asked to take responsibility for as Chief Executive. I was pleased to accept the role and took up the position on 15th March of this year. The responsibility for turning around an institution with a poor performance history, many anxious shareholders and struggling with an identity crisis at a time when financial institutions in most markets were suffering the worst stresses in the history of the industry is a huge challenge. The reason why I accepted this is that I firmly believe that the Bank has the right competencies, potential and now strategy to grow and develop into a profitable and successful business.
I see my responsibility quite simply; to create value for all shareholders, large and small, and wherever they may be based. This can only be achieved by taking EIIB towards long term and sustainable profitability, leading to a rise in the Bank's share price. Whilst other responsibilities obviously also exist and creating shareholder value is not a simple or short term exercise, this overriding concern is my absolute priority.
The new strategy - London based, focussed on Investment Banking, Asset Management and Financial Services in Islamic markets
In terms of numbers, we go about doing this by raising the return on assets in a diversified, risk adjusted and controlled manner, and by earning fees. For an investment bank the two are preferably linked, with investment allocation decisions heavily driven by the consequential ability to generate fees.
In pursuing these objectives we have already made several key investments this year and are actively engaged in closing a number of others. This will deploy the excess liquidity that characterised the balance sheet at the start of the year, generating negligible income. In so doing we expect a considerable rise in revenue, the building of an investment management track record across various asset classes and the introduction of a range of investment products and services that can satisfy the needs of our customers in coming months. The emphasis in making investment decisions has been on quality assets that we are able to acquire at low valuations and, in some cases, considerable discounts from distressed sellers. This requires patience and discipline, particularly in market conditions where many low quality assets are available for sale and being widely offered. Inevitably, the deployment of highly liquid short term deposits into higher yielding assets will change the risk profile of the Bank but this is seen as a positive development, that will underpin the success of the new strategy within the context of prudent risk management. Initial indications, from investments made thus far, can be described as highly encouraging.
Arguably even more important than understanding the basic business drivers of an investment bank, is the need to identify the markets and services in which it can credibly have a value added role allowing it to operate profitably and excel. It is largely in this context that the new strategy is radical, with a refocus away from developed markets and towards Islamic ones. I strongly believe that the Bank's operations out of London are critical for reasons of credibility, regulatory excellence, political and geographical neutrality, involvement in international capital and wholesale banking markets, and as an important bridge between European and Islamic markets.
However, in my view the real value proposition is the opportunity, as an Islamic investment bank, to be active in Islamic markets from Morocco to Indonesia. As these form an important part of global emerging markets there are many obvious reasons why I take this view. Long term growth in economic activity, often inefficient markets and little cross regional competition, combine to create superb opportunities for those with the right skill sets, contacts and financial muscle. These are all qualities which EIIB either already has or can realistically develop.
Human capital and resources - contacts and expertise
Fortunately, I inherited a management team with strong technical capabilities and cutting edge experience of Sharia'a compliant banking. For the new strategy the missing ingredients have been the need for regional expertise and contacts. Steps to ensure that we are adequately equipped to remedy this weakness and be positioned to exploit the perceived regional opportunities have already been taken. With a keen eye on costs, a limited number of highly specialised personnel have been taken on to fill critical internal positions.
In parallel, co-management and advisory agreements have been signed with several institutions known to have particular expertise in their regions or sectors that would be too expensive and time consuming for the Bank to build in-house.
Marketing and sales
Strong placement capabilities are also essential to the success of the Bank going forward. This is an aspect of strategy that is being developed cautiously at present due
to poor market conditions in terms of investor sentiment, a lack of track record and the early stage of the product development process. However, the necessary internal resources and the institutional tie ups that will be required in due course will be addressed aggressively during 2011. Whilst it is important to ensure that this build up is achieved with the right choice of people and counterparts, we have the benefit of a weak market resulting in the availability of many highly qualified candidates for the required positions.
This brings me on to our view of the competitive landscape. Amongst our direct peers in the UK, there is some overlap on local investments but this is seen less as competition than an opportunity to cooperate on joint projects. There appears to be little activity relating to business in our intended regional areas of concentration.
In the GCC markets, the historical focus of most institutions has been on real estate development instead of diversified true investment banking. This has left most of them in a precarious state at best. Even the better managed banks have been hurt badly by the credit crunch and the use of leverage to fund a disproportionate balance of investments in long term illiquid assets. Few of these institutions, surprisingly enough, are pursuing a similar strategy to EIIB but where there is some meeting of minds we are actively pursuing avenues of cooperation.
With respect to other key Islamic markets, most of the local institutions are highly focused on their own locations and, once again, we are actively seeking cooperation possibilities with a number of such institutions.
Finally, the large international banks and financial institutions with "Islamic Windows" pose a different series of issues but are largely active on a different scale to EIIB, with much of what we will be doing coming in under their radar screens. In general, the nature of their activities is also not in the same products and services that we are active in.
This all leaves us with a virtually "open field" in what is a very large market. It is for us to take advantage of this situation and build a reputation for excellence ahead of others.
New products and branding - Technology Fund and Turath
Examples of what we are doing on the product front include the launch, in partnership with a leading regional institution specialised in the field, of an Islamic markets technology fund. This has already received the support of the Overseas Private Investment Corporation (OPIC) from the USA and is one of five funds they chose to support out of over eighty applicants for funding. At the beginning of this month we also launched an Islamic regional quoted equities fund, under the Bank's new "Turath" brand.
As we go forward the approach is to be highly opportunistic, which is considered particularly necessary for a bank of our size, but with a strategic focus on sectors such as technology, energy, environment, commodities and agri-business.
Challenges - capital and leverage
Normal business challenges are obvious and we live with these day to day. However, two strategic issues are of concern and need to be addressed in due course.
The first is a weakness in our ability to leverage at reasonable cost. This arises from the lack of a credit rating, short and unprofitable history and generally still poor market conditions. In addition, unlike most of our direct peers, we do not have a controlling shareholder that may provide support with deposits.
The second issue is with respect to the size of our capital base, which is relatively small for the intended business scope, and is lower than originally intended due to the less than optimal results of the Initial Public Offering and subsequent accumulated financial losses.
Beyond leveraging shareholders' capital, the ability to leverage management by creating economies of scale is crucial in the long term. This is also true in terms of leveraging the related cost base which, due to the expenses associated with operating from the UK, is high as a percentage of shareholders' equity and presents a significant hurdle to surpassing breakeven profitability, especially in a low yield environment.
These are concerns that management are well aware of and are already planning means of tackling.
Close of year and outlook
Finally, I am pleased to be able to end this letter on an optimistic note. It is obvious to me and I believe soon will be to you and the whole market, that your Bank has clearly turned the corner. If anything, this has happened somewhat sooner than I anticipated, as should soon be evidenced by the year end results. This will mean a positive start to 2011 both for the Bank itself but also hopefully for its shareholders in terms of what should be an improving share price performance. Further share price support should become evident as we rebuild our equity base and become increasingly capable of contemplating the payment of some dividends.
Looking further out, and despite the many challenges that remain, there are good reasons to justify higher expectations. Having come through a global banking crisis on a scale unknown in history, the consequences of which are not yet over with more than 130 banks failing in the USA this year alone and numerous casualties in the Islamic investment banking sector internationally, EIIB is relatively unscathed. With a strong balance sheet, and a management team and Board committed to implementing the new strategy, EIIB is set on a path to sustained long term profitability and to becoming a leading institution in Islamic markets that its staff and shareholders can be proud of.
Subhi F. Benkhadra
Chief Executive Office
For Further information please contact:
Subhi Benkhadra, Chief Executive Officer
Keith McLeod, Finance Director and Deputy Chief Executive Officer
+44 20 7847 9900
Nick Tulloch, Ben Wells
+44 20 7012 2000
Michelle James, Andrew Marshall
+44 20 7839 4321