Financial Performance of Dubai Islamic Bank - Report Example

FINANCIAL PERFORMANCE OF DUBAI ISLAMIC BANK Company Profile Dubai Islamic Bank (Public Joint Stock) Company was incorporated by an Amiri Decree issueon 29 Safar 1395 Hijri, corresponding to 12 March 197 by His Highness, the ruler of Dubai, to provide banking and related services based on Islamic Sharia’s principles. The bank was subsequently registered under the Commercial Companies Law number 8 of 1984 (as amended) as a Public Joint Stock Company [Financial reports] Dubai Islamic Bank is currently the leader when it comes to sharia compliant and pure Islamic banking. In this age, the Islamic banking is becoming increasingly popular and is emerging as an alternate to the conventional banking. Currently, Islamic banking is considered to be the world fastest growing economic sectors, which comprises of more than 400 financial institutions having a combined asset base of $1,000 billion. The Islamic operations of Dubai Islamic bank not only attracts is diverse array of customers belonging to Muslim community, but due to transparency and ethical values incorporated in the Islamic banking system, the bank has been able to build a customer base from the non-Muslim community as well Retail Banking The retail banking department of Dubai Islamic Bank offers a diverse range of solution driven and cost effective products to its customer base. With a substantial presence all across Dubai, the customers are able to do transaction through several branches and ATM portals Wajaha Banking Wajaha banking is a wealth management service provided by the bank to a selected number of customers. The bank analyses the member’s portfolio and their personal and financial goals Corporate Banking The bank offers merchant banking, corporate banking and treasury products to its business client form the corporate market. The bank provides inventive solutions in the field of corporate finance, project finance, trade and commodity finance Stock market Dubai Financial Market Date of listing June 12, 2001 Date of incorporation March 12, 1974 Chairman Mohammed Ibrahim Al Shaibani CEO Abdulla Al Hamli Foreign ownership limit Maximum 25% Total shares outstanding (millions) 3,798.554 Fundamental Analysis Dubai is one of the emerging economies of the world, having blessed with rich oil reservoirs, the GDP of Dubai is expected to increase by 3 – 3.5% in the financial year 2011. During the financial crisis of 2009, several economies of the world were shattered to their core. The jolts were also experienced by a strengthen economy such as Dubai, but due to prudent policies and effective resource allocation, the government was able to restore the economy back on track. Currently, Dubai is counted among the richest cities of the world and has always attracted a great deal of foreign direct investment. The financial services sector in Dubai accounts for a considerable 11% of the total economy. The banking sector in Dubai can be regarded as the biggest beneficiary of the economic growth. This is due to the fact that the prevailing interest rate in the UAE economy is lower as compared to the other countries depicting similar economic trends. In recent times, Islamic banking has made great presence in the Dubai economy. Amid the global financial crises, a notion was introduced by some of the financial analyst that Islamic banking could be the solution to the destabilizing conditions of the financial institutions. Currently the Islamic banking sector is growing at the rate of 20% and many worldwide banking giants as now venturing into this particular form of banking and reaping great benefits. Following are some of the biggest Islamic banks in the world [Shariah Fortune] Technical Analysis The share price of Dubai Islamic Bank remained fluctuated over the past few years. If we consider the financial year 2006, the share price of the bank depicts a rising trend. In the financial year 2006, the share price of the bank was crossing 4.48, but by the end of the financial year 2008, the share price took a downward plunge and the December closing of the financial year recorded a share price of 1.233. Despite the declining trend in the previous year, Dubai Islamic Bank was able to restore its previous market capitalization and by the end of the financial year 2010, the share price was 2.083. The earning’s pattern of the bank is linked with its share movement over the years which shows a declining trend over the years. Forecast about the Future Performance The following figure shows the share price movement of Dubai Islamic Bank in the past month [Bloomberg] Based on the above share pattern, following is the forecasted share prices for the period from July 25th 2011 till 29th July 2011. Historical data of dividend payout Supply and Demand Issues From a commercial bank’s perspective, supply and demand can be comprehended as the bank’s activities in generating enough deposits in order to cater the financing needs of its diverse customer base. An analysis of the balance sheet of Dubai Islamic Bank represents that the Islamic Financing has increased by 14.541% during the financial year 2011. As per the basic laws of demand and supply, the increased level of financing should have been financed through funds obtained in the form of customer’s deposits, borrowings from other banks and financial institutions and through other mode of financing. Although, deposits balance during the financial year 2010 1.16%, but the demand was adequately met through borrowings from banks and other financial institution, which increased by a staggering 204%. In addition to that, financing through sukuk instrument also increased 73%. Following graphical representation portrays the demand and supply patterns of Dubai Islamic Bank over the years. Price Elasticity In the market for commercial deposits, price elasticity of demand statistically measures the extent to which business customers adjust deposit balances in response to rate changes. By tracking rate and balance fluctuations among customers over time and analyzing the results, the bank can identify major patterns of price sensitivity. In turn, these patterns form the basis for segment-based strategies. Financial Analysis (Long term investment) Ratio analysis is a very accurate and reliable tool when it comes to analyzing the financial outlook of a bank. The ratios can be divided into various categories such as profitability, gearing and liquidity, each focusing on a different area of the financial outlook of the bank and highlighting its performance. The financial ratios assist the investors in making an educated decision about which companies to invest in. Ratio analysis, in case of banks, can only be proved useful when they are compared with other peer banks having similar operating strategy and asset base. Investors, in most cases compare the financial ratios of the current financial year with that of the prior years, in order to evaluate the performance of the company over the years. Following are the financial ratios of Dubai Islamic Bank for the financial year 2010, comparing them with that of financial year 2009. Ratios 2010 2009 Increase / (Decrease) - % Short term solvency ratios Current ratio 0.673 0.647 4.07% Cash ratio 0.232 0.237 -2.08% NWC to total asset ratio 0.176 0.205 -14.39% Long term solvency ratios Total debt ratio 0.883 0.893 -1.15% Debt/equity ratio 7.563 8.387 -9.83% Equity multiplier 8.563 9.387 -8.78% Profitability ratios Profit margin 0.523 0.575 -9.08% Return on assets 0.027 0.035 -21.73% Return on equity 0.234 0.327 -28.60% The liquidity ratio measures the company’s ability to pay its short term liabilities. The ratio illustrates that how quickly a company can convert its assets into cash and cash equivalent in order to pay off its short term liabilities [Jim Mueller].Current ratio measures the company’s ability to discharge all of its current liabilities in the next 12 months. The ratio is calculated by dividing the current assets of the bank with its current liabilities. In order to identify the current assets and current liabilities, the maturity profile of the bank’s assets and liabilities as mentioned in the financial statements can be utilized. All assets and liabilities up to one year maturity are considered to be current. The current ratio of the bank has increased by 4.07% during the current financial year. Cash ratio analyses the liquidity of the bank more precisely. The ratio is calculated by dividing the cash and cash equivalent with the total current liabilities. Considering the financial statement of Dubai Islamic bank for the year ended December 31, 2010, the cash ratio has decreased by 2.08% which is primarily due to the fact that the yearend balance of cash and cash equivalent has decreased by a 3% during the current financial year. The Working Capital to Total Assets ratio is an authentic tool to measures a companys ability to cover its short term financial obligations (Total Current Liabilities) by comparing its Total Current Assets to its Total Assets. An inclining trend shows a positive sign and portrays that the company’s liquidity is improving over time [Financial Glossary]. The ratio has decreased for the bank which is due to the fact that it’s financing and deposits did not increase in the same proportion. The gearing ratios and indicate the level of risk taken by a company as a result of its capital structure [gearing ratio]. The ratio determines how much the operations of the bank are financed by the funds generated through internal resources and how much of it is financed through borrowing. Total debt ratio is calculated by dividing the total liabilities of the company with the total assets. The main driver of this ratio is the financing to deposit ratio during the financial year. The ratio has decreased for the bank during the current financial year which could be a positive sign for the investors. In order to determine the financial leverage of the company, debt equity ratio is considered to be the most important financial ratio. Financial leverage can be defined as the use of borrowed money in order to finance the operations. It is commonly observed that the banks finance a major portion of their operations through deposits and not through raising equity. The debt equity ratio of the bank has decreased by 9.83% during the current financial year which represents that the Dubai Islamic bank is now relying more and more on the funds generated from internal resources, rather than acquiring than in the form of debt. Conclusion Islamic Banking is becoming increasingly popular among various countries of the world. The fact that the banking system is primarily based on moral and ethical values makes it stand apart from the conventional banking system. Although it is still considered that Islamic banking is in its primitive stages, but initiatives are being taken by several Islamic an non-Islamic countries to implement the core Islamic banking principles in its banking industry The short term and long term financial analysis of Dubai Islamic Bank advocates the fact that a pure Islamic bank, can cater the needs of a diverse spectrum of customers, by limiting itself according to the principles of Islamic Shari’a. The supply and demand analysis of the bank presents that the company has always been able to cater the needs of its corporate and consumers customer and at the same time was able to attract depositors by offering state of the art banking facilities and offering attractive returns on their investments. Although due to recent economic crises and global financial turmoil, the share price pattern of Dubai Islamic bank represents a declining trend lately, but a thorough analysis would reveal the fact that the share prices are on the rise again. The bank has always maintained a reputable dividend payout history as portrayed by the graphical representation. Long term evaluation of the bank shows that the bank has been able to increase its liquidity as compared to the prior financial year, which is a positive sign. The bank is now relying more and more on the funds generated through internal resources rather than borrowing from external debt market, a fact which is depicted by the decrease in the debt to equity ratio. On the other hand, the profitability of the bank took a downward plunge in the current financial year, although its financing increased during the current financial year. This declining pattern can also be justified by the stringent condition of money market during the financial year 2010. References Shariah Fortune. Viewed 26th July 2011 Financial Reports. Dubai Islamic Bank. Viewed 26th July 2011 Bloomberg. Dubai Islamic Bank. Viewed 26th July 2011 Jim Mueller. Understanding financial Liquidity. Viewed 27th June 2011 < http://www.investopedia.com/articles/basics/07/liquidity.asp#axzz1QmH3X0Uk> Gearing ratio. Bloomsbury information limited. Viewed 27th June 2011 < http://www.qfinance.com/dictionary/gearing-ratios> Stephen Baird. Commercial Deposit Pricing: Optimizing Through Analytics . Viewed 27th June 2011 Read More