Abu Dhabi Islamic Bank - Case Study Example

Name: Course: Tutor: Date: Abu Dhabi Islamic Bank Introduction Abu Dhabi Islamic Bank was founded in 20 May 1997. It became a Public Joint Stock Company in 1997 through Amiri Decree Number 9. It was in 1998 that the company started its commercial operations. The bank’s performance in the stock exchange has been improving significantly because of the many investors who have been investing in the company (Oxford Business Group, 2010). This means the company is one of the performing in the banking sector in the United Arab Emirates (UAE). The company has been expanding its operations very fast because of the adequate funds from the stock exchange (Greene, 2000). Listing of the bank’s stocks in the stock exchange offers the bank with diversification strategies and risk management. The share price of the company has been oscillating between $3 and $ 3.98. Capital Asset Pricing Model (CAPM) Capital Asset Pricing Model (CAPM) is used to analyze and calculate the banks stock prices, riskiness and its trend in the industry. This market equilibrium model is used in the bank to find out the mean variance and riskiness of the stocks. The betas of the stocks are always found using the model (Greene, 2000). Capital Asset Pricing Model (CAPM) = This is a model used to find the risk and mean of their stocks in the market so that they can be compared with others. Capital Asset Pricing Model (CAPM) is essential for the success of a company because it gives us the parameters such as mean, variance, and standard deviation. These parameters are critical because the company’s management can easily calculate and establish whether the company is doing well or not (Oxford Business Group, 2010). The formulae is Where: represents the Expected Return on the capital assets of the company refers to the Risk-free Rate of interest such as interest from government treasury bills and bonds (Greene, 2000). this is the beta. This refers to the sensitivity of the expected assets, which are in excess of returns to the expected market returns, which are in excess. This can also be represented as follows or also: , refers to the Expected Return in the market is commonly known as the market premium (this is the difference between the rate expected in the market on return and the risk-free rate of return in the market). this refers to the risk premium in the market. An example of this is found when we calculate the performance of the company based on the financial reports and statements. Beta shows the compensation of equity that the investors need before taking an additional risk with their finances (Greene, 2000). The stocks beta for the company is 2.0, the rate of market’s return is 4%, risk free rate is 3%, and 7% is the available market rate of return. The market excess return = (7% - 3%) = 4% The stock’s excess return = beta * market excess return = 2 * 4% = 8% Therefore, the stock’s total return = Risk free rate plus the stock’s excess return = 8% + 3% = 11% The overall performance of the Abu Dhabi Islamic Bank in the stock exchange has been impressive for the past years based on the financial reports and statements of the bank. However, some instances, the bank’s performance has been below the industry rates or expectations (Oxford Business Group, 2010). The performance is as shown below Overall performance of Abu Dhabi Islamic Bank Beta 1.02 Market capitalization DHs. 749.13 Dividend per year 0.22 Shares outstanding 2364.69 Share price (2011) $ 3.23 Financial analysis ADIB INDUSTRY SECTOR P/E 7.1 15.4 95 EPS 268.3 00 00 ROE 12.7 6.5 00 ROI 00 12.8 6.5 From the above statements and analysis, the company has been performing well compared to the industry rates or average (Oxford Business Group, 2010). In addition, it shows that the investors can have trust in the bank’s performance; hence, improving the reputation and image of the company. The future performance of the company is expected to improve significantly because of the improved management and committed staff (Greene, 2000). The share price has been increasing significantly because of the improved market performance. The mean price (MP); Coefficient of Variance, CV = Standard Deviation divide by Mean (Greene, 2000). Standard deviation, mean, and variance are the parameters we used to measure the riskiness and performance of the stock’s performance. Therefore, standard deviation measures the diversity or variability in the probability theory and statistics. This shows the dispersion or variation from the mean or expected value. If the standard deviation is low, it shows that the data points inclines to the mean. However, if there is a high standard deviation, it means the data points are spread over a large range of values that are available (Oxford Business Group, 2010). To find the standard deviation, we calculate the square root of the variance. Standard deviation = √Variance α = √α2 Mean = 12% Variance = 20 * 20 = 400 Standard deviation = √Variance = √400 = 20% To get the lower and upper boundaries, we less and add standard deviation from the mean respectively. Lower boundary = 12% - 20% = -8% Upper boundary = 12% + 20% = 32% Recommendations For the company to outperform other competitors in the market, it should implement the following recommendations (Greene, 2000). First, the bank’s management should employ qualified financial advisors so that they can guide the top management on when to invest and when not. Stock analysis and performance depends on the speculation, demand and supply in the market. The stock’s rate keep on fluctuating regularly; hence, wise decisions should be made in order to avoid in stocks that will lead to a loss (Greene, 2000). Investors want to get higher returns on their investment when buying the stocks. This means, if the banks is giving higher dividends to the customers, then it will attract many customers. In addition, the bank’s performance should impressive for it to appeal to many customers for the bank to get funds to finance their projects. Proper management of the shareholders money is critical because this is the only way to attract and retain the customers (Oxford Business Group, 2010). The average growth rate of 12% can increase annually by 2% if the top management formulate and implement strategies accordingly. The bank’s performance in the stock exchange has been improving significantly because of the many investors who have been investing in the company (Oxford Business Group, 2010). This means the company is one of the performing in the banking sector in the United Arab Emirates (UAE). The company has been expanding its operations very fast because of the adequate funds from the stock exchange (Greene, 2000). The model is important and the bank should adopt it for the improvement of its performance. Sales and marketing of the company should be continuously for the investors to notice. References Greene, William. Econometric analysis. New Jersey: Prentice Hall, 2002. Oxford Business Group. The Report: Abu Dhabi. Oxford: Oxford Business Group. 2010. Read More