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Thu 22 May 2008 04:00 AM

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Future capital

Bahrain's Ithmaar Bank Chairman Khalid Abdulla-Janahi on what's next for the financial institution.

Bahrain-based Ithmaar Bank saw profits almost double in the first-quarter of 2008. Chairman Khalid Abdulla-Janahi tells Andrew White what's next for the fledgling financial institution.

KhaLid Abdulla-Janahi eats his breakfast in a hurry at the Four Seasons Hotel in Sharm El Sheikh amid the bustle of activity that is the World Economic Forum.

It's clear that time is of the essence to the Ithmaar Bank chairman. And yet this is to be expected. After all, for an institution that is only just three years old, Ithmaar has come a long way - and Janahi with it.

By its very nature, in investment banking you can never extrapolate.

Earlier this month the Bahrain-based investment bank announced a 91% surge in its first-quarter net profit, to a record US$59.3m, up from US$31m earned in the same period of last year.

The results come as the bank and its subsidiaries and associates in the Middle East, Asia Pacific, Europe and North Africa continue their expansion into new markets. For Janahi, the Q1 performance is just a stepping stone to bigger and brighter things.

"The results are just the beginning of reaping some of the benefits of some of the investments that we have put through, both in terms of restructuring and in terms of new investments that we have made," he insists. "I would not look at our bottom line until three years down the road."

Such restructuring and investments are manifold. In February, Ithmaar Bank announced its acquisition of 19.1% of BBK, a leading Bahrain-based commercial bank, for approximately US$329m.

Also during the first quarter, Ithraa Capital, an associate of Ithmaar Bank, received licences from the Saudi Arabian Capital Market Authority to set up an Investment Bank in the Kingdom of Saudi Arabia.

At the end of the first quarter, the bank's consolidated total assets stood at US$4.5bn, up 10% on a year earlier. Funds under management also recorded a steep hike of 18%, rising by US$300m to US$2bn.

"All the benefits have yet to be seen, but they will be seen in the future," Janahi claims, nevertheless. "You're not going to see the benefits of changes like this on day one - you have to put in the time and money, and then look three years further.

"On a group basis we're ahead of last year's Q1 - I think US$60m against US$30m - but those results aren't anything to do with the restructuring or anything we have changed, it's just down to the business we are doing," he adds.

Janahi argues that it is impossible to extrapolate such results over the course of the year ahead and he says it is unwise to count on the success of deals that are yet to be realised, particularly those undertaken by its investment banking unit.

"By its very nature, in investment banking you can never extrapolate," he says. "It's not a seasonal thing - it is a business of deals and it depends when a deal is done. There are always so many deals in the pipeline, and it depends what deal comes in at what time."In addition, he notes, investment banking is a particularly difficult game in which to grant assurances - "in retail and commercial banking it is easier to look ahead and manage the process", but in investment banking where other people are on the same playing field, you can win a deal or lose a deal in a second.

Such considerations are not helped by the global credit crunch. Although Janahi does not see the crisis "lasting much more than a year", market pressures have ensured that putting a deal together in 2008 is far harder than it was a year ago.

"We are all feeling the credit crunch, and as a result raising money over the next nine months or year will be made much more difficult," he sighs.

"You want to do a deal partly through equity and partly through finance, and now raising finance is not very easy - banks don't lend to each other and everyone is sitting on the liquidity," Janahi continues.

"This is even happening in the Middle East, and this is because most of the banks here borrow from the big [global] banks. The cash is there, but it's a question of everybody sitting on it rather than giving it away. Even when they do give it away they do it at very high prices."

Despite the crunch and its attendant concerns, Janahi insists that Ithmaar is still looking for direct acquisitions similar to the BBK deal. Moreover, the bank's focus is shifting eastward, and Janahi is in the hunt for deals that will allow the bank to diversify its geographical base.

"Any good analyst can see that we are in that process of acquiring and putting things together - changing things and fixing things," he says. "There is direct investment, plus there are funds for regional purposes, for the East: China, India, Pakistan, Eastern Europe and Africa.

"Whereas in the past we tended to look more at Western European countries and North America, that is shifting - now we are focused on Eastern Europe, the CIS countries, Turkey, China and Asia," he adds. "There are better deals in those parts of the world and we are diversifying into that."

Further diversification will come in terms of the growth sectors that Ithmaar has identified in the Gulf region and beyond. One such example is healthcare, and Ithmaar is already developing the US$1.6bn Dilmunia Island for the healthcare industry in Bahrain.

Dubbed 'Health Island', the development is due to feature medical facilities, hotels and apartment buildings, and will be located off Bahrain's north coast.

"There is so much need for good health service, and I'm not talking about primary service where the Gulf states are some of the best in the world, but about secondary service, where there is a big need," says Janahi

"There is much more requirement and this is a business where no volume of investment is good enough - there's always room for advancement; there's always room to invest."Likewise, Janahi suggests that the region's education system leaves something to be desired. "No-one has got it right yet", he argues, and adds that Ithmaar is carefully considering a move into the sector.

"You can spend billions of dollars in education without getting any value, which we have done in the last ten and fifteen years," he says. "There is big room for investment there, if it is directed in the right way, and we are interested."

He says that Ithmaar is assessing its options, but emphasises that although he believes the firm could make millions in the sector, it has to be done in the right way - "it has got to be something where the investor makes money, but adds value".

Janahi's main priority at Ithmaar is to continue to add value to a firm with great expectations.

And while financial growth appears well under control - "we're looking at getting to US$7bn funds under management by the end of the year, up from US$6bn today," says Janahi - the difficulty will be in preserving the firm's values of considered long-term investment.

"Flipping is very easy - you see something, you go in and you flip it," shrugs Janahi disdainfully.

"I like flippers, and I invest with flippers personally, but our institution is not like that because a flipper in our part of the world is only there for 10 or 15 years, and then it's gone," he continues.

"The flipper is going to be a billionaire and make a lot of other people rich, but at the endgame somebody is going to get all the garbage. We are not interested in that; we are interested in long-term investment."

Kazakhstan a new horizonAt the World Economic Forum on the Middle East, Ithmaar Bank announced the launch of the US$1bn Ithmaar Kazyna CIS Energy Fund, in partnership with Kazyna Capital Management, a unit of Kazakhstan's Sustainable Fund, Kazyna.

The fund, which is expected to have a term of 10 years, will target Kazakhstan's and the Commonwealth of Independent States' (CIS) burgeoning requirement for investment in the energy, energy-related and energy-intensive sectors, and is expected to act as the catalyst for capital investment of up to US$10bn.

With reserves of 39.6 million barrels of oil, Kazakhstan currently holds 3.3% of the world's proven oil resources. The country's political and social stability, skilled workforce and bright economic outlook all enhance the country's investment climate - the economy of Kazakhstan grew by 8.5% last year, with the country experiencing annual economic growth of between 8 and 10% year on year since 2001.

"Many of the CIS countries are at a crucial juncture in their development, as they prepare for greater integration into the global economy. Support from the private sector will be essential in maintaining this momentum," said Kazyna chairman, Arman Dunayev.

"Ithmaar Bank's impressive portfolio of achievements and proven track record will add enormous value to the fund, which is set to deliver positive returns to investors across the region."

The announcement came after news that Qatar Islamic Bank is also setting up a unit in Kazakhstan, while last month the Kazakh government said Bahraini Islamic lender Gulf Finance House planned to develop a petroleum-related research and education area on Kazakhstan's Caspian Sea coast at a cost of US$10bn.

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