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BCC Group Annual Report & Accounts
Report of the Directors
The Directors have pleasure in placing before you the Consolidated Statement of Condition and Consolidated Statement of Earnings of BCCI Holdings (Luxembourg) S.A., its subsidiaries and affiliates for the financial year ended December 31, 1986 together with the Auditors' Report.
The divergent world economic trends visible in 1985 became more pronounced in the course of 1986 producing wide disparities between developed and developing countries. The major industrialized economies witnessed a resumption of moderate growth combined with low and falling inflation following a pause in activity early in 1986. Weak commodity prices continued to boost real incomes in the developed countries contributing to growth in private consumption. Aggregate output in the main industrialized economies is estimated to have grown by 21/2 to 3 per cent at an annual rate in the third quarter of 1986. However, large current account imbalances between the United States, Germany and Japan have increasingly become a cause for concern with the Dollar experiencing a depreciation of over 20 per cent against the Yen and DM over the year as a whole.
The fall in non-oil commodity prices exacerbated economic problems in the developing countries and consequently, they continued to face severe balance of payment difficulties. The debt situation of many of these countries remained a major international problem. Although low oil prices throughout 1986 provided a measure of short term relief to the non-oil developing countries, the increasing protectionist attitude of many developed countries will place further constraints on the growth of world trade.
BCC Group operating through a global network of branches and offices in 72 countries, did not escape the impact of the international economic environment, nevertheless it showed its resilience by producing satisfactory results in the commercial banking sector. The fact that the cost of closing out the remaining open option contracts of 1985 had to be carried into the 1986 accounts, unfortunately, had an unfavourable effect on the overall profit. Excluding this exceptional loss, the normal commercial banking operations showed a profit of U.S. $283 million before loan loss provision and tax.
The year-end balance sheet clearly reflects the Group's financial strength. The capital/asset ratio stood at 8.4% while the advances/deposits ratio continued to be less than 54% again reflecting a position of high liquidity which has been a cornerstone of our policy.
The key aspects of the balance sheet and of the operating results for the year are as follows:
Capital Fund
The year-end Capital Fund figure now stands at U.S. $1.471 million as against U.S. $1,190 million at the end of 1985, an increase of U.S. $281 million after taking into account a net translation adjustment on non-dollar capital assets of the Group which had a negative impact of U.S. $20 million on the General Reserves of the Group.
Pursuant to the policy of the Shareholders and the Directors to strengthen the capital base of the Group a Rights Issue of U.S. $250 million was made during the year at a premium price of U.S. $40 per share of U.S. $10. The Rights Issue was fully subscribed by our shareholders. Further additions were made to the Capital Fund by subscription of U.S. $300 million in convertible Loan Capital and U.S. $70 million Subordinated Capital Notes, replacing U.S. $306.5 million non-convertible Subordinated Capital Notes which were redeemed in 1986.
Liabilities
Our consistent policy of maintaining a strong and well spread deposit base received further emphasis during the year and Customer Deposits rose to U.S. $13,785 million in December 1986 as against U.S. $12,734 million in 1985. The figure would have been approximately U.S. $1,000 million higher but for the adverse translation effect on deposits in several countries where currencies were severely devalued. Deposits and Other funds increased from U.S. $14,916 million to U.S. $15,637 million. The total balance sheet footing, excluding contingent items, now stands at U.S. $17,500 million against U.S. $16,600 million at the end of 1985.
Assets
In line with the stated policy of the Group to maintain high liquidity, Loans and Advances were held at U.S. $7,400 million representing 42% of Total Assets and 54% of Customer Deposits. The bulk of the advances continued to be self-liquidating short term trade related. Exposure to LDC countries with international payments problems remained at a very low level. Liquid assets, including readily encashable investments in securities and other dealing assets, stood at U.S. $9,300 million, including U.S. $7,700 million in short term placements.
There was a net increase in Investment in Affiliates during the year of U.S. $33 million reflecting mainly the investments made in Australia, Brazil and Trinidad and Tobago.
Reserves and Provisions
As part of the ongoing process of building up the Capital Funds, the total of Reserves and Retained Earnings was raised to U.S. $381 million from U.S. $265 million in 1985.
In determining the Loan Loss Provision for the year management has carried out a full review of the Loan Portfolio and decided to make a conservative charge of U.S $112 million for the year. This builds up the total provision, after writing-off U.S. $30 million and allowing for exchange movement during the year, to U.S. $441 million (1985: U.S. $371 million). After allowing for full and adequate specific provisions, general provisions are now nearing 1% of the Loan Portfolio. It is management's intention to continue to build up this provision to a higher level in coming years with a view to provide further protection from any unforeseen adverse developments in the future.
Operating Results
As stated earlier the operating results of the Group for the year 1986 must be considered as satisfactory given the adverse effects of significant currency devaluations in certain important developing countries where the Group operates, and lower interest margins throughout the year. In spite of these adverse factors, the Group generated a commercial banking profit of U.S. $283 million before tax and provisions after absorbing U.S. $21 million as a consequence of currency devaluations in 1986. Results for the year, before taxation and the net exceptional loss of U.S. $55 million, relating to 1985, stood at U.S. $170 million. There will be no further impact of the 1985 position on our earnings in future years.
Group Structure
As at December 31, 1986 the international network of the BCC Group consisted of 404 offices in 72 countries of which 85 are in Europe, 71 in North and South America, 56 in South Asia Far East and Australia, 96 in the Middle East and 96 in Africa. Having achieved its planned target of global coverage the policy of the Group for the last few years has been to consolidate its position in all these areas. Additional geographical and branch expansion during 1985 and 1986 was therefore minimal.
The significant events were the introduction of the Group into Brazil through the acquisition of an investment banking licence in that country, the entry into Trinidad and Tobago through a merchant banking licence and the start up of BCC’s Australian operation. Our Tokyo office has also become fully operational and should contribute to our business in other parts of the world.
We feel that the BCC Group is now well poised to avail of maximum advantage from the expected upturn in international banking particularly in the area of international trade.
Outlook for 1987
Although the economic outlook for 1987 remains uncertain, particularly in the third world, the Directors, on the strength of 1987 Group budget figures and other indicators, feel confident that the results for 1987 will show a significant improvement.
The Directors take this opportunity to thank the Central Banks and Supervisory Agencies in countries where the Group Banks are operating for the valuable guidance extended by them.
The Directors wish to place on record their appreciation for the loyalty, devotion and services rendered by the members of staff whose individual and collective efforts and aspirations are reflected in the progress of the Group. Their quality and commitment continue to promote confidence in the strength of the Group.
Agha Hasan Abedi
Director and President