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BCC Group Annual Report & Accounts
Report of the Directors
On behalf of the Directors, I place before you the Consolidated Statement of Condition and Consolidated Statement of Earnings of BCCI Holdings (Luxembourg) S.A. for the year ended December 31, 1989, together with the Auditors' Report.
The most significant event of consequence, affecting 1990 and beyond, is the major restructuring of the Group's shareholding and the subscription by the Abu Dhabi Government of US $400 million for new capital and their acquisition of certain existing shares, such that together with related institutions they now hold over 77% of the share capital of the holding company. This gives the necessary strength to the BCC Group to support its future performance and development.
The year 1989 presented the BCC Group with many challenges. The indictments in Florida in October 1988 required a significant commitment of corporate resources and management time. New initiatives by regulatory authorities concerning cross border exposure to countries experiencing debt repayment difficulties and the evolving credit weakness in a few industries which we serve called for a further review of the Group's loan portfolio.
BCC's fundamental operating performance showed an improvement in revenue generation and expense control as reflected by an operating profit of $224 million before provisions, taxes and extraordinary items. However, pursuant to an intensive review of our loan portfolio, we believe it prudent to establish a large provision against known and possible future loan losses in order to allow the Group to continue to build on its operating strengths. Accordingly, we have taken a charge against earnings of $600 million which caused a significant financial loss for 1989 after provisions. Our provision against cross border exposure to troubled-debtor countries is now about 50%. Total loan loss reserves for all categories of loans exceed $1.1 billion, including a general reserve approaching $100 million.
A decision of this magnitude clearly had a material impact on our capital, upon which our future growth and success depend, and we are therefore pleased to report that the Directors had the full support of the shareholders in establishing these provisions. In addition to a $75 million Rights Issue during 1989, the Government of Abu Dhabi has, as mentioned above, subsequently subscribed a further $400 million in equity capital, thereby rebuilding the Group's capital base. There was also an increase of $106 million in Subordinated Capital Notes during the year. The year-end Capital Fund of $1,074.6 million has since been restored to above $1,475 million in April 1990. The risk-weighted capital adequacy of the Group, based on the 1989 accounts and the fresh Injection of capital in April 1990, exceeds the 8% target set by the Basle Committee of the Bank for International Settlements for 1992.
The Directors are also pleased to report the settlement, in February of this year, of the indictments in Tampa, Florida which were mentioned in last year's report. Although a civil forfeiture was imposed, the Group considers that the settlement was satisfactory and brings to an end an unhappy chapter. The incident had no significant negative impact on our global business, customer relationships or operating results. Our intention is to continue a presence in the USA. As noted in the attached Management Report, intensive work has taken place throughout the Group to strengthen procedures and controls and to develop a vigorous compliance function.
As projected last year, operating earnings improved from $192 million to $224 million over the previous year. Other positive developments included an increase to $18 billion in our traditional line of business of trade finance resulting In a substantial increase in commission and exchange income. Furthermore, the escalating operating expenses of previous years were not only capped, but were actually reduced. The majority of locations in the Group produced better results in comparison with 1988. There has been a noteworthy increase in profitability in the Far East, the Gulf area and Africa. The Statement of Condition also demonstrates a gratifying growth in customers' deposits which allows us to remain independent of volatile money market funding sources. We take this opportunity to acknowledge and thank the Central Banks and Regulatory Authorities 1n the countries where BCC operates for their continuing guidance and support.
Despite the setbacks, there have been many encouraging developments during 1989 and the Directors intend to build on these in 1990 beginning with a major reorganisation of the Group. Where appropriate we shall consolidate operations and significantly reduce administrative expenses by reorganising the Group's Management. We look forward to the opportunities presented by the increased integration of major markets which our extensive global network is well suited to serve. Technological updating will be vigorously pursued. Renewed emphasis will be placed on the allocation of enhanced capital resources to optimise our return on investment. The Group faces the future with renewed strength and a positive attitude and is confident of the support of shareholders, regulators, customers and staff.
We would like to conclude by placing on record our deep appreciation for the loyalty and hard work of BCC staff, often in challenging circumstances. Their efforts indeed ensure the future success and prosperity of the group.
Yves C. Lamarche
Director