CDIC, NDB <- I told you so

See the latest submission, CDIC should come down significantly after the buyback. The sub will now lose its core cash-flow and source of profitability - it will be an overvalued 18B/= subsidary (worth 21B/= right now).

NDB has itself to blame, and I hope they bite the bullet and write off most of its value instead of taking "fair value of investments" as per IFRS. In the 2011 annual report NDB has used 2.7B as cost value and Market value 13.9B ---- Fortunately they have used cost value or otherwise NDB shareholders would have seen a massive impairment.

Anyway I would like to see NDB write off some. If it doesn't the Auditors should be held up for their accountability.

Oh.. I thot the thread is started by Rajitha - going by the name

So is there a chance of NDB getting a bad rating (Fitch, etc..) if hold on?

Let me join you in your sentiment Small

Rain if you are confused, there was a guy who used to dissaper from the forum for a long time and suddenly reappear when the time is right to say I told you so.

smallville wrote:Oh.. I thot the thread is started by Rajitha - going by the name

Yes I shouldn't have said "told you so" because I didn't tell you anything before!!! I honestly don't know who Rajitha is.

I was actually surprised that it wasn't picked up earlier. As a plus it was a good thing they didn't take market value as they have every right to do so. -> like CDB et al

Actually if they did disclose fair value they would have booked some good profits in the past. as equity gain is posted through P&L before going into the balance sheet. From the 2011 Annual report to now the Market cap of CDIC has improved by 11 B/= (from 13B to 24B).

Usually when disposing an asset the Audit Committee should disclose the impact on consolidated results. Hence NDB should disclose to its shareholders that an impairment in value of its subsidiary would occur.

It seems that there is an accounting problem because NDB can also not impair the cost value but then revert to market value. Not sure but I think they should have provided more guidance.... I'm sure another disclosure will arrive once the Auditors/ SEC get the wind of this

@rainmaker,

Would you like to share your experience in CSE bit (only if you wish)? How long you are in the business, your academic background etc?..
You seem to be someone who is heading a top position in this industry.
By the way, I’ve send you are private message (if you have not seen yet), and highly appreciate if you can send a reply.

Been a while since we have seen a "I told you so" post

Appreciate rainmaker's contribution, but still I'm confused.

Why confused? Look at the latest statements. Under assets you will see:

Investments in Associates & Subsidiaries 2,659,704 (in '000s)

Most of that relates to the following:
Capital Development and Investment Company PLC 2,330,855 (in '000s) - cost value as per the 2011 Annual Report

In the same annual report you will find two notes that are not correct.

24.2 The Directors' valuation of Investments in Subsidiary companies has been done on net assets basis except for investments in quoted
companies, which is at the market value as at the Balance Sheet date.

24.3 As explained in 24.2, Capital Development Company PLC has been valued at the market price as at the Balance Sheet date. The Company's
shares are traded and the market price is driven by the minority shareholders of only 0.4%.

--------

The above note has not been applied by NDB's accountants because the notes declare that the market value is 13 Billion but the balance sheet only shows the cost value.

Now since the following subsidiary has been affected negatively by disposing its core cash-flow + giving a costly buy back, this subsidiary's value has to be impaired.

If NDB is consistent, it will right off 2.33 Billion. This is the cost value before NDB IB and NDB Stock Brokers. Therefore 2.33 Billion will be written off the balance sheet and this will be passed on in the P&L as a "loss" to the company.

The loss will be offset against the "gain" from equity income from the investment subsidiary. Without this gain, the loss from the above would be taken into the "Statements for Changes in Equity".

So that's the picture that NDB has to disclose to the market (if it decides to be honest and impair the asset).

rainmaker wrote:

If NDB is consistent, it will right off 2.33 Billion. This is the cost value before NDB IB and NDB Stock Brokers. Therefore 2.33 Billion will be written off the balance sheet and this will be passed on in the P&L as a "loss" to the company.

The only reason to write off the 2.33 billion is if CDIC trades at 0. As long as a few trades takes place at 500 there is no accounting need to fully write off.

I am no accountant but is the declared gain pure capital gain ( which takes into account cost of purchase) or is it just the amount received by selling?

rainmaker wrote:Why confused? Look at the latest statements. Under assets you will see:

Investments in Associates & Subsidiaries 2,659,704 (in '000s)

Most of that relates to the following:
Capital Development and Investment Company PLC 2,330,855 (in '000s) - cost value as per the 2011 Annual Report

In the same annual report you will find two notes that are not correct.

24.2 The Directors' valuation of Investments in Subsidiary companies has been done on net assets basis except for investments in quoted
companies, which is at the market value as at the Balance Sheet date.

24.3 As explained in 24.2, Capital Development Company PLC has been valued at the market price as at the Balance Sheet date. The Company's
shares are traded and the market price is driven by the minority shareholders of only 0.4%.

--------

The above note has not been applied by NDB's accountants because the notes declare that the market value is 13 Billion but the balance sheet only shows the cost value.

Now since the following subsidiary has been affected negatively by disposing its core cash-flow + giving a costly buy back, this subsidiary's value has to be impaired.

If NDB is consistent, it will right off 2.33 Billion. This is the cost value before NDB IB and NDB Stock Brokers. Therefore 2.33 Billion will be written off the balance sheet and this will be passed on in the P&L as a "loss" to the company.

The loss will be offset against the "gain" from equity income from the investment subsidiary. Without this gain, the loss from the above would be taken into the "Statements for Changes in Equity".

So that's the picture that NDB has to disclose to the market (if it decides to be honest and impair the asset).

Jiggysaurus wrote:

rainmaker wrote:

If NDB is consistent, it will right off 2.33 Billion. This is the cost value before NDB IB and NDB Stock Brokers. Therefore 2.33 Billion will be written off the balance sheet and this will be passed on in the P&L as a "loss" to the company.

The only reason to write off the 2.33 billion is if CDIC trades at 0. As long as a few trades takes place at 500 there is no accounting need to fully write off.

That's not correct. Every quarter the value of that subsdiary is assessed for consolidation. If the directors/auditors believe that the subsidiary is impaired, then they have to impair it. If they don't they are personally liable for submitting misrepresenting accounts. The auditors have to also endorse the accounts ---- Hence this will change.

The only reason why NDB has not taken market value is because the "bank" will have fluctuating Tier I and Tier II ratios.

As per Basel II, "the bank must deduct in full any capital investments that exceed the materiality threshold" - hence the ratios get altered.

If NDB Group owned an investment company below the materiality threshold then that investment carries a risk weight of 100% in full. <---- Hence the need for a separate incorporation. This is why banks don't like to invest in the sharemarket. If you do, the risk capital is quite high.

rainmaker wrote:See the latest submission, CDIC should come down significantly after the buyback. The sub will now lose its core cash-flow and source of profitability - it will be an overvalued 18B/= subsidary (worth 21B/= right now).

NDB has itself to blame, and I hope they bite the bullet and write off most of its value instead of taking "fair value of investments" as per IFRS. In the 2011 annual report NDB has used 2.7B as cost value and Market value 13.9B ---- Fortunately they have used cost value or otherwise NDB shareholders would have seen a massive impairment.

Anyway I would like to see NDB write off some. If it doesn't the Auditors should be held up for their accountability.

@ Rainmaker,
Good Observation. Pardon me, but I am trying to figure out the actual point in this rather lengthy discussion. So it seems that NDB has overvalued its investment in CDIC by taking the market price of its holding which is higher than the cost /asset value by Rs 2.3 Billion, despite only 0.4 % of CDIC traded in the market. This is your assertion right ? Correct me if i'm wrong. Is'nt this the Mark to Market Principle ? Is'nt this what the new SLFRS requires us to do ? Is'nt it true that most companies trade above their cost / asset values ? If NDB accounted for its investment in CDIC at cost and the repurchase happened at a higher price, the opposite of what your saying would have to happen. I did not follow this entire NDB / CDIC / Eagle Insurance sale and repurchase transaction ( and i am too lazy to revisit and research this !). All i know is that NDB is sitting on a pile of cash as a result of this. So even though they may have to (according to you) write off approx approx Rs 15/- per share and this a non cash item (and will not effect their Cash Flow in any way), would'nt the net benefit it receives overall due to this transaction, offset this ? In the final analysis, Is NDB (Rs 150) a Buy, Sell or Hold in your opinion ?

Rain, Pls clarify how can we as an investor hold auditors responsible ?Pls see below from any anual report.

Management’s responsibility
Management is responsible for the preparation and presentation of the Statement in accordance with the “Guidance for Directors of
Banks on the Directors’ Statement on Internal Control” issued in compliance with section 3((ii)(b) of the Banking Act Direction No. 11 of
2007, by the Institute of Chartered Accountants of Sri Lanka.
Our responsibilities and compliance with SLSAE 3050
Our responsibility is to issue a report to the board on the Statement based on the work performed. We conducted our engagement in
accordance with Sri Lanka Standard on Assurance Engagements SLSAE 3050 - Assurance Report for Banks on Directors’ Statement on
Internal Control issued by the Institute of Chartered Accountants of Sri Lanka.

The Alchemist wrote:

rainmaker wrote:See the latest submission, CDIC should come down significantly after the buyback. The sub will now lose its core cash-flow and source of profitability - it will be an overvalued 18B/= subsidary (worth 21B/= right now).

NDB has itself to blame, and I hope they bite the bullet and write off most of its value instead of taking "fair value of investments" as per IFRS. In the 2011 annual report NDB has used 2.7B as cost value and Market value 13.9B ---- Fortunately they have used cost value or otherwise NDB shareholders would have seen a massive impairment.

Anyway I would like to see NDB write off some. If it doesn't the Auditors should be held up for their accountability.

@ Rainmaker,
So it seems that NDB has overvalued its investment in CDIC by taking the market price of its holding which is higher than the cost /asset value by Rs 2.3 Billion, despite only 0.4 % of CDIC traded in the market. This is your assertion right ? Correct me if i'm wrong. Is'nt this the Mark to Market Principle ? Is'nt this what the new SLFRS requires us to do ? Is'nt it true that most companies trade above their cost / asset values ? If NDB accounted for its investment in CDIC at cost and the repurchase happened at a higher price, the opposite of what your saying would have to happen.

That's the confusion, rainman is saying that they have valued at 2.3 billion (which is cost) and he wants a further impairment at the company and group levels.
If the share is trading at 550 the directors can easily say that there is no need for impairment, since the market cap is 21 billion and they are carrying on the books for 2.3 billion.

I have forgoten my accounting so someone please explain .

Say I have in my account shares purchased at a cost of Rs 100 .

Then I sell them for Rs 300.

So I include my capital gain of Rs 200 a share in my Income statement.

Where would the other Rs100 which I have received ( which will offset my cost) go in my account?



[quote="slstock"]I am no accountant but is the declared gain pure capital gain ( which takes into account cost of purchase) or is it just the amount received by selling?

Yes @Jiggysaurus is correct. Actually the impairment should occur because I believe they will not take market value for Basel II reasons.

This is not a Buy/Sell/Hold discussion but more of a discussion of the sort of mess that NDB is now entangled in. After the buyback, I don't believe CDIC's shares will be worth much. Hence current shareholders have to decide whether to hold and take the buy back or sell now.

On the other hand I think NDB has not handled this correctly. They should have changed the articles of association to ensure the major shareholder can force a takeover if the major shareholder holds more than 90%.

If NDB buys out the other shareholders, the cost will not be expensive. CDIC has 43,855,007 in issue of which 150,245 is not theirs. If NDB buys them out at 560/= the cost will be only 84 million.

Even at 1000/= each, it would have cost them only 150 million.


-------------------------
@slstock, This is not about a capital gain but about impairing an asset. Say if a bank writes off a billlion rupees of loans (ie bank assets), how would it get processed. For example when you look at banking and finance stocks, you should look at the NPL ratio. You may say you have an asset, but is it really an asset?

rainmaker wrote:

This is not a Buy/Sell/Hold discussion but more of a discussion of the sort of mess that NDB is now entangled in. After the buyback, I don't believe CDIC's shares will be worth much. Hence current shareholders have to decide whether to hold and take the buy back or sell now.

Hang on, i just looked at CDIC's Dec statements and they have NAV/book value of 11 billion (mainly made up of cash). so assume they have to pay out 5 billion for the buyback (not bothered to check the exact details) that still leaves NAV/book value of around 5 billion. NDB is carrying this at 2.3 billion. So you really can't say that CDIC's is not work much ( it's definitely not worth 500 but it's worth more than NDB's carrying value)

[quote="slstock"]I have forgoten my accounting so someone please explain .

Say I have in my account shares purchased at a cost of Rs 100 .

Then I sell them for Rs 300.

So I include my capital gain of Rs 200 a share in my Income statement.

Where would the other Rs100 which I have received ( which will offset my cost) go in my account?

slstock wrote:I am no accountant but is the declared gain pure capital gain ( which takes into account cost of purchase) or is it just the amount received by selling?

@slstock - not an accountant either but here goes -

Revenue - Rs 300
Carrying amount of Investment disposed - Rs 100
Profit - Rs 200

The Rs 200 Profit which is shown in the Income Statement then goes to Retained Earnings (Revenue Reserve) in the Equity Account on Balance Sheet.

It gets more complicated if you account with many other shares you may have in your portfolio as you have to nett unrealized gains / losses, before arriving at a profit number. also under the new accounting standard, it depends on how you classify your initial investment i.e. long term investment or available for sale. If it is under available for sale, then you are required to impair cost (mark to market) in period where it went below Rs 100 cost.
For eg - before you sold your Rs 100 Share at Rs 300, say in a period the market price was Rs 80, then you would account for it in your personal income statement as
Revenue - Rs 0
Impairment of available for sale financial assets - Rs 20
Loss - Rs 20

Then subsequently when you sell it for Rs 300 and have to account for it, you would also have to reverse the initial impairment of Rs 20.

Not 100 % sure about all this ! Hope others will clarrify.

Your book keeper simply helps you to maintain the above sale transaction.

Your investment account Rs.100/= becomes zero since you sold the shares.
Your bank balance is increased by the amount less any sale commission charged. (i.e. 300 less sale commission charged-let us assume Rs.295/
Sales commission of Rs.5/= is charged as an expense against the income.
Profit of Rs.200/- shows in your income statement.

worthiness wrote:Your book keeper simply helps you to maintain the above sale transaction.

Your investment account Rs.100/= becomes zero since you sold the shares.
Your bank balance is increased by the amount less any sale commission charged. (i.e. 300 less sale commission charged-let us assume Rs.295/
Sales commission of Rs.5/= is charged as an expense against the income.
Profit of Rs.200/- shows in your income statement.

I am no accountant but think the book-keeping entries will be:
Dr- Bank/cash -------295.00- to record the cash/chq in bank
Cr- Investment-------100.00 - to wipe out the investment that is sold
cr- Profit/loss a/c-----195.00-to record the profit


But it is not so simple as rainmaker explains in the case of NDB Capital Hldgs

Thanks for all the responses. We are learning from each other.

CDIC... Rare stamp