Tuesday 26, September 2017 by Georgina Enzer

GFH Financial Group’s ratings affirmed with a ‘Stable’ Outlook

Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, today announced that it has affirmed GFH Financial Group’s (GFH or the Bank) Long-Term Rating at ‘BB’ and the Short-Term Rating at ‘B’.

The Outlook for GFH’s ratings remains ‘Stable’. The ratings are supported by the Bank’s successful implementation of its recent strategy to convert to a financial group, improved and satisfactory liquidity, low debt and leverage, and increased profitability at both the operating and net levels in H1 2017. The Bank’s focus on income-generating investments, planned acquisition of financial services assets and value-accretive exits are expected to reduce earnings volatility in the future. The major constraining factors are Bahrain sovereign risk (Bahrain ratings ‘BB+’/’B’/’Stable’), and the increased and high concentration particularly in the real estate sector. The other constraining factor is the drop in capital adequacy in H1 2017 due to considerable growth in total risk weighted assets (RWAs). However, the capital adequacy ratio (CAR) remains satisfactory and management is expecting to monetise a part of its education portfolio investments during the second half of 2017, which will lift CAR. The challenging regional economic environment and increased credit risk driven by the fall in oil prices remains another constraining factor.

GFH has made considerable progress on its communicated strategy of 2014-2017, which involved transforming from a pure investment bank to a fully integrated financial group. The Bank has increased its stake in its commercial banking subsidiary, Khaleeji Commercial Bank, as well as modified its strategy within investment banking to focus on cash-yielding private equity businesses within stable sectors such as healthcare, education and consumer retail, as well as income-producing real estate assets across the US & Europe. GFH also owns a significant land bank, comprising prime properties across the GCC, Africa and India and is aiming to monetise values by employing a capital-light model alongside key JV partners and contractors.

GFH’s balance sheet liquidity has increased to a satisfactory level in recent periods, notwithstanding a marginal decline in the net liquid asset ratio in H1 2017. More positively, GFH’s debt service capacity has improved as borrowings are paid down and/or refinanced. As a matter of internal policy, GFH has curtailed new borrowings as clearly evidenced by the low levels of debt. Leverage also continued to be maintained at a rather conservative level as indicated by the ratio of total debt to total capital.

In March 2017 the board of directors approved the increase in GFH’s authorised share capital to $2.5 billion from $1.5 billion. In turn, GFH launched a strategic initiative to issue new shares for the acquisition of a number of infrastructure projects. The infrastructure shareholders’ holdings were acquired in return for a pre-determined number of GFH shares. As a result of these acquisitions in H1 2017, concentration in development properties (real estate) – mostly in India, Africa and the GCC − increased significantly due to the consolidation of these entities. In turn, the already high sector concentration risk particularly to the real estate sector rose further. With GFH now firmly in control of these projects, the Bank does not rule out an opportunistic sale of these assets over the medium term. The current strategy is to proceed with the development of the projects but with minimum injections of cash by partnering with reputable contractors to develop the land bank in exchange for a revenue share.

Following the aforementioned assimilation of the newly acquired non-bank entities – and the subsequent marked increase in total RWAs − the Bank’s capital adequacy declined in H1 2017 from the strong level seen in the prior year. However, the CAR remained satisfactory and above the 14-15 per cent floor (minimum) established by management and moderately higher than the regulatory minimum requirement. Importantly, the capital base continued to have a high Tier 1 component. Notwithstanding the fall in capital adequacy, CI considers GFH’s risk buffer as being adequate, especially in view of the large investment write-downs (through P&L) in recent periods. Furthermore, management is expecting to monetise a part of its education portfolio investments during the second half of 2017, which will lift CAR to about 17 per cent.

Looking ahead, management seeks to reduce earnings volatility by establishing a robust 3-year strategy (2017-2020) geared towards: (1) increased focus on higher-yielding investments to provide a steady source of income; (2) unlocking value from the real estate portfolio; (3) achieving value-accretive exits from its other direct investment portfolio of assets; and (4) growing organically through acquisitions targeting stable earnings-generating financial businesses. As regards the latter, the Bank is in advanced negotiations with several entities.

GFH commenced operations in Bahrain in October 1999 as an Islamic investment bank operating under a wholesale banking licence granted by the Central Bank of Bahrain (CBB). The Bank is regulated and supervised by the CBB. Being a wholesale entity, GFH has no official lender of last resort. The principal activities of GFH Financial Group include commercial banking, investment banking, real estate and direct investments.

GFH’s largest shareholder remained Integrated Capital P.J.S.C, which owns nine per cent of outstanding shares. Integrated Capital is an entity that is ultimately controlled by Abu Dhabi Financial Group (ADFG) in UAE. ADFG is an alternative investment company with USD5 billion in total assets under management. The Bank’s other major shareholders include the Abu Dhabi Royal Family, which owns another four per cent of outstanding shares, financial / investment institutions (16.3 per cent), and ultra high net worth individuals (15.7 per cent). The Bank’s shares are listed on both the Bahrain and Kuwait Stock Exchanges and on the Dubai Financial Market. As at end June 2017, GFH reported total assets of $3.93 billion and total capital of $1.52 billion.

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