Thursday, December 1, 2016

GFH –A “Bold” and “Considered” New Strategy


Out With the Old

In With the Powerful New

As outlined in my previous post, GFH’s performance has been disappointing since 2008.
In 2014 GFH announced what they touted as a “bold” and “considered” strategy. They also changed the “brand” name from Gulf Finance House to GFH.  No longer a mere Shari’ah compliant investment bank, GFH became a self-described Shari’ah compliant financial group.  
Let’s let GFH speak for itself to set the stage.

GFH’s Chairman’s Report page 29 FYE 2014 AR.
It is the beginning of a new era where GFH adopts a new strategy and transforms from an investment bank into a financial group.  This transformation began during the year when we announced a new structure, which has seen us embark upon a path to further diversify our activities to include the full spectrum of Asset Management, Wealth Management, Commercial Banking and Real Estate Development.

2014 AR -- Page 23. 
A strategic shift.   Historically GFH has been a real estate-centric investment bank, whereby a large proportion of its holdings was centred on landbased investment dealings. With its strategic shift towards finance, the bank is looking to reduce its holdings in this class from its current position of 50%, to a more even distribution of under 40%, in the mid term, and closer to 30% in the long term.
Sometimes though you have to reclaim the own land!

2014 AR – Page 19
GFH’s interest in its key commercial banking asset Khaleeji Commercial Bank is part of it’s (sic) strategy to ensure greater stability from global financial issues. The group will undertake to grow this asset through operational and brand developments.

2014 AR – Page 37
GFH launched a revised business strategy during the year, targeting various operating parameters; prime amongst them is to evolve as a ‘Financial Group’ having operations across a range of financial service businesses, thereby having a stable and recurring income, profitability and cash flows.

To summarize diversification away from over dependence on real estate, more stable income and cash flows with a key focus on Khaleeji Commercial Bank (KHCB) and commercial banking.
AA has prepared three charts using info from KHCB’s and GFH’s annual report to analyze the impact of KHCB on GFH over the past five years.
Impact on Net Income
GFH Net Income Shareholders Only 2011-2015  USD Millions

2011
2012
2013
2014
2015
Total
GFH
$0.38
$10.03
-$17.66
$14.98
-$5.52
$2.21
 w/o KHCB
-$0.27
$9.09
$6.35
$11.23
-$14.29
$12.11

Over the past five years, if KHCB had not been part of GFH, net income would have been roughly US$10 million higher. 
Impact on Volatility of Net Income 
GFH Net Income Statistical Analysis 2011-2015


Mean
STDV Pop
STDV Sample
GFH

$0.44
11.55
12.91
AA w/o KHCB

$2.42
9.21
10.29

Technical notes:  STDV=Standard Deviation.  STDV Pop=Standard Deviation of the Population.  Amounts in millions of US$s.
Without KHCB the distribution of net income would have been tighter (smaller but still large STDV relative to the mean) and around a relatively higher—but by no means (pun intended) adequate—mean.  Volatility would have been somewhat less.
 Impact on ROE
GFH ROE 2011-2015

2011
2012
2013
2014
2015
GFH
0.22%
3.26%
-4.00%
4.79%
1.80%
AA
0.22%
3.26%
-4.01%
2.62%
-0.83%
AA w/o KHCB
-0.15%
2.96%
1.44%
2.59%
-3.68%

Technical note:  “AA w/o KHCB” GFH's share of KHCB's net income has been eliminated for the entire period.  Since consolidation of KHCB only took place in 2015 with an accompanying restatement of 2014, KHCB equity only needed to be removed for those two years. 
Here the picture is more mixed.   In 2013, ROE would have been higher.  In 2015 lower. 
Recent legal victories promise to provide GFH additional “dry powder” to fund diversification efforts, particularly those involving the UAE defendant.  It’s really too early to pronounce on the overall strategy.  Time will tell. 
But, a key element of that strategy—commercial banking—depends on KHCB. 
As indicated above, there is a credible case that GFH might be better off without KHCB. 
Past performance is no guarantee of future performance.  Thus, GFH’s strategy depends on KHCB’s future prospects and performance. 
A separate post on that topic will follow.

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