Sunday, 30 June 2019

Translation of GFH 2019 Annual General Meeting Minutes - Part 2 of 2

AA Takes a Moment to Reflect on the Nuances of Translation
Arabic is  a Language of Subtle "Taste" Like a Glass of Cold Vimto
And Both are to be Savoured and Enjoyed

Here’s the continuation from Part 1.

As before, if any reader of Arabic sees an error or shortcoming in my translation, please post a comment.  AA would welcome the tuition.
Discussion of Fiscal Year 2018 Financial Statements (Agenda Item #5)  
During the discussion Mr. Ahmad Abdullah asked for clarification on the settlement of the (Villamar) Sukuk.  Mr. Jaliil Aali of KPMG explained that GFH had settled a sukuk issued by a related company at a discount that resulted in a USD 77.8 million profit. 

This would appear to be precisely what was said in the FYE 2018 annual report with no further details provided.  But we don’t know if there were more points that were edited away. 
Mr. Abdullah continued by asking about the increase in personnel expenses and whether it was going to continue.  GFH’s Chairman noted that it included the expenses of KHCB and other companies in the Group.   And that it would continue or not in line with the growth of the Group.  
Responding to a follow up question on this topic by Fadi Majaaly, GFH’s Chairman noted that according to accounting principles, GFH included 100% of KHCB’s personnel expenses in GFH's personnel expenses not just GFH’s ownership share in KHCB (55.54% but not mentioned) and that these and other similar expenses are deducted from profit at the end (presumably a reference to the one line attribution of the share in net income due to “Non-Controlling Interests”.  This one line figure is a net of revenues and expenses as its name indicates). And note well GFH also recognizes 100% of the revenue of consolidated firms which is similarly adjusted via the NCI allocation of net income.
Fadi noted that the y-o-y growth in expense was 18% much above other banks and that these other banks were working to reduce expenses.  That was important because 95% of profit was from debt settlement.  
GFH’s Chairman noted that the profit was not generated by debt settlement but by contracts to acquire companies (capital reorganizations) and the sale of assets to “the company” (unclear what this reference is, but it seems it may be GFH) and the profit was real and that the auditors had agreed to the amounts shown.  
Whatever the case AA doesn’t understand the Chairman’s reply.
First, it is a fact that GFH recorded USD 77.8 million for debt settlement from GH and another USD 35.3 million from AHC. In the first case the amount arises from the difference between the face amount of the Villamar Sukuk and the price at which it was purchased.  The second from a reversal of a  prior year non-cash provision for settlement costs.
As far as other profit associated with the acquisition of GH, GFH had not recognized any change in asset values or good or bad will in connection with that transaction.  Perhaps, it’s a reference to the acquisition of AHC – the other component of the debt settlement income for the year.  If so, the amount doesn’t appear to be material.

In any case if GFH acquired GH, but Al Rajhi did not sell the Villamar Sukuk at a discount.  GFH's FY 2018 net profit would USD 77.8 million lower. 
Mr. Ziyaad alBanaa spoke up to say that there were individuals (presumably shareholders) who had no idea about the matters appearing in the annual report.  GFH’s Chairman noted that some shareholders (AA wants to emphasize these words) were deficient in following and reading the official announcements made by GFH as well as the articles written by GFH’s CEO Mr. AlRayes.  
The CEO then emphasized the need for shareholders to pay attention to official press releases by the Group.
Ziyaad continued that performance  (إنجازاتshould be added at the beginning of the report. (I believe that is a reference to metrics on performance rather than a recitation of other "accomplishments")  Mr. AlRayes referred to a press release the Group published at the Bahrain Bourse with detailed comparisons year by year, quarter by quarter, semi-annually of GFH’s performance, viz. profit, expenses according to the principles set down by the Central Bank of Bahrain.
Next up was Mr. Abdul Muhsin Ad-Darwiish, the representative of Al Rajhi who objected to the Chairman’s comments about shareholders being deficient in reading announcements. His complimented the efforts of GFH and paid tribute to its work, and then continued by complaining that the book value (per share) in 2018 was lower than 2016 and about the purchase of real estate portfolio in 2018
AA believes this is a typo.  In 2017 GFH increased its equity by persuading certain holders of infrastructure investments and GFH funds to swap those fine investments for even finer GFH shares thus increasing the number of shares roughly 63%.  That is dilution with not only a capital “D” but the entire word in capitals.  According to AA's calculations, these shares were issued at an approximate 5%  discount from the value of the assets received (USD 297.502 million) and 7.8% from net proceeds to GFH USD 293.106 million).  AA assumes the USD 4.396 million between the two are expenses associated with the issuance of the new shares. Thus, the 5% discount from par is the better measure of the discount.  Expect to see more on this topic in another post.
Mr. AdDarwiish asserted that there was no clarification of the profit to be obtained on exit (from the real estate purchased) and the transaction harmed “old” shareholders. And that the new shareholders had benefited at the expense of the old for the 2016 recovery of money.
A reference to the 2016 settlement of litigation that added USD 465 million to GFH’s income.  Presumably a reference to the new shareholders having the ongoing benefit as these assets were realized in the future.
And he continued that over 5 years the new shareholders had benefited at the expense of the old shareholders as shown by the decline in book value per share from 0.366 to 0.299 (USD). AA doesn't understand the "5 years" reference.  New shareholders entered in 2017.
Below is a chart that shows GFH’s book value per share, price to book ratio and market price over the period 2014 through 2018. Information from GFH’s website.
It’s not clear to me why Mr. AdDarwiish is focused on book value.  Perhaps he has some doubts—which AA shares-- about the efficiency of local markets and resulting “market” prices.  Or that GFH’s price support activities might distort its share price away from “fair” value.

Yet, when it comes time to sell one’s shares or pledge them to a lender for a loan, market value not the book value is going to be the determinant of value ascribed.

GFH Share Performance


Rather dismal performance across the board (read that as a pun if you’d like to).
Turning to Mr. AdDarwiish's first point, GFH's Chairman apologized for the misunderstanding noting that he had not meant that all shareholders weren’t reading (the press releases and other documents issued by GFH) but only some. (As outlined above, the minutes state that Mr. al Seddiqi did say "some shareholders" earlier).
He then continued noting the share repurchases and cash distributions were responsible for reducing the book value. And that if we wanted to grow and expand we would need to increase cash distributions and thus the book value per share will go down.  He also commented that there were profits in 2016, 2017, and 2018 which increased book value per share (BVPS).
This is patently absurd if we look at the change from 2016 to 2018. BVPS has clearly decreased. 

One can compare the relative impacts by looking at the change from 2016 to 2017 (dilution) and 2017 to 2018 (treasury shares). The impact of each is clear. 

As to distributions, if the number of GFH’s shares does not increase, then unless GFH pays out more in dividends than that year's net income, dividends will not cause book value per share to decrease. BVPS may not increase as fast it would if less dividends were paid out but it won't decrease. A key point here is that the dates used for comparison must be equivalent.  One cannot compare BVPS at FYE BV to BVPS on the ex-dividend date. 

That is less an issue with GFH.  With over 3.6 billion in shares and dividends per share at say 10% of par or USD 0.0265 per share dividends are unlikely to have an effect that most shareholders are going to notice.
As to Treasury Shares, while GFH did waste (sorry "invest") a lot of shareholder money with its excellent misadventure in Treasury Shares, the effect of the purchase on share book value was minuscule compared to the impact of increasing the number of shares 63% in 2017.  

Clearly, the trading in Treasury Shares caused real harm to shareholders.  By selling Treasury Shares below their purchase price as discussed here and then cancelling them as discussed here.  
It is unclear to me what he means by increasing cash distributions.  Is he referring to the fact that GFH needs to pay out more dividends and thus book value will not grow as much?  This is an answer to a different lament than book value going down.
One might ask if GFH wishes to grow and expand, should it therefore limit dividends and treasury share purchases to husband cash for investments?
On the other hand, if GFH makes (buys) new investments, there should be no impact on equity if it funds the purchase by using its cash.  The new investment on the books is offset by a decrease in cash. 
If GFH funds the investment with a loan, then loans will increase.
In neither case is there a change in equity. Equity will change when profit or loss is recorded on the new investments.
If GFH issues new shares for the new investment as it did in 2017, then yes book value per share will go down unless the seller agrees to pay more than book value per share for the new shares.
Or in the case where Treasury Shares are used as compensation, book value will not go down, if value of a Treasury Share is considered to be  more than the greater of (a) BVPS and (b) cost of acquisition of the Treasury Share.
If on the other hand, Mr. al Seddiqi is referring to the need to hire additional staff and incur other additional expenses, this should result in a reduction of net income which wouldn’t reduce book value per share but just moderate its growth unless of course such additional expenditures resulted in a net loss, i.e.  expenses exceed revenues.
Mr. AdDarwish interrupted him disagreeing with his view stating that an increase in book value was a profit for him.
Mr. al Seddiqi commented that if he followed the financial statements from 2016 to 2018 he would see there was profit that went to share book value, but then there were cash distributions and treasury share transactions that reduced it (again the argument from above which ignores the massive dilution in 2017) and that there was a profit in 2016, 2017, and 2018 and that value went to the shareholder.
Mr. AdDarwish expressed his opposition to the Chairman’s view saying that the real estate portfolio (AA believes this is a reference to the real estate obtained for the share conversion) was a harm to the old shareholders and that he believed the profit announced in February contained exaggerations and wasn’t real and that the old shareholders were entitled to the benefits from amounts (settlement) received in 2016..
Mr. al Seddiqi pointed out that GFH’s operation and financial statements were subject to supervision by the CBB and the Bahrain, Kuwait, and Dubai stock markets.  If there was anything confusing or erroneous in what GFH published, it would correct it immediately. (An answer to the doubt raised on the accuracy and "realness" of GFH's reported income).
He also commented that GFH was bound by law to allocate the 2016 settlement to shareholders at that time (presumably when settlement was received).  He noted that the board had a duty to recompense shareholders but because it is a bank is subject to financial solvency (ratios) that it must keep.

This appears to be a reference to GFH’s inability to dividend out the full amount of the  settlement because if it did, it would breach these limits. Most likely capital adequacy ratios. There is also the issue of when the settlement assets actually turned into cash. That did not happen immediately on receipt.  Once one becomes a shareholder, one is entitled to profit on assets the company held before one owned shares.  The theory being that current shareholders will factor that into the price of the shares that they sell.  Here the shares were issued by the firm after receiving shareholder approval at the EGM in 2017.

One very important thing to note is that at the 2017 AGM for FY 2016, GFH's shareholders voted to increase the proposed cash dividend from 10% to 12% of par.   The Central Bank of Bahrain did not approve the increase.  Readers may draw their own conclusions why the CBB refused.
He then asked Mr. AdDarwiish that if he had any proposals to make regarding the old shareholders, he should write to the supervisory organizations with a copy to the Board.
After this topic was finished, Mr. Fadi AlMajaaly asked about the USD 150 million acquisition of The Entertainer.  Mr. al Seddiqi replied that GFH was selling shares to other shareholders and had earned some USD 15 million in profit on these sales with another USD 10 million to come in FY 2019.  At present GFH owns 10% of The Entertainer.
Next came the “adding or submission of notices” ( أضاف ملاحظة  )  by shareholders.

AA believes but doesn’t know that this is the presentation of written statements by shareholders recommending actions or registering objections so that these become an official part of the record.  Such written documents have more legal force than verbal statements which may be construed as questions or expression of feelings rather than formal requests for action or formal objections.
Mr. Ahmad Abdullah noted the lack of precision and detail in news published by GFH.  The Chairman agreed and ordered the management to produce more transparent and detailed reports in the future.
Mr. Ziyaad AlBanaa asked about the Tunis Project.  Mr. AlRayes noted that this was GFH’s AGM to discuss GFH’s shares.  Discussions on the Tunis Project would take place with individuals later.  (This seems a strange comment.  GFH is majority owner of Tunis Bay. It would seem GFH shareholders would have the right to ask about major shareholdings.)
(اخيرا وليس آخرا ) tip of AA’s tarbush to whoever prepared the minutes for adding this phase (last but not least), Mr. Ali Tariif gave his “notice” which stressed the necessity of lowering liabilities and increasing shareholders’ equity from the decline the previous year.  He also recommended an increase in focus and concern on expenses and on return on shares.  And finally stressed the importance of controlling provisions that lower the value of assets and operating sectors.
The minutes record that the Board took all these comments and notices under advisement/into consideration.
Discussion of 2018 Board Compensation (Agenda Item # 7) 
Mr. Fadi AlMajaaly commented that the proposed USD 3. 5 million was extremely high when compared to the compensation and profits of other firms in Bahrain.  And he pointed out the importance of consideration for the interest of the shareholders as a priority
The Chairman noted that this proposal was subject to shareholder vote. (Presumably to retort that the shareholders' vote would express if the shareholders felt that this compensation was putting shareholders' interests first.)
Mr. Ziyaad AlBanaa proposed that in future years the Board’s compensation be lowered and distributions to shareholders increased.
The AGM approved the Directors’ 2018 compensation.
With some 3.6 billion shares, if board compensation were reduced to zero and the amount "saved" devoted to increasing dividends, USD 3.5 million when rounded up would equal USD 0.001 per share. 
That being said, for what GFH shareholders are getting this compensation seems high.  See my earlier post on comparative board costs.
That was the end of shareholder discussion in the AGM.
Shortly I’ll post on the EGM but that will be more an accounting lesson for shareholders than an extensive translation.
There wasn’t much discussion and what there was seems to AA to be off point. Some very crucial issues were missed.
The EGM illustrates that GFH's shareholders need more understanding of sources of information on company performance if they are to protect their interests and discharge their responsibilities for corporate governance. AA suspects they are not the only ones.

Saturday, 29 June 2019

Translation of GFH 2019 Annual General Meeting Minutes - Part 1 of 2

One of Bashmutargim AA's Finest Bur Least Known  Successes
I Helped a Relative Unknown Become President of Egypt and Keep the Job

Part 2 is here.

In my post “What’s a Board Worth?” I recommended reading the minutes of GFH’s FY 2018 AGM and EGM held 28 March this year.  
At that time I noted that the complete minutes were available only in Arabic and only on the Bahrain Bourse website. Links here:  AGM and EGM.  But the Arabic versions there  are PDFs of an image so those who can’t read Arabic can’t cut and paste into translation software. Not that that technique will be greatly helpful.  
These same minutes are not on GFH’s website.  Nor at the DFM.  On both you will find summaries that just tell you what was approved and omit any details of the accompanying discussion. 
As usual AA has your back, if you can’t read Arabic. Below is a translation/paraphrase. 
Now AA is not James T. Monroe so the translation is a paraphrase and certainly short of his work. That being said, there is little that could be described as maqaamaat (مقامات) in GFH’s financials.

Some preliminary caveats.  AA doesn’t know if GFH voice records its AGM and EGM.  A lot of companies do. That practice makes the later compilation of minutes easier than working from handwritten notes.  
But whether voice recording or hand written notes are used, the minute taker/preparer then goes on to summarize key points. The minutes are not a verbatim transcript of the words actually spoken by participants.  
Bear these two points in mind as they may explain some things that appear to be incomplete or puzzling.  
As well, sometimes detail can be lost or deliberately omitted if the transcriber doesn’t know the topic well. Why raise what you can't explain or express? "Lost in Transcription" as they say.  Once shareholders depart it is not convenient to check with them as to what they meant to say.  That’s an exercise, at least theoretically, for the 2020 AGM for FY 2019.  
As well, while it pains me to say this, you may not want to rely 100% on AA’s translation. If any readers of Arabic out there have a different translation, please leave a comment with your correction.
What follows are excerpts from the complete minutes with a focus on shareholder questions and GFH’s responses delivered by its Chairman Mr. Jassim al Seddiqi.  AA’s comments are in italics to try and make it clearer what’s in the minutes and what’s not.  

Also note if the minutes or AA's translation are incorrect or incomplete, then the comments may be as well.
This was GFH’s second “go” for its AGM and EGM as the first failed to have a quorum.  Second time lucky a quorum of 48.96% of shareholders was obtained.  
Discussion of Board of Directors Report to Shareholders (Agenda Item #2)  
Mr. Ali Tariif started off shareholder comments by lamenting the continuing decline of Khaleeji Commercial Bank.  He encouraged the Board to pay more attention to KHCB. GFH”s Chairman reportedly took his proposal under consideration.  
Auditors’ Report to Shareholders (Agenda Item #4) 
After listening to KPMG’s report as GFH’s external auditors, Mr. Ahmad Abdullah expressed the view that the income from settlement of debts was exceptional income.  (Reading between the lines “RBTL”—a favorite pastime of AA--this would appear to be reference to the fact that it was not normal income nor likely to be recurring.)  
And if it were excluded, then the Group (GFH) didn’t achieve anything (a reference to profit) and there would be expenses only (that is, GFH would have a loss).  
In addressing this point, Mr. al Seddiqi, laid the blame (al-atab) on the auditors (فاجاب بأن العتب على المدققين ) who he said had used “specific principles”  (probably a reference to accounting principles) that didn’t sufficiently explain the income.  
He noted that in 1Q19 the firm would should additional income of this sort in a clearer fashion.  (Note 16 1Q2019 another debt settlement).  (Presumably to point out that for GFH this sort of income is normal, recurring, and real.)
He commented that GFH was an Islamic investment bank and not a conventional one and thus engaged in contracts like this with income that was “certain/firm”.  
He further noted the settlement of debts referred to by the auditors involved acquiring a real estate firm (unnamed but clearly GH) and debt at a discount.  
Now  if you read auditors’ reports to the shareholders, you will see the statement that management is "responsible for preparing the financial statements" .  That’s everything from the balance sheet through all the notes.  Auditors then audit and comment on those statements. 
Here’s a close-to-home example right here on page 6 from KPMG’s report in GFH’s FY 2018 financials.  
At first blush, it would seem GFH is dodging its responsibility for what it claims is unclear wording.   Trying to shift the blame onto the auditors.  Instead of Brother Jassim squaring his shoulders for a “buck stops here” moment (appropriate because GFH keeps its books in US dollars), we got Trump.  Blame someone else.
To be very clear on this unless there is something very unusual going on GFH would be the original author of the note with the auditors making revisions if they felt those were appropriate.  If GFH’s auditors suggested a change GFH felt was unclear, GFH certainly could raise the point and seek to find wording that the auditors could “live” with.
Additionally GFH has a free hand in the Chairman’s Report to Shareholders and the Management Discussion and Analysis to emphasize its points.  You can look over those for clarification.  AA found none.
Those looking for a silver lining—as AA always does—could read this an indicating that GFH never ever tries to influence its auditors’ work in an attempt to spin things in its favour. 
Others might not read it in this fashion. It would depend, AA thinks, on their assessment of GFH disclosures in the past.  
Shareholder concerns seem well founded to AA.  
GFH should have a core business that covers expenses and generates an appropriate net profit.  Debt settlement gains might make a good but infrequent add-on.  But if firm profitability or a decent return depend on them, then there is something wrong with the business.  
If GFH can’t make an appropriate return from these other businesses and can't "fix" them, then it should exit them and focus on those where it can. 
It may be the GFH’s management not only has the skill to identify and exploit distressed situations but also is able fill the deal pipeline with them. Or perhaps that last skill was the previous management?    
More to come (much more) in Part 2.

Friday, 28 June 2019

Gulf News Reports on UAB's Front-Loaded Loan - Stumping AA

AA's Brother Stumped Again But a Completely 
Different Situation than AA

Under the headline  "UAB front-loads syndicated term loan to $195m" the GCC's newspaper of record, Gulf News reported that
United Arab Bank said it has concluded of its $195 million 2-year syndicated term loan facility, 30 per cent more than the original planned amount of $150 million.
AA is familiar with the term “upsize” used in situations like this.
Front-load generally refers to the paying of fees at inception of a deal or a pattern of interest payments that are initially greater than principal payments.  
For example, a “load” on an investment fund that one pays up front as the price of entry to the fund.  If the load is 2% and you give the investment fund manager USD 100, you actually only invest USD 98.  As an aside, you should avoid funds with front-end loads, unless of course you’re dealing with Bernie Madoff.
The other case is where payments for interest are front-loaded.  
For example, a fixed-rate mortgage where most of the amount of the initial repayments the borrower makes go to paying interest and not reducing principal.
Does the term “front-load” have a different meaning in GCC?  If so, what term is used for the front loaded examples given by AA?

What’s a Board (of Directors) Worth?

Where There is Little Rain and One Must Use Local Wood,
A Board Might be Rather Expensive

If you’ve read the minutes of GFH’s March 2019 AGM, you will know that one shareholder Fadi Majaaly objected to the proposed USD 3.5 million in 2018 Board of Directors compensation as “extremely expensive”.  

Another, Mr. Ziyaad AlBanaa,  suggested that in the future board remuneration be reduced and dividends increased.  That is a sure sign of desperation regarding dividends because the odd USD 1 million or 2 million doesn't go very far when outstanding shares are counted in the billions.  3.6 billion in this case.

Despite these two comments, the proposed 2018 board compensation measure passed according to the published minutes.   

As a side note, if you haven’t read the AGM and EGM minutes, you should.  It makes for quite entertaining reading as GFH’s board answers questions from unhappy shareholders.  Links are here:  AGM and EGM.   
Sadly, the minutes are only available in Arabic.  No English translation.  The Arabic PDF is of an image so you won’t be able to cut and paste into a translator if you don’t know Arabic. 
As to an English version, either all the competent translators in Bahrain and elsewhere in the GCC are busy and have been for some months now.  Or there are none.  AA hopes it’s the former not the latter.  In any case AA is preparing his own translation.  JTM, watch out! 
More suspicious souls than AA might wonder GFH is trying to limit knowledge of what happened at the meeting.  Those same suspicious souls might wonder why the minutes don’t appear to be on GFH’s website, nor do they seem to have been provided to the DFM.  
No doubt there are sound reasons for all of this, though at the moment AA can’t think of one all by himself.  
That’s an invitation to readers to chime in with possible reasons.  
In any case Brother Fadi’s objection got AA to wondering, what is a board worth.  
As a firm believer in the efficiency of markets (sarcasm alert), AA prepared the below chart.  Surely there is market price for boards.   

Board of Directors Comparison
USD Thousands, Except for Directors
Number Directors
Board Comp
Net Income

Readers no doubt will have their own conclusions.  
Here are some of AA’s thoughts.  
AA tends to agree with Brother Fadi.  At first blush particularly within the group above, GFH’s board compensation does seem high but not by any means the highest.  
But one does have to pay for performance.  AA cannot name another board that could have approved and overseen the execution of the treasury share transactions the way GFH’s board did.  One would also have to consider ROAA and ROAE as well.  
In any case, a greedier board probably would have asked for even more compensation in light of 2018’s many achievements.  
As to NBK, what can be said?  A board that doesn’t ask for compensation.   Gulf Bank’s 9 directors received KD 135,000 for 2018.  GB WOW! To be fair, Kuwait apparently has a law limiting board compensation.  
Finally, AA stands ready to join the FAB or ENBD board.  AA will definitely find time in his schedule not only to attend each and every meeting but to come early.