GFH Bahrain - Less to 3Q2020 Reported Income than Meets the Eye

For the first nine months of 2020, GFH reported net income of roughly USD 30.3 million down roughly 50% from the comparable period last year.

That’s not surprising. COVID-19 is casting a pall over many firms’ financial results.

But, neither is the full story.

That’s why one has to read the entire financial report and not just the Income Statement.

By my calculation the true economic performance of GFH over the period was a loss of roughly USD 66 million.PPA “swing” of some USD 96 million from the reported number!

Where does AA’s performance number come from?

The Consolidated Statement of Changes in Owners’ Equity page 4 in GFH’s Third Quarter 2020 interim financials.

The Retained Earnings column is the appropriate locus of focus for our attention.

Why?

Because it’s where economic gains and losses that are not required to be included in the Income Statement appear.

Despite their being excluded from the Income Statement, they are as real a loss as the charges that appear in the Income Statement. And, at times, gains are recorded here that are not included in the Income Statement.

To be very clear there is nothing inherently wrong with these entries.

Equally at times company management may use the discretion allowed under accounting principles to shift a “loss” from the Income Statement to the Statement of Changes in Shareholders’ Equity in order to present a “better” picture of performance.

Motives might be the desire to pay dividends, particularly for a regulated firm like a bank. Management bonus. Share price.

That’s why looking a comprehensive income or loss over a period is a better measure of the firm’s performance. 

Let’s review the pertinent charges to Retained Earnings.

There are three significant “losses” disclosed here.

First up is a USD 59.9 million charge arising from GFH’s underwriting of the entire BD 72 million (equivalent to USD 191 million) AT1 capital increase at Khaleeji Commercial bank. Note 1 on page 9 contains a detailed explanation if you’re interested.  GFH's carrying value of equity in KHCB is based on its share in the net assets of KHCB.  Not the purchase price.     

Next USD 13.9 million arising from “modification of terms” of financiing GFH has provided. That is, an easement of repayment terms on the debtor which decreases the amount GFH will ultimately receive (assuming the debtor pays) and thus the value of the related asset. Think of this as the recognition of a likely loss on the related financing.

Following that USD 22 million which represents the difference between the cost of Treasury Shares GFH sold (USD 108.7 million) and the amount it received (USD 86.7 million).

I’ve heard of “buy low sell high”, but not the opposite. Perhaps, an alternative investment strategy?

These transactions result from what GFH calls “market making” and AA calls a failed attempt to prop up its share price.

Not much evidence of a positive prop for the price of GFH’s shares. They began the year at USD 0.23 per share and were at USD 16.0 as of end of 3Q. As of 16 November trading at USD 14.9.

Of course, COVID has depressed markets.

But a look at previous posts analyzing this activity over several years suggest that GFH shareholders receive scant benefit from these “market making” activities.  

You'll find these using the search tool on the right hand side of the page and the words "treasury shares".

As noted above, if we adjust GFH’s reported Net Income for these three items, GFH had an economic loss for the period of some USD 66 million.