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Net profit including Non Controlling Interests (NCI) share was some US$ 19.3 million compared to US$ 6.8 million for the comparable period last year.
Profit attributable to GFH’s shareholders (excluding NCI) was some US$ 16.1 million versus US$ 5.1 million the year earlier.
That’s 3.2x last year!
Wow!
But strangely GFH’s equity attributable to its shareholders only increased US$ 4 million from FYE 2020.
Similarly total equity including NCI was up US$ 8 million from FYE 2020.
What happened?
What accounts for the “missing” US$ 11 to 12 million?
Normally we would begin by looking at the Statement of Comprehensive Net Income which usually follows the Statement of Net Income.
Examples from Conventional Banks in Bahrain.
Investcorp 3Q2021. (Recall the Investcorp’s FYE is June for no doubt some excellent reason which I was told was to prevent having to issue audited financials some years back when the results would have been “mighty disappointing” to use a technical financial term.)
But it seems that Islamic Banks in Bahrain are not obligated to provide a separate Comprehensive Income statement.
See Al Baraka’s 1Q2021 report here. And note their auditors are a different firm than GFH’s.
So what to do?
Off we go to the Consolidated Statement of Changes in Shareholders Equity where those sort of entries would be recorded.
There you will notice two amounts US$ 4.479 million (fair value changes) and US$ 8.280 million (disposal of sukuk) for a total of $12.759 million being deducted from net income.
You will notice that after these transactions there is a line labeled “Total recognized income and expense”.
This is the equivalent of “comprehensive income”. But “buried” where you might miss it.
That is why as I have argued before it is critically important to look at Consolidated Statement of Changes in Shareholders’ Equity.
Not only to catch “comprehensive income” when there is no separate income statement for that. But also to see what other entries are affecting equity which are the economic equivalent of “income” and “expense”.
What’s behind these entries?
For those assets that are carried on the balance sheet at “fair value” as opposed to historic cost, accounting standards allow banks to recognize changes in fair value of those assets in two ways:
The first is to recognize the change in value (whether plus or minus) in the income statement (FVTIS)
The second is to recognize the change directly in equity (FVTE). So the change does not appear in the income statement.
In 1Q2021, the assets that GFH holds as FVTE had an aggregate net “loss” of fair value prompting a US$ 4.479 million charge to equity. This charge is non discretionary. It is an “expense” in "comprehensive income".
However, the US$ 8.280 million was discretionary.
GFH decided to sell the sukuk
When a FVTE asset is sold, the profit or loss on the sale must be recognized in the income statement.
In order to prevent “double counting” of profit or loss already recorded in the fair value reserve when an asset is sold, the previously recorded profit or loss must be subtracted from the fair value reserve.
As hopefully is clear from these entries, the impact on shareholders' equity is nil when those two amounts are equal.
When the profit or loss on sale differs from that already recorded in the fair value reserve, then the impact on equity will reflect that difference.
For example, let's suppose GFH sells an asset for a US$ 8 million profit but has (already) recorded only US$ 7 million increase in the fair value reserve.
In this case, GFH's equity will increase by US$ 1 million. If the situation is reversed, GFH's equity will decrease by US$ 1 million.
To be fair by selling the asset, GFH has “locked in” the profit on the sale.
Removing the US$ 8.280 million from the reported US$ 16.1 million in net income lowers net income attributable to GFH shareholders to some US$ 7.8 million.
But what’s the point of all this?
Income is income, isn’t it?
Yes, but.
As noted above, GFH has the “discretion” to decide when to sell an asset. And thus when to declare a profit.
Even though moving the profit to income has no real impact on shareholders’ equity. The needle doesn’t move as they say.
Having that option can be quite handy. Particularly if one expects that one's shareholders aren't bright or industrious enough to see that the "profit" has already been booked.
To be fair, we don’t know if GFH was taking advantage of particularly favorable market circumstances that might not occur again to sell the sukuk.
Or if it was seeking to manage its earnings upwards.
If we then remove the US$ 4.479 million change in fair value from reported income, that further lowers income to US$ 3.321 million.
As you will notice, there were no items in comprehensive income in GFH’s 1Q2020 financials.
On this basis 1Q2021 wasn’t “incredible” at least in the positive sense of that word.
Based on Comprehensive Income, it was actually lower than the previous year.
However, we're not done yet with the analysis.
If we look beyond “Comprehensive Income” to other items that I have argued are economically income and expense. we will see additional entries in both periods which further affect economic income.
1Q2020 was particularly brutal – net charges of US$ 25.8 million.
1Q2021 had a gain of US $ 4.8 million.
On that basis, 1Q2021’s positive result looks much better compared to a rather disappointing 1Q2020 negative performance.
“ كل لبيب بالإشارة يفهم “
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