Gulf Finance House - Clarification on News Report Regarding Qatar Energy City Project

 

Gulf Finance House issued a clarification on a news item appearing in the aptly named Kuwaiti Newspaper "AlJarida" today on the Bahrain Stock Exchange.  AlJarida apparently stated that the Government of Qatar was studying withdrawing the Qatar Energy City Project from the Developer, Gulf Finance House.  

(This press release also appears at the Dubai Financial Market but not at the Kuwait Stock Exchange.  It appears that when one is listed on so many financial markets and has so many clarifications to issue it's quite a logistical feat to get them all out at the same time).

GFH noted that it had not been notified officially in this regard (i.e., that the Qatar Government was studying whether to remove GFH as Developer on QEC).  It also noted that because there was a court case involving GFH and a Qatari businessman (AA:  That would be AlSuwaidi) before the Courts of Bahrain it was not able to comment out of consideration of the rights of the parties to the case.

You've probably noticed as I have that when issuing a response to a question or a clarification GFH seems to be very precise in its wording.  You'll recall the day before they announced the rollover of US$100 million of their West LB syndicate, they issued a denial that they were discussing a US$50 million Sukuk with West LB.  The next day they announced they had concluded a US$100 million murabaha with West LB. 

So maybe you're wondering as I am if they have received "unofficial" word from the Qatar Government that it is considering removing them as Developer on QEC?

Gulf Finance House Issues Small "Clarification" on Its Earnings Announcement - "Going Concern" Emphasis of Matter from Auditors

Gulf Finance House noticed that it had omitted one trivial detail from its 15 February press release on its financials and in the spirit of disclosure announced on both the Kuwaiti and Bahrain stock exchanges today that without qualifying their audit opinion, GFH's auditors had called attention to the fact that a lack of liquidity and insufficient capital might raise issues with GFH's ability to continue as a going concern.  As of yet, this press release is not posted at the website of the Dubai Financial Market, where GFH is also listed.

The Kuwaiti press release is below and it is apparently a verbatim quote of the auditors' "emphasis of matter".  The Bahraini press release is a description of the auditors' statement and points out that the auditors have not cast any doubt on the accuracy of the financials and have described GFH's plan to deal with both issues.

You'll recall that GFH's Chairman committed himself to greater transparency on 17 February.   And that is clearly not only a regulatory requirement but as well a moral imperative, especially if one is upholding the good name of Islamic financial institutions.  From where I sit the next step perhaps should be a commitment to timeliness.  And then perhaps one for comprehensiveness to make sure that the announcement gets to all Stock Exchanges where GFH is listed.

And, yes, if you're wondering, GFH still has not updated its website with its current rating.  In fact it hasn't yet updated its website for the downgrade last 26 November 2009.  You may recall that was the first of several that resulted in it being downgraded to "SD". 

[8:31:30]  ِ.بيت التمويل الخليجي ‏
يعلن سوق الكويت للاوراق المالية عطفا على اعلانه السابق بتاريخ 15-02-2010 ‏
والخاص بالبيانات المالية السنوية لبيت التمويل الخليجي ،افاد البنك بان ‏
تقرير مراقبي الحسابات يحتوي على الفقرة التوضيحية الاتية :‏
دون التحفظ فى راينا،نلفت الانتباه الى الايضاح رقم2(ب)فى البيانات المالية ‏
المجمعة الذي يناقش عدم تاكد جوهري يتعلق بحاجة المجموعة للسيولة وكفاية ‏
الراسمال القانوني والذي قد يشير الى شك حول صلاحية مبدا الاستمرارية ‏
المستعمل فى اعداد البيانات المالية المجمعة .ان خطة الادارة للتعامل مع هذا
الموضوع مبين فى الايضاحات رقم 40(ب) و 41 فى البيانات المالية المجمعة .‏

GFH Press Release on Janahi Resignation from Khaleej Commercial Bank

Today GFH issued a press release on the reasons for Mr. Janahi's resignation as well as advising that Mr. Ted Pretty, Acting CEO, had been appointed to replace him on the Board.

In commenting on the reasons for his resignation, Mr. Janahi is quoted as saying.

“Considering the current difficult circumstances, there needs to be an even greater effort from everyone to manage and overcome the crisis affecting the regional and international markets. It demands transparency and dedication to lead Gulf Finance House’s activities in coordination with the executive management. I want to continue concentrating my efforts on supporting GFH, and position it for success as we seek to return to profitability. We enjoy fantastic support from the Board and its shareholders and God willing,  target returning to profitability in the first quarter.”

Indeed, especially the transparency part.  Being honest with the market, in other words كلام شريف  is highly important.  GFH was downgraded from BBB- on 26 November 2009.  It's current rating is SD.  It's website still has to reflect the first downgrade.  Of course, that first downgrade only occurred 83 days ago so let's not be too harsh.

Gulf Finance House - US$728 Million Loss for 2009 Does This Equal A Critical Covenant Breach in US$1 Billion Sukuk Program? APPARENTLY NOT

Update:  The US$728 million loss in 2009 apparently does not result in a breach of the US$1 Billion Sukuk program covenant because GFH issued shares during 4Q09.  Resulting year end shareholders' equity is US$433 million as per financials released.   At 30 September 2009, GFH had only US$17 million in Goodwill which would take them to US$416 million - unless of course this number changed.  This post has been accordingly amended to reflect this new information.

GFH has issued a press release on its 2009 results stating that it had a loss of US$728 million for 2009 and pointing out that a major cause of the losses was due to non cash provisions of US$656 million as if that somehow made the loss less onerous.  

Some quotes and then some comments.

Gulf Finance House Chairman Dr. Esam Janahi commented today saying “While 2009 proved challenging, it is important to view our results in the context of what prudently managed banks must do in tough economic times. We have closely reviewed all of our assets, made provisions where appropriate and have also begun to dispose of those which are non-core. We have asked management to review our cost base and also to ensure that we have a strategy to grow revenues. It is my strong view that as we achieve these objectives GFH will return to profitability and I am personally focused on this objective.”

Acting CEO Mr. Ted Pretty added “2009 was a year which presented unprecedented challenges to banks in both the global and GCC markets. All institutions have been impacted by declining asset values and by the tightness in liquidity.

And now for the comments.

1. The comment about non cash provisions is quite amusing.  Generally that's the way the provisions work.  The money for the assets is already gone.  It was spent when they were acquired.  So when the assets turn out to be worth less than one paid for them or worthless one takes a non cash charge.  In fact if a firm takes a cash charge for assets already paid for, it's probably a very clear sign that you need to engage forensic accountants.
2. This focus on the non cash character of provisions is also remarkable in another sense.  How many of you out there have seen a company make the statement "We earned $1 billion this year but only 60% was realized in cash"?  This reminds me of the comment attributed to Mr. Abbas who apparently only sees rating agency mistakes occurring when they downgrade an obligor. 
3. Come to think of it.  This announcement rather neatly demolishes the argument that S&P didn't know what it was doing when it downgraded GFH.  And in a remarkable coincidence was released on the same day that S&P was chastised for its lack of skill and understanding.
4. Sorry, Mr. Janahi, but it's hard to understand how one can call a company that starts the year with US$967 million in equity and loses US$728 million "prudently managed".  That's a loss of 75% of equity.  Wouldn't the "prudently managed" bank have much lesser or no losses?  The National Bank of Kuwait would fit the "prudently managed" description.   Note:  To be fair a 75% loss of equity is my estimate. GFH has not released its financial statements.  There may  well be some positive offsets to the  2009 net loss of which I am not aware. Though I note that starting with 30 September 2009 equity and allocating the 4Q09 loss of US$607 million, the decline in equity is 80%.
5. Yes, indeed all banks were affected by the Global downturn, but, Mr. Pretty, not all lost 75% of their capital.  So I'm afraid I'm finding it hard to see GFH's performance as the result of global or other external factors.  I'm presuming that if GFH made US$728 million this year management would not be crediting the market as being responsible.  But rather we'd be hearing about the vision, hard work and leadership of management. Selective responsibility where problems are the fault of others are about as credible as Mr. Abbas' apparent belief that rating agencies only make mistakes when they downgrade an obligor.
6. GFH's US$1 billion Sukuk Program requires that GFH maintain Consolidated Tangible Net Worth of no less than US$400 million. Otherwise 25% of its Sukuk certificate holders may accelerate repayment of the transaction.  And thus trigger GFH's Purchase Agreement.  The quotes below are from Page 112 of the Offering Circular.

Consolidated Tangible Net Worth Covenant
GFH irrevocably and unconditionally agrees and undertakes that until the Sukuk Certificates  have been redeemed in full in accordance with the Conditions, it will at all times maintain a  minimum of Consolidated Tangible Net Worth of not less than US$ 400,000,000 (or its  equivalent in Bahraini Dinars).

"Consolidated Tangible Net Worth” means, the aggregate of the amount for the time being  fully paid up or credited as fully paid up on GFH’s issued share capital, advance towards  share capital, share premium, any subsidiary company share grant, statutory reserves,  investment fair value reserves, and retained earnings, of the Group, but deducting any treasury shares, and deducting any amounts attributable to goodwill or other intangible assets.

Abu Dhabi Islamic Bank - A Tale of Two Press Releases

Let's look at two press releases on ADIB's 2009 financial performance.  One reflects well on the professionalism of the institution.  The other frankly does not.  

Let's start with the offending press release.

First, at WAM the headline reads "ADIB Reports An Operating Profit of AED 1,527 mn for the 2009 Financial Year."

This approach illustrates another of Abu Arqala's 8 Simple Rules of Financial Analysis.  When the earnings headline doesn't mention net income, you know there's an earnings problem.  And a corollary:  the further down in the press release the net income line is buried the more serious the problem.  There were a couple of egregious examples of this in Bahrain a while back, despite a very clear statement in the Central Bank of Bahrain's Rulebook Module PD about burying bad information.

In the second paragraph, after being regaled with the year's numerous achievements we get the bad news:

After a year of multiple achievements, including: increasing total customer numbers by 27.2% to 342,097; the opening of the 50th branch in the UAE; an increase of 25.1% in total assets to AED 64.1 billion; the strengthening in both capital adequacy (to 16.96% under Basel II) and liquidity ratios (financing to deposits ratio improved to 83.9%); and a top three year-on-year improvement in customer service ratings, the Bank has taken a preemptive decision to set aside a year's earnings to enhance its total provisions and secure future growth.

You'll notice that the provisions aren't described as being necessary to cover duff loans and investments that the bank has made.  They are actually a pre-emptive decision to "enhance total provisions and secure future growth".  Right.

Equally amusing is the later statement "while the growth in customer financing comes on the back of a robust credit process that ensured the booking of quality assets."  If the credit process is so robust, why then is there a need for provisions of this magnitude?  Or are these the sins of the past? 

In regard to credit quality asset growth of  25% during the year is touted as though this were some great accomplishment.  It is really not that hard to make loans to people.  The trick is of course collecting the loans you've made.  That raises a second of AA's 8 Simple Rules of Financial Analysis.  When a bank has explosive growth in assets, look for a spike in bad loans to follow in the next 18 to 24 months.

If things are just fine, I suppose there is also an intriguing question why the Federal Government and the Emirate of Abu Dhabi had to put in additional capital in the form of Tier 2 instruments.  If I'm not mistaken the amounts are not trivial:   AED4.2 billion compared to shareholders' equity of AED5.9 billion as of 30 September 2009.

The press release then goes on to recount a variety of peripheral and not particularly important issues related to 2009's financial performance.  It seems in the hope that the bad news will be buried in so much prose that the reader will miss it or forget it by the time he finishes.

A couple of comments:

1. Provisions generally are the result of past mistakes and/or to be fair as well bad luck.  There's no real banker who's never made a bad loan unless it's someone who works in administration. That being said, precisely how booking a provision leads to further growth isn't clear.  In fact, when a bank has to take a provision this size, it might be a good occasion for it to consider whether a bit more moderation in growth (booking assets) is advisable.
2. Does whoever wrote this press release actually believe that this sort of announcement isn't perfectly transparent?  And doesn't elicit a snicker or two from just about everyone who reads it?  And leave the impression of less than kalaam sharif? 

Turning to the press release at the ADX, this is much more professional and deals with the provisioning issue in its headline:  "To Provide A Solid Base for Future Growth, Abu Dhabi Islamic Bank Sets Aside A Year's Earnings As Provisions".   

There the hard news is dealt with up front.  Some of my same quibbles would apply to the sugar coating of the need for the provisions, but at least the thorny issue is raised.   

BTW  provisions are now 4.2% of gross financings up from 1.69% the previous year.  Simply put, bankers don't take provisions for fun.  Taking provisions is one of the hardest things for a banker to do because it directly impacts his or her career and bonus.  Also it is very hard to get unneeded provisions past competent, diligent auditors particularly given the current constraints under IFRS for recognition of impairments.

So we're left with a question.  Did WAM take ADIB's reasonable press release and cut and paste to create what we saw above?  I'm guessing this is the case.  If so, then ADIB and others would be well advised to have a word with WAM to avoid "Gulf News journalism standards" in the future.

Central Bank of Bahrain Regulations: Disclosure Standards

A new feature here at Suq al Mal.  We'll look at various CBB Regulations and see how the banking community is implementing them.

Back in October 2007, the CBB issued "Disclosure Standards" - a comprehensive and well thought out set of regulations which set forth requirements for listed companies and for the offering of securities in the Kingdom of Bahrain.  The full text of the regulations is here.

The particular text I'd like to focus on today is the following:

42.1 Immediate disclosure should be made of any information regarding an issuer's affairs, or about events or conditions in the market that will affect the issuer's securities, which meets either of the following standards:

Where the information is likely to have a significant effect on the price of any of the issuer's securities.

Where such information (after any necessary interpretation by securities analysts or other experts) is likely to be considered important, by a reasonable investor, in determining his choice of action.

Now, it would seem to me as a casual observer that if a firm were listed on the Bahrain Stock Exchange and it was say downgraded to below investment grade or perhaps even to Selective Default a reasonable person would expect that such a development would have a "significant effect" on the price of the issuer's securities.  And as an investor, AA would certainly like to have such information in "determining my choice of action".  That is, if a company's debt were considered highly risky, and given that debt has priority of repayment over equity, then it would seem that the equity was even more risky.  And riskier equity should have a higher return and therefore sell cheaper.

One might argue that the best course of action was a formal announcement on the Bahrain Stock Exchange where all might see it.  Second best would of course be posting such information on its website, though that approach assumes that investors will search for information.

With that as background, what are we to make of the following facts:

1. GFH has not published any such announcement at the BSE except in response to a BSE request as happened today.  And you will note that the BSE has been actively pursuing GFH for additional information on a regular and timely basis.
2. GFH has apparently not yet had the opportunity to update the ratings information on its website, though to be fair only a scant 80 days has passed since it was downgraded to BB+.  Currently, the rating is SD.

Gulf Finance House - A Deconstruction of Its 14 February 2009 Press Release

GFH issued a press release today on the Bahrain Stock Exchange titled "GFH Announces Further Liquidity Initiatives".

Sometimes when I read things in the financial press, I wonder what were they thinking?   In many cases more precisely were they thinking?

Today is a prime example so let's take a closer look at GFH's press release.

First, in the opening paragraph we're told that GFH is "the leading Islamic investment bank".  Not "a leading Islamic investment bank" but rather "the leading" one.  For an institution whose business model has proven inadequate, that has been downgraded by rating agencies to below sub-zero status, whose last GM resigned after a scant stay, which has no discernible operating earnings, I would have expected a bit of humility.   Unless of course this is a rather adverse assessment on the state of the "Islamic" investment banking industry? Perhaps, not that unreasonable an assumption.

Second, the Chairman of GFH continues by highlighting the strength of "our innovative business model" and the "continued support" from "our investors and partners".   Again one might question how GFH's admittedly innovative business model is a strength since it is precisely the major factor responsible for its current predicament.  And until the LMC syndicate agrees to a rescheduling it is a bit premature to speak of "their confidence and support".   And, if like the West LB syndicate, the LMC syndicate's only choice is between an extension and a default, it may also be a bit of a stretch to speak of "confidence and support".  A decision taken with a gun to one's head is usually not considered a "free will" decision.

 

Third, Acting CEO Ted Pretty refers to the "support received from the Central Bank of Bahrain on our new product initiatives and also their advice on strengthening our position".   Clearly, the CBB doesn't want GFH to fail.  No reasonable person or firm does.  But this seems to be another stretch.  I'll bet that the support the CBB is giving GFH in terms of "advice" on strengthening its position is to get its house in order.  Not sure that strictly speaking that qualifies as "support".  Cynics might refer to it as a "warning".

With respect to new products, one would expect that any CBB approval would be subject to two very important conditions.  

1. That GFH resolve its liquidity issues prior to any such sale to ensure that it is a going concern able to manage the investments to be made and to look after the interests of its customers.
2. And probably more importantly that if GFH is taking investor funds today for disbursements in the future that those funds are legally segregated from GFH.  That is, investor deposits are placed with another financial institution and not with GFH so that investors do not become trapped as creditors at GFH should something untoward happen.

Fourth, and perhaps the most striking quote is that by the CEO of LMC:  "We are in an era where ratings and rating agencies sometimes have not comprehensively and adequately reflected the true standing of entities specifically the positive outcomes of GFH’s strategy and capital management program."  As I read this Mr. Abbas' view is that rating agencies really aren't capable of doing their jobs with at least sufficient frequency that we can rely on them.   

That raises quite an interesting question. GFH mentions the possibility of a ratings upgrade twice in its press release as though this were a good thing.

But if, Mr. Abbas is right and the rating agencies in effect don't know what they're doing, why should we trust them if they upgraded GFH?  Or is his position that they only make mistakes when downgrading issuers?

BTW, if like me, you're watching GFH's disclosure of its ratings, you'll notice they have yet to update their website for the first downgrade 26 November 2009 a scant eighty days ago.   More on that topic in another post.  Until then, we'll add the label كلام شريف  to this post.