GFH --Rebranding Rituals

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Over the years of AA’s imagined illustrious career, he has seen employers, competitors, and clients launch strategic changes.  As a result, AA has developed a keen “appreciation” (euphemism of today’s post) for the rhetoric and corporate rituals associated therewith.  AA certainly cannot let the opportunity pass to comment on GFH’s participation in these customary rites. 

One further introductory note. 

What follows is not so much a criticism of GFH’s new strategy as a commentary on how that strategy was presented. 

Image, morale all have their part to play in corporate success.   As a participant in such exercises, AA always felt that these rituals and the rhetoric that accompanies them need to be controlled to avoid overstatement–which can well undermine their fundamental intent.

  To start things off a headline blurb from GFH’s 2014 Annual Report (AR):

“There are those who prepare for change and grow stronger because of it, while others struggle to come to terms with the inevitable. We believe our remarkable brand needed a bold and considered change and we have been preparing for the right time to make the required transformation.

That time is now.”

“Bold” yet “considered”.  Launched at just the “right time” to make a “transformation”.    

Some initial reflections on the above:

“Come to terms with the inevitable” sounds rather ominous.  Apparently, it wasn’t only a question of business.  GFH didn’t see much of a future as a mere investment bank nor retaining the Gulf Finance House moniker--one element of the “remarkable brand” that unfortunately had to be jettisoned.  Coming to terms has also resulted in a strategic decision to continue what the ill-destined investment bank GFH was doing but not to do so much in real estate.  Luckily GFH’s preparations were finalized in time!  From a more philosophical and perhaps even theological perspective does the new GFH’s change in strategy represent a repudiation of the regional adage that “real estate may get sick, but it never dies”?

“Remarkable brand” – it’s interesting that the focus is on “brand” rather than “business”.   A case of corporate babblespeak?  Or an indication that image rather than substance is the key focus?     Sadly of late, the brand has been remarkable primarily for unremarkable (two euphemisms in a single post!) results.

“Bold and considered change”—what does it entail? 

Besides changing its name, GFH the “financial group” has boldly separated out activities that Gulf Finance House—the apparently inevitably doomed investment bank—undertook. Its new strategy is to develop these businesses under newly created LOBs and thus diversify its portfolio.  

In AA’s opinion this seems less bold than proclaimed. 

Essentially it is largely more of the same in terms of activities. GFH is not entering the insurance business or exiting real estate completely. Either of these would be bold moves.  The plan to diversify the business away from real estate is eminently reasonable given performance.  Sensible rather than bold.  Yet real estate will remain the core business.  Fine-tuning not radical change. 

From investment bank to financial group.  By AA’s reckoning none of the new LOBs are outside the range of investment banking activity. Even the Goldmine and Morgan Stanley are now pitching middle market commercial banking services.   And shudder some are into retail lending!  Diversification is also a concept that is not foreign to most investment banks. 

So why is “GFH transforming from investment bank into a financial group designated to offer a unique financial portfolio and maximize value potential to its shareholders” as we’re told on page 33 of the 2014 AR?  For that matter why is GFH more concerned about maximizing value potential than in maximizing value realization?  Should it be pursuing return of financial portfolios rather than their uniqueness?

Is there a compelling business reason or is this corporate imaging?

From where AA sits, this seems to be either

(1) rebranding: an attempt to create a new corporate persona to put some “daylight” between the new brand and what then is highly likely to be the old tarnished brand and/or

(2) kotodama.   Names have power.  If we change our name, our fate will change.  In earlier days those who perceived the need for a name change consulted religious figures, numerologists, astrologers, etc. to help find appropriate and powerful new names and symbols.  In these imagined more enlightened times, corporations hire corporate image consultants. 

GFH now ventures forward as a self-identified “financial group” under a somewhat new (brand) name with a new and no doubt more powerful logo and apparently new corporate colors—all part of the customary and sacred corporate rituals that accompany this exercise.  AA sadly did not notice if the preferred corporate font had changed—a step that some consultants say irrevocably seals the transformation. 

In case you’re wondering given the apparent cynicism of the remarks above, AA bears his employer’s logo and corporate colors proudly by day with pitchbooks (yes, we have a preferred font and font size!) and by night with specially made pajamas.  Pinstripe of course!    And a more casual pair but only for use on nights of officially sanctioned casual dress days.

Before closing one further quote, this from GFH’s 2015 Annual Report cover which is a nice collection of corporate babblespeak favorite terms  Boldface and comments are AA’s.

GFH Financial Group is on course to achieve steady and sure financial growth by following a clearly defined strategy [AA’s practical business experience suggests clearly defined is a key element in a good strategy, but while necessary, not sufficient].  As our 2015 Annual Report & Accounts illustrates, our brand’s vision to discover, innovate, and realise value potential [perhaps proof not that any is needed of corporate personhood.  It’s unclear though if “vision” relates to imaginings of things that never were or of things that might be, etc.  Special kudos for linking “vision” to action verbs.], has empowered us to diversify our sectors of excellence, as well as expand our geographical footprint.

I was hoping for “one-stop shopping”, “leverage”, “best of breed”, “best practices”, “global architecture”, and maybe even “evisculate”. 

Something perhaps for 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.

GFH Bahrain: What’s Changed Since 2010?

Heading Up But Still Lots to Climb

I last posted about GFH in 2010. 

At that point, its financials were a mess.

Along with Global Investment House and The Investment Dar it was part of the trio of once high-flying regional investment banks that hit the wall at high speed. 

What’s happened since then?   

On a positive note, GFH escaped the fate of Global Investment House.  Its shareholders remain in control, cases have been lodged to recover funds, additional capital has been raised, and assets have not been stripped off to creditors. 

Nor is GFH in what would appear to be the nearly persistent vegetative state of The Investment Dar –a chronic condition punctuated by infrequent bouts of apparent lucidity in which TID announces yet another restructuring plan. Sadly during those periods TID is insufficiently lucid to issue financials, the last to see daylight being from FYE 2009, or to even update its website.  Love the Board members’ pictures.  Despite the difference in surnames, three of them look remarkably similar.

So how has GFH performed since 2010?  

Short answer:  not so well. 

On page 36 of its 2015 Annual Report, GFH kindly provide five years of financial highlights.     

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%

As you see from the above, AA has a different analysis of the last two years’ ROE.

1.      For 2014 and 2015 GFH used total net income— both GFH shareholders and those of non-controlling interests (NCI)—and equity attributable only to shareholders of GFH (excluding NCI’s share of equity) to determine ROE. 

2.      AA used net income—actually a loss of US$5.5 million—attributable only to shareholders of GFH and like GFH used equity attributable only to GFH shareholders.   Why? Because the point is GFH’s ability to generate income for its shareholders.  Also this choice is related to the nature of consolidated statements as outlined in #5 below. 

3.      As consolidation only affected 2014 (restated) and 2015 results, those are the only two years where there is a difference in calculation methodology.  

4.      Both GFH and AA used beginning and end of period equity to determine a year’s “average” equity to calculate ROE.  Because there were significant capital increases over the five year period (an almost three times increase), this method overstates ROE for certain periods because it understates average equity.  But what’s important here are trends, directional rather than locational statistics.

5.      One very important note:  consolidated financials are an accounting construct.  They are designed to provide a way to analyze the economic performance of a “group”.   But the consolidated "group" is not a legal entity.  That is, the group does not really (legally) directly owns the assets or receive the income shown.  Parent only or individual financial statements show the legal status ownership of assets, cash flows, etc.  Take a look at note 34 in JPMC’s 2015 AR and compare the data to the consolidated financials.  Parent revenues are largely dividends and assets are largely investments. This fact has important implications for investors and creditors that buy holding company equities or unsecured debt securities. Or for lenders to holding companies.  Access to cashflow, access to assets, priority in bankruptcy, responsibility for subsidiary/affiliate debt (absent parent guarantees) are some of these. 

Whether you take GFH’s or AA’s calculations, performance has been “disappointing” (euphemism of the post).  Earnings have been volatile.  ROE has been subpar.

Some of this is economic:  a “weak” (second euphemism) legacy portfolio, the cyclical nature of GFH’s businesses, etc. 

Some of this is a function of internal management: legacy leadership—responsible for the high risk portfolio—was only conclusively removed in late 2013, no doubt delaying remedial action.  GFH has also conducted successful legal actions against “two of its ex-Chairmen for bonuses illegally obtained during the period 2005-2008”  which some readers may interpret as indicating less than the ethics one might hope to find in a self-described Shari’ah compliant institution.   الله اعلم

A coming post will take a look at GFH’s attempt to address its problems.  

Death of Thailand’s Beloved King – Why Didn't Bahrain and Kuwait Embassies Fly Their National Flags at Half-Staff?

Picture Courtesy of Akh  Abu Arqala  Note the Flag of Greece is at Half-Staff

Powered by more than 2,600 journalists and analysts in more than 120 countries, another Suq Al Mal exclusive.  (OK, an overstatement.  AA’s brother is on a strictly business trip to Bangkok).

AA can now report that last week for at least three business days both the Bahrain and Kuwait Embassies in Bangkok have not been flying their national flags at half-staff to participate in official mourning for Thailand’s beloved king. 

A letter to the editor at The Nation indicates that this has been going on for some time and other GCC nations have not lowered their flags.

At least as far as Bahrain an interesting development given the close relations between the two countries and the particular fondness of Bahrain’s Prime Minister for Thailand. 

HRH Shaykh Khalifa personally conveyed the condolences of the government and people of Bahrain on 18 October.  While not the first representative of a foreign nation to pay condolences in person, early enough to show the extent of his feelings

So why didn't Bahrain's Embassy fly its flag at half-staff?

Awal Bank Chapter 11 Filing Update - Request for Extension of Time to Provide Information

Here's an update from Bell Pottinger Middle East on the case.  BPME is the PR company used by Charles Russell for the Awal Bank engagement.

Awal Bank files request for extension of time

Bahrain, 4 November 2010: Charles Russell LLP, acting as External Administrator and Foreign Representative (the “Foreign Representative”) of and for Awal Bank BSC (“Awal Bank”) has filed a request for an extension to the deadline to file schedules of assets and liabilities and statement of financial affairs (the “Schedules”) in the Chapter 11 Case commenced on 21 October 2010.

The request follows the first day hearing that took place on 26 October 2010 at which the Foreign Representative sought an order to establish a workable protocol to administer the Chapter 11 Case in cooperation and coordination with the Bahraini administration. After hearing from both the Office of the United States Trustee and counsel for the Foreign Representative, the Bankruptcy Court directed that the Motion be further considered at a later date in order to allow more time to assess the information provided and after giving opportunity for creditors to make representations regarding the relief requested in the Motion.

The Foreign Representative has determined that additional time is required to assess, among other things, creditor views in relation to the Chapter 11 Case. Upon this assessment being undertaken, the Foreign Representative will determine whether to further pursue the Chapter 11 Case. The Office of the United States Trustee has indicated it has no objection to the Foreign Representative’s request for additional time to file the Schedules.

In October 2009 the Foreign Representative obtained “foreign main proceeding” recognition from the Bankruptcy Court under Chapter 15 of the U.S. Bankruptcy Code for Awal Bank’s administration proceedings in Bahrain.

The Bahraini administration governed by the Central Bank of Bahrain and Financial Institutions Law (“CBBFIL”), continues to be recognised as the foreign main proceeding under Chapter 15. The U.S. based legal activities form part of a multinational litigation process, with court proceedings also currently underway in Bahrain, the Cayman Islands, the Kingdom of Saudi Arabia, Switzerland and the United Kingdom.

Please contact David J. Molton, Esq. from Brown Rudnick LLP, counsel to the Foreign Representative, at 00 1 212 2094822 with any inquiries.

Gulf Finance House to Ask Sukuk Holders for Three Year Extension

Reuters is quoting an unnamed GFH spokesman that the Bank intends to ask the holders of its US$200 million Sukuk issue (US$137 million outstanding) to roll the Sukuk on its original terms for three years.  That is, to extend the maturity from 2012 to 2015.

I'm not sure if "chuzpah" is an Islamic banking term, but it would sure seem to apply here.  The Sukuk is currently trading at around just a whisker over 50% of face value.

I'd also note that earlier this week GFH formally stated that it had not issued the information the Gulf Daily News report that it intended to either (a) sell assets to  US$90 million in debt next year or (b)  reschedule debt.   If you recall the original GDN article, there was a third alternative mentioned - which was extinguishing debt via asset transfers.  Interestingly enough, what is mentioned in the GDN article is precisely what I see  on page 13 in the copy of GFH's October 2010 "Return to Growth" Presentation to investors which I recently obtained. 

It is, I suppose, indeed sad that someone is issuing presentations using GFH's highly respected name in such a fashion.

As to pricing for GFH debt, please see my soon to be issued companion post on the draft terms for GFH's proposed new Sukuk.

Gulf Finance House 3Q10 Financials: A Train Wreck

Studio Lévy & fils  1895
When You Turn the Corner Make Sure the Track Goes There

Get out your magnifying glasses and join me in reading the full 3Q10 financials that GFH submitted to the Dubai Financial Market Wednesday morning. Since I've got my soapbox out for a later tirade, I might as well take this opportunity to suggest to the  DFM that they invest a few dirhams in upgrading their electronic imaging system for faxes they receive. There really is no good reason in this day and age that the output cannot by A4 size.

Looking at the financials we see from Note 12, that GFH's US$115 million loss was primarily caused by provisions. Some US$101 million of them. But not provisions for investments. Rather US$60.5 million for an investment banking service receivable. And US$36 million from the sale of investments. I guess if one sells assets of "volatile" quality, one might expect some "volatility" in the receivables from the sales.

That being said, GFH has continued to maintain in its Other Assets the US$134 million "magical asset provision" and US$161.8 million in "Financing to Projects".

Another unfortunate trend is operating income which is running US$60.7 million negative for the first nine months of 2010 as compared to US$36.7 million for the comparable period the previous year. This is due to a collapse in revenues. On the cost side GFH has actually done quite nicely in bringing costs down.  But, if one can't pay the light bills from operations, it's hard to see a bright future.

As a result of the net loss, GFH's CAR has slipped below the 12% minimum set by the CBB. In the financials, KPMG coyly states in Note 2: 

"Further, the capital adequacy ratio of the Group as at 30 September 2010 was below the minimum required by the regulatory ratio …"

No quantification is given. We don't know if GFH just missed the ratio and has a CAR of 11.99%. Or, if it's CAR is 1.9%. You might think that the auditors would consider it important to quantify this shortfall. It certainly is a bit of "material" information that stakeholders would like to know. And more importantly should know.

If like me that's what you think, you're disappointed by KPMG's apparent lack of action on this point. They were silent on this topic. And they did not force GFH to disclose this information in a note to the financials. It's unclear if this is due to desire not to embarrass its client. Or slavish adherence to some accountant's taqlid as to the wording used for "emphasis of matter".

Note to Central Bank of Bahrain: It might be a good idea to specify in Module PD that when the CAR regulatory threshold is breached, the Licensee state the resulting ratio with details of the calculation. And if anyone from the CBB is reading this, I'd reiterate my earlier suggestion that Module PD be amended to require that Licensees report on the BSE the more detailed of (a) what Module PD requires and (b) what they are required to report on other exchanges. There is no reason that Bahraini investors should get second rate incomplete information which is available to investors in Dubai or elsewhere.

We don't have all the information required to calculate GFH's CAR at 30 September 2010. But we can make some estimates which should give a pretty good directional sense of the CAR.

The Table below summarizes these:

	30-Jun-10	Case A	Case B
Regulatory Capital	US$   363,220	US$   248,220	US$   114,229
Total RWA	US$2,811,417	US$2,683,417	US$2,549,417
CAR	12.92%	9.25%	4.48%

Notes & Assumptions:

1. 30 June 2010 CAR is as per GFH's Basel II Pillar 3 Disclosure. 
2. The key assumption is that there is no real significant change in Regulatory Capital or Total Risk Weighted Assets (Credit, Market and Operational Risk) except for the adjustments specified in the two "cases". These adjustments are made from the 30 June figures reflected above. This is a simplifying assumption so the ratios derived will not be exact but should be "close enough" to get a good sense. 
3. Case A: US$115,000 (the 3Q10 loss) is deducted from Regulatory Capital and US$128,000 is deducted from Total RWA at 100%. 
4. Case B: US$134,000 (the "magical asset" provision) is deducted from both Regulatory Capital and Total RWA. And again at 100%.

And if you have any doubt about the realisable value of any of GFH's other assets, like those Project Financings which may very well be to the same firms whose financial condition caused their bankers to pull the GFH guarantee, it's not too much of a stretch before the CAR is negative.

The results are to say the least not encouraging. It's hard to see how even the "Prettiest" words could convince even the "wisest" of investors to put equity into this firm.

The Gulf Daily News is reporting that they've seen a GFH "Investor Presentation" in which GFH states it intends to sell assets to raise cash to pay back some US$90 million in debt maturing next year or restructure that debt. In further discussions with GFH, the GDN was told that other options being considered were an IPO of some of its mega projects (North Africa and India) or perhaps giving creditors land, shares or other of GFH's highly valuable assets. There is a danger with the latter for creditors. As the choice assets are stripped from GFH's balance sheet, remaining creditors are left with lesser ones to settle their debts. The only option not mentioned here was putting a brick from one of these projects under EJ's pillow in the hopes that the Real Estate Jinn would put US$500 million under his pillow.

It's hard to imagine a "wise" creditor putting funds into GFH. 

And it takes a bit of "optimism" to see a real future for GFH. 

You can find more posts on GFH by using the Label "Gulf Finance House".