GFH 2020 Financials – Another Festivus Miracle!

 

Theological Question
If the holiday was invented, are the miracles as well?

Time for a look at GFH’s 2020 financials.

First at reported income. 

And then to what isn’t in the income statement but is economically income or loss.

Summary

GFH reported consolidated net profit for the year of USD 49 million.

98% of that amount was due to two revenue streams from “special” items, not GFH’s main lines of business.

What that means is that GFH’s ”mainframe” LOBs in aggregate are basically breaking even.

It also suggests that the quality of reported earnings is low.

Turning to Retained Earning (Consolidated Statement of Changes in Owners’ Equity) there are two items totaling USD 37 million that I believe represent economic losses. 

The only difference is that accounting principles do not require that they be included in Income Statement.

On that basis, GFH’s adjusted consolidated net profit for 2020 was some USD 12 million. Or 24% of what it reported.

Reported Income

GFH reported FY 2020 “consolidated profit for the year” of USD 49 million compared to USD 53 million the prior year. Roughly an 8% decline.

Net income was then further subdivided with USD 45 million attributed to Shareholders of the Bank versus USD 66 million the year earlier. Roughly a 32% decline. Or 4x greater than the decline in consolidated net profit.

The remaining USD 4 million (of 2020 consolidated profit)  was ascribed to non controlling interests (NCI). In 2019 NCI share of net income was a negative USD 13 million.

2020 was an extraordinary year.

Covid caused significant economic disruption across the globe.

So perhaps not so bad for GFH.

But the problem though is that GFH doesn’t really have a good track record in terms of return on average equity (ROAE).

The chart below shows ROAE attributable to GFH Shareholders and then to GFH Shareholders plus Non Controlling Interests (NCIs).

There is another “negative”.

GFH’s revenues and thus net income tend to be dependent on “special” items not on recurring income from its primary LOBs.

So it’s not just a case of low returns but of low quality returns.

Two particular 2020 revenue categories are worthy of a closer look. As you will notice, these two items account for 98% of net income. 

Without them, GFH would have essentially “broken” even. 

Before we start our “excursion” I’d note that we are using consolidated figures as revenues and expenses are not “broken out” by those belonging to shareholders of GFH and those belonging to NCI.

First, Note 22 other income of USD 39.026 million (79% of net income) is composed of:

1. USD 23,2 million in “settlements and write back of liabilities no longer required”
2. USD 8.4 million in “recoveries of expenses from project companies”
3. USD 2.0 million in “income from non financial subsidiaries”
4. USD 5.4 million in [unspecified]

These are hardly what I would consider typical operating income. 

Does that mean that they are bogus? Of course not.

But they are the sort of flows on which a typical bank/FI does not have to depend for a significant share of its net income.

Usually items like this are a minor portion of net income and more similar to the icing on the cake than the cake itself. 

Here that is not the case. 

Without them there is no “treat”.

Also management may have some discretion over the timing of recognition of some or all of these sort of items. Perhaps a useful feature in times of “need”. 

Nice to have hats with rabbits in them.

Second, Note 21 (i), USD 8.418 million gain on the purchase of additional 21% in GBCorp Bahrain. (17% of 2020 net profit). 

This amount is included in Direct Investment Income under Income from Proprietary and Co-Investments where it is roughly 41% of the amount shown.

This is based, as the note tells us, on GFH's preliminary assessment of assets and liabilities of GBCorp.

Also GFH paid the consideration for the purchase by transferring to the sellers “investments held by the Group” not cash.

When one in-kind asset is exchanged for another (in-kind) valuation can be “trickier” (that’s a technical financial term) than usual because two sides of the transaction have to be valued.

Based on a purchase price of USD 21.571 million for a 21.72% share in GB Corp, the sellers ‘ valuation of GB Corp was USD 99.3 million. Or a discount of some 23% from GFH’s preliminary assessment of fair value.

Now it is certainly possible that GFH is better positioned to extract more value from GBC’s assets than the original GBC shareholding group could.

And perhaps the sellers thought they could extract more value from the investments they acquired than GFH could. Or maybe they had pressing financial needs and so had to “fire sale” these assets.

Who sold their shares?

On that point over to the MOICT website to check the CR of GBCorp (CR 65708). From the change in shareholding data there it appears that the two selling shareholders were:

1. Oras Investments (CR 63525) owned by National Amlak Investment AlKhobar KSA for 13.0313%
2. Special Projects WLL Qatar for 8.6875%

National Amlak’s website doesn’t appear to be active. What little information is on its website is “little”. Perhaps a sign of just how motivated a seller they might be.

No idea on SP Qatar.

Typical AA semi-irrelevant but hopefully interesting side note. 

Other GBC shareholders who might be inclined to sell in the future are:

1. Soura Investments (CR 4380) at 12.5% which is held ultimately through a chain of companies leading to Premier Group W.L.L. – a name you may have heard if you “know” Bahrain. For "some" reason, I couldn’t find the Premier Group’s CR on the MOICT’s website. But kindly note AA is not throwing even a single “Stone” here.
2. UGB Holding Bahrain at 12.5%.
3. 2 Seas Investment at 9.043%
4. The rest of GB Corp’s shareholders have relatively small percentages.

Those are the major points I want to make about reported earnings.

Now to other items not appearing in the Income Statement but which have an economic impact on GFH similar to those on the Income Statement.

As usual for this exercise we’ll turn to Retained Earnings section of the Consolidated Statement of Changes in Owners’ Equity.

First is the USD 59.9 million adjustment to retained earnings to reduce the carrying value of the USD 159.1 million KHCB AT1 Murabaha Sukuk that GFH purchased at a premium of BD 12 million (USD 31.9 million) for a price of USD 191 million. PPIt’s important to note that there is a different impact depending whether we look at GFH Parent Only financials or GFH consolidated financials.

GFH Parent Only still “holds” a BD 60 million instrument and will be paid the 10% p.a. murabaha profit rate on the nominal (face value) of the instrument. On GFH’s consolidated financials, the AT1 instrument and earnings thereon will not appear.

Conversions to common shares (not expected to occur) will be based on the nominal value of the AT1 divided by the price per common share as determined. 

Thereafter, if this were to occur, GFH Parent would have a gain or loss on the price movement in shares. And would show an increase in its equity holding in KHCB. 

On the consolidated financials, GFH’s ownership share in KHCB would increase – assuming a going concern and no other common stock issuance-- the share of KHCB assets, liabilities, and income appearing on GFH’s consolidated financials.

If I am right, the immediate economic impact on GFH Parent of this is zero. The lost BD 12 million premium GFH paid is offset by the BD 12 million subscription/underwriting fee GFH received.

On the chance that GFH is able to sell the AT1 to third parties in the future  it would record a loss or gain depending on the sale price versus its cost.

Such profit or loss would also be reflected in GFH consolidated financials, assuming such transactions did not involve “Group” entities. 

Second, there is a USD 14.016 million charge related to modification of financing assets that was not required to be passed through the income statement. Think of it as a provision or other write-down. Wherever it appears in the financials, it is an economic loss.

Third, a loss of USD 22.985 million on Treasury Share sales. That brings the total cost of this pointless exercise to some US $161 million. That includes the cancellation of roughly 45% of GFH TS to occur this year, but excludes the cost of TS trading this year. Most recent post on this topic here.

So, the additional economic events from 2020 not recorded in the income statement are USD 37 million loss.

That makes “economic” earnings for 2020 USD 12 million. USD 49 million (Income Statement) less USD 37 million (Changes in Shareholders Equity).  

And should you discount the "special items" in reported income even lower than USD 12 million.