Analyzing GFH's 1Q2021 “Incredible” Performance

Whether It is Counting or acCounting
AA Helps You Keep the Numbers Straight
(Professional Actor - Not AA)

According to the headline numbers from GFH’s short form press release on its 1Q2021 performance, GFH had an “incredible” quarter.

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.

BBK 1Q2021. 

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 “

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.

What is a Consolidated Financial Statement and Why You Should Care

Arqala Minor with the Prep School's
Beloved Accounting Teacher Mr. Debits
I studied hard then so I could answer your questions today.

At first blush this topic no doubt sounds like it will be a recitation of arcane accounting principles and standards complete with multiple examples of journal entries and the tracking of matching debits and credits.

I promise you it won’t be. Can’t promise much on length though.

The real point of this post is the second part of the title.

You may be thinking why should I care?

After all the accountants will do their job and “account”. 

“Why should I care anymore about this than the recipe the hummus chef at Hummus Express uses?

The reason you should care is that consolidated financials are not the financials of a legal entity rather they are the financials of an “economic entity”. 

An economic entity that the accountants have “constructed” according to certain (accounting) principles. 

From a legal standpoint, this entity exists solely on the pages of a financial report.

Consolidated financials are designed to give a picture of the position and performance of the economic entity or group.

But they can also be misleading, if one doesn't know what they represent.

In the real world, one conducts business with legal entities not accounting constructs.

One buys the stock or debt of a legal entity. One signs other contracts with a legal entity.

Contracts with legal entities are enforced against legal entities and their assets.

Not against economic entities.  

One only gets protection from the "group" if subsidiaries of the parent guarantee the obligations of their parent.

What are the benefits from understanding consolidated financials?

First, the “ships” of many a credit officer or “wise” investor have floundered on the conflation of “consolidated” financials with legal entity financials. Legal entity financials look much different than those of a consolidated group.

Assets (including cash) that appear in the consolidated financials that one thought were available to the Holding or Parent Company are not.  Because they are  assets that belong to a separately incorporated company.

One which is likely to have other shareholders (NCIs) whose permission would be required to "use" them for the Holding Company. And whose reluctance/refusal to give permission to use their "money"   to bail out the Holding Company is probably a safe bet.

Absent a guarantee from the operating subsidiaries, if you lend to the parent company or invest in its securities, you have a claim against the parent company and its assets and cashflow as reflected in its legal financials.

Second, if you understand what you’re looking at, you will be able to get a better sense of the performance of the legal entity whose stock or debt you own. And whether you should accumulate or divest. 

Sometimes you can get an insight into problems in the "group" merely by looking at the NCI share of income.  

In 2019 the NCI share of income at GFH was minus $13 million.  If we assume a 50% split between GFH shareholders and NCIs, this means that GFH also experienced a similar loss. But in GFH's case there was other income that absorbed that loss. The size of the total loss would suggest that there were problems in a major subsidiary.  KHCB would be a likely candidate.

How does consolidation work?

Consolidated financials include not only 100% of the assets and liabilities of the subsidiaries and associated companies that meet the accounting tests for consolidation, but also 100% of their revenues and expenses (thus, their net income). 

Any transactions between the "group" companies are eliminated, i.e., removed from the financials.

When subsidiaries are not 100% owned by the Holding Company, two adjustments are made to reflect the non controlling shareholders’ interests (NCIs).

On the balance sheet a single line adjustment is made on the liability side by creating a component of total equity called Non Controlling Interests. 

No adjustment is made for assets and liabilities of the NCIs on the balance sheet. If you're looking to the consolidated financials as an indication of the assets the "group" has you should not "count" those belonging to the NCIs.  But you have no idea what assets and liabilities "belong" to the NCIs.

A similar approach is taken on the income statement. A single line adjustment is made in net income for the 100% of NCI revenues and expenses by distinguishing a component called “net income attributable to NCIs” from “net income attributable to shareholders of the group”.

Keep in mind that this is a single adjustment across all the subsidiaries. If NCIs have net income of $104 in some subsidiaries and a net loss of $100 in other subsidiaries then the amount shown will be $4.  Again the absence of detail is not particularly helpful for analysis.

Also keep in mind that NCIs are unlikely to be exactly the same parties across all subsidiaries.

Let's turn to Citigroup to get real life examples of these key points with the intent to make them more concrete.

To be very clear there is no negative connotation in the choice of Citigroup.

Rather there is a rich vein of information in their 2020 FY annual report. (Form 10K) 

Compare this to Note 33 in JPMorgan’s FY 2020 Annual report. (Form 10K) which has less detail.

2020 Revenues (Page 301)

Citi Parent’s net income is shown on the extreme left. Citi consolidated on the extreme right with adjusting entries in the middle.

There are wide differences in amount in each revenue or expense category.

In the end the net income for both Citi Parent and Citi consolidated is equal at $11.047 billion. 

But the details show that there are two critical differences between the two sets of financials.

First, Citi Parent does not conduct significant business on its own as reflected in the individual revenue and expense items. Its cashflow is largely secondhand and dependent on payments from the subsidiaries.

Second, subsidiary dividends drive Citi Parent’s cashflow. And, thus, are (a) volatile and (b) subject to constraints on payment.

In 2020 Citi Parent did not receive $9.894 billion of that year’s net income in cash (roughly 90%).

And will not until the subsidiaries pay it dividends.  Until it receives the cash it cannot use it to settle obligations, make investments, etc.  

Government agencies or regulators have the right to restrict the amount of dividends that a regulated firm—think primarily FIs--may pay under various measures to "protect the financial system". 

In all firms shareholders must approve the payment of dividends through formal processes, e.g. AGM.  So one can't simply ring up the subsidiary and ask for $1 billion in dividends by tomorrow.

As to volatility, in 2019 and 2018 (pages 302 and 303), Citi Parent received dividends 10x those in 2020.  In both of those cases the dividends were more than 100% of those years’ net income.

Also look at the penultimate column on the left "consolidating adjustments".  That will give you an idea of intragroup transactions "eliminated" on consolidation.  You will also see this on the balance sheet, statement of cash flows. 

2020 Balance Sheet (Page 304)

Here the difference is even more stark.

Citi Parent had total assets of $386.134 billion, while Citi consolidated had assets of $2,260.090 billion (almost 6x Citi Parent).

Even more telling, 95% of Citi Parent’s assets were equity in subsidiaries (55%) and advances to subsidiaries (40%). Probably most holding companies look like this. They after all are “holding” equity in subsidiaries.

Compare that to the consolidated financials where there is a greater range of asset types and a greater range of liquidity as well as much larger amounts..   

That has implications when there is corporate distress.

Distress at the subsidiary level is usually but not always the cause of distress at the Parent. 

At this particular time the Parent will be even more dependent on the subsidiary for cash because it most likely has no significant operations of its own. In such a case dividends are unlikely.  Selling the equity in the subsidiary or pledging it as collateral is unlikely.  

The most likely scenario is that the Parent will have to wait for its share from the liquidation of the subsidiary's assets.

Because the Parent holds equity in the subsidiaries, it is last in the priority of payments. Senior creditors get paid first, subordinated creditors next, and equity holders get what’s left. Usually that’s nothing or close to nothing.

There is also a risk that Parent extensions of credit to the subsidiaries may be equitably subordinated to other subsidiary creditors or recharacterized as equity. This of course depends on jurisdiction and the specific circumstances/form of the extension of credit.  

If this happens, the cash flow from the subsidiary to the Parent will be even less.

Even if it doesn't,  Parent Company creditors and investors are likely find themselves at the very end of the cash "waterfall".  

Not where they thought they would be when they extended credit or invested. 

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.

Gulf Finance House –2018 and 1Q19 Treasury Share Transactions Cost GFH Shareholders More than USD 37 Million

Satellite View of GFH Statement of Changes in Shareholders' Equity 

Update  12 June below in red.

The sad story of wasted shareholder money continues here.

First, a technical note to ground the analysis that follows.  In line with accounting standards, gains and losses on sales of treasury shares don’t pass through GFH’s income statement so technically they are not “income”.   But since this decline in value is the result of deliberate actions by GFH, it’s hard for AA not to consider this the equivalent of an income statement “loss”.  And I shall use the term “loss” in that sense in this post.  

Now to the analysis.  

In his Shareholders Report in the 2018 audited consolidated financial statements, GFH’s Chairman stated: “Also of note during the year, GFH took active steps to support its share price and market capitalisation, acquiring treasury shares up to 7% of the Group’s total issued shares.”  

Indeed, it did!  

But perhaps the results weren’t so good for GFH’s shareholders.  

In short (1) a lot of money was spent and lost and (2) the impact seems to have been minimal.  

As per AA’s analysis, it appears that the net result of GFH’s buying and selling of its own shares in FY 2018 was a reduction in equity of some USD 27.9 million.   If you’ll look at Statement of Changes in Shareholders’ Equity in GFH’s 1Q19 interim unaudited report, you see that GFH admits to losses of USD 24. 8 million on treasury share transactions in 2018.  

AA believes the roughly USD 3 million difference between AA and GFH relates to the USD 3,058 million 2018 charge to the share premium account which zeroed it out.  It appears that GFH considers that “loss” to be covered by earlier years’ gains.   

You will also note in the 1Q19 report that GFH has continued its treasury share transactions in 1Q19 for an additional USD 9.6 million “loss”.  And three more quarters left this year.  That's a time reference not a monetary one.

So a total of USD 34 million by GFH’s accounting and USD 37 million by AA’s.  

But you might ask AA:  Yes, but what about the impact on the share price? Surely, this was a small price to pay for “supporting GFH’s share price and capitalization”.  

GFH’s closing share price on 2 January 2018 was AED 1.520 and on 31 December 2018 was AED 0.902, according to investing.com.  Looking at share price performance only, that’s a decline of approximately 41%.  The share price at the end of March and May this year was in a similar range to the FYE 2018 price. 

I suppose in defense of GFH one might argue that absent their efforts the price would be even lower.  AA will not.  

The central question is why GFH is spending shareholders’ money to prop up the stock price?   

And perhaps whether regulators think that the method employed is “sound practice”?  

We don’t really know what is motivating GFH’s board and management. 

But what we can do is take a detailed look at their actions and try to guess (note that word) what is going on.  

In the recent past, GFH had minimal treasury share transactions.  It was only in FY 2017 that break was made with past moderate efforts.  FY 2018 saw a real break with the past as this chart demonstrates.  

GFH Financial Group Holding of Treasury Shares
FYE		Number of TS		Total Issued Shares		TS as % TIS
2013		5,283,272		3,161,889,967		0.17%
2014		5,204,536		4,730,665,467		0.11%
2015		24,503,697		2,256,583,403		1.09%
2016		2,211,891		2,256,583,403		0.10%
2017		106,467,804		3,681,450,441		2.89%
2018		255,455,953		3,681,450,441		6.94%

Source:  GFH Annual Reports  

1. Clearly, FY 2017 was a transitional year from the pattern of the previous four years.  
2. FY 2018 saw an “explosion” of Treasury Share transactions.  

Let’s look a bit closer at FY 2018.   

GFH Financial Group Treasury Share Transactions
by Quarter for FY 2018 -Millions of US Dollars
		TS BOP		Buy	Sell	Net = B-S	TS EOP	G/(L)
Q1		$58.4		$5.4	$3.2	$2.2	$60.6	($0.9)
Q2		$60.6		$10.8	$20.6	($9.8)	$50.8	($5.2)
Q3		$50.8		$56.1	$17.9	$38.2	$89.0	$0.0
Q4		$89.0		$88.7	$92.3	($3.6)	$85.4	($21.8)
FY TOTAL				$161.0	$134.0	$27.0		($27.9)

 Source:  GFH 2018 Quarterly Financials, Amounts in Thousands of US Dollars

1. TS= Treasury Shares BOP = Beginning of Period, EOP End of Period.  G/(L) = Gains/Losses.  
2. Buys in 4Q18 were 55% of the FY’s total and 69% of sales.  
3. It appears that these (4Q) sales were undertaken to either fund new purchases or because of imposed limits on the amount of Treasury Shares GFH was allowed to hold either from its regulator (CBB) or the GFH Board itself.  Or perhaps some combination of both.  
4. 78% of FY 2018’s loss on Treasury Share transactions occurred in 4Q.  
5. That suggests, but does not prove, that GFH was frantically trying to stave off a decline in share price for the “all-important” FYE 31 December reporting date.  

Just how frantic that activity was can be seen from the next two charts.  

First, let’s look at 4Q18 transactions in GFH shares on the BSE, KSE, and DFM.

Trading in GFH Financial Group Shares 4Q2018
		Local Currency		USD Equivalent
BSE		BHD 6,379,970		USD 16,906,921
KSE
Oct		KWD 1,013,881.569		USD 3,335,137
Nov		KWD 311,267.257		USD 1,023,905
Dec		KWD 4,119,336.652		USD 13,550,450
DFM		AED 1,363,936,328.99		USD 371,644,776
TOTAL				USD 406,461,188

Sources:  BSE, KSE October, KSE November, KSE December, and DFM.

1. With the DFM, you’ll have to do a bit of manual tinkering to select the time period.  Click on the orange box on the upper left hand side of the Bulletins Page.  Select 2018 and then Q4.  
2. What emphasizes the “frantic” nature of GFH’s efforts is the percentage of their Treasury Share transactions of the above total as detailed in the chart below.

GFH Financial Group Treasury Share Transactions 4Q18
	Amount		% Total 4Q18 Transactions
Buys	$88,662,000		22%
Sales	$92,267,000
Loss on Sales	-$21,780,000
Net Sales	$70,487,000		17%
Total Transactions	$159,149,000		39%

Sources:  Previous Two Charts.

1. Percentages are calculated using the Total Transaction from the previous chart, i.e., USD 406,461,188.  
2. Net sales transactions are estimates of cash proceeds = Cost – Loss = Cash.  
3. Chart is based on the assumption that all of GFH’s Treasury Share transactions took place on a stock exchange.  
4. If the above analysis is correct—and AA invites readers to point out any mistakes—then GFH had an outsized share of transactions.   Does AA dare use the phrase “حوت الخليج“ ?   

What are we to make of all of this? 

Here are some thoughts of what might be going on.  Not proofs, but rather conjectures.  

Some of you out there may have other thoughts.  Please post a comment. Share your views.   Point out AA's mistakes.

If we assume limits on GFH’s holding of Treasury Shares (as a percentage of shares rather than a USD amount), then it would seem likely that GFH’s management would be aware that attempting to continue to prop up the share price in 4Q18 would require selling some of the existing Treasury Shares to make room for new purchases.     

And that selling those shares would lead to losses.  

If one looks at the average Buy/Sell ratio by quarter (adjusted for the cash losses on existing Treasury Shares), it’s 1.7 in Q1, 0.7 in Q2, 3.1 in Q3, and 1.3 in Q4. 

Clearly, the “bang for the buck” in Q4 is rather limited.  Each USD 1 of existing Treasury Shares sold only increases demand by USD 1.3.   Hard to see that having a material effect on the price.  

Perhaps that explains GFH’s whale-sized share of total trades in 4Q.  Trying to use volume to move the price in a favorable direction.

But taking on that volume of transaction caused substantial losses. 

AA is at a loss to understand why GFH did not stop trading in its shares when the losses began to mount.  If this were FX or other trading, a stop loss limit would have been triggered.  

GFH’s shareholders were bleeding substantial cash.  And consequences of continuing in 4Q18 are highly likely responsible for some of the pain in 1Q19. Overall a loss to the tune of USD 37 million for FY 2018 and 1Q19.  

We don’t know what GFH’s reason for continuing Treasury Share transaction but they certainly evidenced determination to proceed David Farragut style at a level that AA interprets as “frantic”.  

All this leads AA to conjecture that there seems more to this behavior than merely propping up the share price because it appears management accepted the large amount of losses incurred.  

What could motivate this behavior?  

As noted above we don’t know. 

But if we want to conjecture, what could be possible motives?  

Was GFH propping up the shares to “help” those investors who financed their share purchases using the shares as collateral?  And were exposed to lenders calling in the loans or asking for more collateral?  If so, who might those shareholders be?  

If Homer can nod, surely AA can.   In early August 2018 as reported by Gulf News, GFH advised the market "that on Thursday that its shareholders Abu Dhabi Financial Company (ADFG) and Integrated Capital (IC) have transferred 102,094,573 and 79,905,427 of GFH’s shares respectively from their NINs to Al Hilal Bank for a financing facility."   Coincidence?

Or perhaps to help investment funds who bought GFH’s shares “high” and would have to report a loss to their investors based on FYE 2018’s much lower price?  Who might those funds be?

Well, according to press accounts, Goldilocks acquired a 4.9% stake in GFH in January 2018.  At that time shares were trading around AED 1.5 per share.   As noted above with the share price at AED 0.902 at year end, Goldilocks would have to have reported a 41% loss on the investment considering only movement in the stock price over the year. 

AA in the Press Again as Usual with Similar Effects, Sadly

Reporting “Rant” Questions 

In previous years, GFH’s Statement of Changes in Consolidated Equity clearly labeled the results of Treasury Sales transactions which resulted in a Loss or a Gain by using those exact words.  That changed with the 2018 FYE report.  The loss amounts appear but there is no descriptor.  

Those who know their IAS/IFRS would understand that there was a loss in 2018.  But AA believes that certainly not all of GFH’s shareholders are accounting experts.  And it’s highly likely that only a handful are.   And how many of the accounting experts are reading GFH's financials?  

2018 was coincidentally a year in which the loss was quite large.  

Questions for GFH:

1. Was this change designed to avoid drawing attention to the loss?  
2. Or a simple oversight?  If this is the case, what caused the change in the existing template?  Or in other words, why change the tried and true? 

Interestingly, the term “loss” to describe 2018 was used in a footnote to the 1Q19 interim financial Statement of Changes to Consolidated Equity.  But in the same note on page 4 in the 1Q19 financials, the 1Q19 "loss" was again not used as it had been in past as part of the main text?   Why is this?  

Questions for external auditors,

1. Did they “miss” this rather important change in 2018 AR?   
2. Or did they approve it?  
3. Additionally, when a bank loses an amount this size (some 20% of net income) is this not a material piece of information that needs to be highlighted?  And not buried in a note?  Which is unclear except to accountants? 
4. Would auditors consider this level of "trading" in a firm's Treasury Shares as constituting "material information" as well? 

More posts to come on GFH’s 2018 results.