Update Gulf One Investment Bank Bahrain

Last December while commenting on the ongoing woes of Dana Gas, I mentioned that there were other firms in even worse shape and cited Gulf One Investment Bank in Bahrain.

It’s time to take another look at G1 as AA ventures off his well worn path of larger institutions in Bahrain.

As per its 2018 annual report, G1 has extended its string of losses in 2018 to five years.

Over the period from FYE 2013 (its last profitable year) through FYE 2018, G1 has:

1. Lost (but not in the sense of misplaced) approximately USD 92 million in equity, a 69% drop from FYE 2013.  Driven primarily by cumulative net losses of some USD 82 million over the period.
2. Suffered a decline of approximately USD 79 million in investments, a 73% drop from FYE 2013. Driven primarily by USD 57 million cumulative net losses in Investment Income.

You can see the details in G1’s 2018 and 2017 Annual Report both on Page 8.

This is rather a dismal record.

But Gulf 1's Board is confident in the future as evidenced by these quotes from the MD&A section of the 2018 Annual Report.

“The Bank made important strides in 2018 towards repositioning its business on a sustainable path, including expanding its income-based business and realising value from its private equity portfolio. In particular, the Board has undertaken a critical review of the challenges facing the Bank and is now evaluating significant structural changes that would put the bank on a stronger footing without affecting the range of activities it currently undertakes.”

So far the important strides have yet to be reflected in the financials.

As to the critical review, лучше поздно, чем никогда.

And again.

“The bank’s journey towards the realization of the value of its private equity investment continues into 2019. This process will have a favourable impact on the Bank’s ability to grow its successful income generating investments to take the bank to profitability and growing shareholder value.”

With cumulative losses of some USD 57 million in investments the bank’s journey towards the realization of the value of its private equity portfolio would seem to a very long term journey.  It will take some rather incredible multiples to cover these losses and generate an appropriate return.  But then 千里之行，始於足下.

 A few other observations.

Regulatory Issues

It pays to read the auditors’ opinion carefully.  In the section “Report on Other Legal and Regulatory Requirements” tucked away in the third bullet point is the phrase “except for the matters discussed in note 1” we are not aware of any violations of ….

The violations in question are:

1. Accumulated losses exceed 50% of paid-up share capital.  Resolution can be by an increase of paid in capital (raise new capital) reduce paid in capital to offset the accumulated loses, or wind up the firm.I’m guessing that of the three shareholders would opt for the second – a capital reduction. If that option is chosen, then G1 would have a short respite, if losses were to continue at the levels of the past five years.
2. But there's a wrinkle that complicates this strategy. G1 has insufficient shareholders equity. Central Bank of Bahrain Rulebook Volume 1 LR-2.5.2B requires wholesale bank licensees to maintain minimum total shareholders’ equity of USD 100 million.

G1’s Board has decided to surrender their wholesale banking license in favor of Category 1 Investment Firm.  There are no set amounts for minimum capital required for this license.  Rather the firm and the CBB will agree an amount based on the firm’s business. 

As I noted in December, G1 has no borrowings. There are no deposits taken from other banks or from individuals or corporates.  Its miniscule USD 7 million in liabilities consist of internal accruals.

Shifting from a bank to an investment firm seems to make eminent sense.

Other signs of distress.

1. The last press release on G1’s website is from 2012.
2. The last weekly update if from 2014.
3. The last research bulletin is from 2013.

Dana Gas 3Q 2018 Earnings: "Woof, Woof"

Earlier this year, I took a look at DG’s 1Q18 earnings and made some predictions for the full year.  A best case 4.5% ROE or worst case a break-even year.  As you’ll note, the best case falls well short of what would be an adequate return given the risk profile of DG.  

So how does AA’s prescient prediction look with a full three quarters of data?  

Frankly, not so good.                  

DG reported USD 41 million in net income for the first nine months of the year.  Pro-forming this for the full year, would result in roughly USD 55 million for the full year or an ROE of 1.9%.  

But to get a sense of the return from ongoing operations, we need to exclude two special items.  Those are USD 8 mm in 2Q18 sukuk restructuring expenses and a 1Q18 reversal of 13 million in previously accrued expenses.  If we exclude both amounts—a net of negative USD 5 million--, DG earned some USD 36 million over the first nine months of the year.  Pro-forming this over 12 months results in projected full year net income of USD 48 million or an ROE of 1.7%.  

Inadequate when one considers what would be a normal ROE for a stock investment.  

Dismal indeed when considers the higher ROE that that a risky stock like DG should deliver. 

To boot DG’s ROE remains well below its current roughly 4% cost of borrowing which is artificially depressed from the appropriate risk adjusted cost by the restructuring.  

Of course, there could be a miracle in 4Q18. 

The hoped for settlement with NIOC could materialize.  The US Government could graciously facilitate Iran's payment of the settlement proceeds to DG and, perhaps, as well give DG a license exempting its transactions from newly re-imposed US sanctions on Iran.  

At this point, it appears that the best value creation opportunity DG has is to repay its debt in full.  That will result in a net "benefit" of some 2.1% per annum to shareholders.  Dividends are another option - as it might be expected that shareholders could find other investments to return more than 1.9% a year.

To end on a rare (for AA) positive note,   all things are relative.   

DG may be a “mutt” investment, but AA suspects that investors in Gulf One Investment Bank Bahrain might find it quite attractive. 

Gulf1 has not reported a profit since FY 2013 and appears poised to continue that "run" in FY 2018.  Over the period FY 2014 through FY 2017 Gulf1 “lost” (that doesn’t mean “misplaced”) some 57% of its total equity:  from USD 133 million at FYE2013 to USD 57 million at FYE 2017.  

It’s hard to say how FY 2018 will turn out, though the loss this year for nine months is larger than for the comparable period last year.  But as is well known providing an opinion on fiscal year audited financials generally concentrates the minds of auditors more sharply than the  signing off on interim unaudited financials.  In 2017, the bulk of G1's USD 27 million loss was booked in 4Q.

On another somewhat positive note:  Gulf1 is equity funded so there are no lenders with significant exposure and thus in significant danger.