GFH: A New and Improved Strategy

Not Proof of a Successful Strategy, Hard Work, or Integrity

If you’ve read GFHFG’s press release regarding 2016 net income, you’ll see that GFH has declared success in implementing the strategy it announced in December 2014--a scant two years after announcing what was described as a "long-term" strategy--and the  need for a new strategy.

Let’s let GFH’s top management set the stage for this post.

Commenting on the results, Dr. Ahmed Al Mutawa, Chairman of GFH, said, “We are extremely pleased to have delivered great performance for 2016. These results are a testament to the success of the strategy that GFH has adopted since 2014, and the commitment and integrity of the Board and management team. Our results were supported by the significant recoveries that saw $460 million of assets restored back to the Group, a major benefit for shareholders and one that will allow us to deliver stronger results for the years to come.

Building on the successful achievement of our strategy for 2014-2016, GFH’s Board of Directors has also approved and recommended a new strategy for 2017-2019, which focuses on accelerating growth by way of acquiring financial institutions, infrastructure investments and strategic assets. The new strategy will be presented for shareholder approval at the next General Assembly Meeting and are subject to final regulatory approvals.

Mr. Hisham Alrayes, CEO of GFH, added, “2016 was a year of significant progress across the Group and we are proud of the transformation that has been accomplished as demonstrated by our results.  During the year, we have delivered on our promise to shareholders and the market with regard to recoveries, which will effectively return to the Group all past accumulated and written-off losses of the last eight years.

We have also set the group foundations for the future by further strengthening our Investment Banking, Real Estate and Commercial Banking activities, and have taken sufficient provisions to make the Group’s balance sheet more efficient for future value extraction.

As a prelude to my comments, a recap of GFH’s 2014 strategy.

1. stable and recurring income, profitability and cashflow 
2. reduce holdings in “land-based” business  (real estate) from 50% to 40% in the midterm and to around 30% in the long term
3. ensure greater stability from global financial issues

You’ll find an excellent analysis of GFH’s strategy in this earlier post.

Now to my comments.

Chairman al Mutawa:

1. “Delivered great performance” -- According to my analysis GFH had an operating loss of some US$ 192 million for 2016.  The windfall earnings from litigation settlements do not reflect underlying performance or any fundamental change in GFH’s ability to generate income.  Operating earnings do.  And they evidence dismal performance and no substantial change. 
2. “Testament to the success of the strategy” -- Looking at the above key pillars, I don’t see that any of these were achieved.  Nor does the equivalent of buying a winning “lottery” ticket validate that strategy.  
3. “Commitment and integrity of the Board and management team” -- Frankly AA is puzzled how these two factors influenced the litigation settlement.    Since this was an out-of-court settlement, I suppose one could read this statement to mean that in conducting the negotiations GFH’s board and management team looked out for the interests of GFH and not the payees.  A strange comment to make. 
4. “Results supported by significant recoveries” – Excuse me.   The litigation settlement was the entire cause of the results.  As noted above without the settlement, GFH had a net loss from ongoing operations in 2016. 

CEO Al Rayes

1. “Proud of the transformation” -- What precisely has been transformed?  Certainly not the underlying business (see 2016 results from ongoing operations).   The windfall litigation settlement reflects nothing more than the successful conclusion of legal actions.  
2. “Laid the foundation”  -- One would expect a firm whose main business is real estate development to know that laying foundations and actually completing buildings are two different things.  Though I’m told GFH’s historic forte has been marketing.  There is I am told a lot of unfinished construction at the BFH – Villawhere as local wags have it.  Foundations laid buildings not completed.  Hardly a demonstration of anything except perhaps difficulties in persuading one’s lender to advance more funds. 
3. “Demonstrated by our results” – This is an even further stretch than “laid the foundation” as proving success of the earlier strategy. 
4. “Taken sufficient provisions to make the Group’s balance sheet more efficient for future value extraction” – Since impairment provisions are only to be taken to reflect the impairment of assets, this is indeed a puzzling statement.   Is Al Rayes admitting that GFH has overprovisioned in order to build up a “hidden reserve” to use to boost lower operating revenues in the future?  This could of course "demonstrate" the success of whatever strategy GFH claimed to be following at the time.  And as well the integrity and commitment of the Board.  Or is he admitting that GFH was severely underprovisioned?  

As regards the new strategy, mark AA as unconvinced. 

There seems to be nothing new here.   The touted potential acquisition of an Islamic bank in Bahrain and infrastructure development are fundamentally exposures to real estate. 

A glance at the Chairman’s report in GFHFG’s 2016 financials bears this out. 

Mentioned in quick succession are: 

1. Acquisition of a US-based  industrial real estate portfolio and discussion of existing US industrial real estate 
2. Jeddah Mall 
3. Villamar aka Villawhere? 
4. Harbour Row and Harbour Walk (also at BFH)
5. Tunis Financial Harbour
6. Gateway to Morocco
7. Mumbai Economic Development Zone

 A following post will take a look at the assets received in the litigation settlement. 

What is the quality of these earnings, a key issue for the Financial Group going forward.

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.