GFH 2019 EGM – A Timely Accounting Lesson for Shareholders of All Companies

Not Available, You'll Have to Make Do with AA's Tuition

Note this post concerns the EGM held in March 2019 for FY 2018.

As promised earlier, AA has prepared a translation of the EGM Minutes which are available elsewhere in Arabic only.  

The contents of this meeting are certainly interesting in their own right.  

But AA thinks there’s something more significant here. 

That there is an important lesson for shareholders of all companies to learn.  That is, shareholders need to look at more than just the Balance Sheet and Income Statement.

According to the formal published minutes of the EGM, there does not appear to have been any shareholder comment or discussion, except on two points. And that discussion was in AA's opinion sorely off point.  

So AA will focus on those two and draw the lessons to be learned from the second point – the discussion or lack thereof on the cancellation of Treasury Shares.  

You can use the English or Arabic very brief summaries of the EGM available on the GFH or DFM website for the other points.  

First point:  Mr. Ali Tariif asked why HSBC acting as representative of investors holding 1.68% of GFH’s shares had objected at last year’s EGM to the proposals in Agenda Items #2 and #3 to amend the Memorandum and Articles of Association to comply with changes to Bahrain Company Law and requirements of the Central Bank of Bahrain with any such changes subject to CBB approval (#2) and authorize the Chairman or CEO to delegate authority to another person to implement such changes (#3).  Agenda here.  

AA couldn’t find 2018 EGM or AGM minutes for FY 2017 to see if these would shed any light on the topic.

Mr. al Seddiqi responded that the majority of shareholders present at the EGM voted for the proposals.  

Essentially he did not answer the question directly.  Perhaps, he did not know. In any case these actions were forced on GFH by operation of law and changes were subject to CBB approval.  

Second point:  Regarding the cancellation of 207,547,170 Treasury Shares, Mr. Tariif asked about the mechanism for deleting the shares.  Mr. al Seddiqi responded that GFH’s lawyers would provide him a complete explanation about the mechanism after the meeting in the case the shareholder needed more details. 

That's the end of AA's translation of the EGM Minutes.  

It’s clear to AA from this that shareholders did not understand that GFH had purchased the Treasury Shares using GFH’s cash (ultimately shareholders’ money) and that by cancelling them the money “invested” in Treasury Share would be lost. 

Why is it so clear to AA?  

In the AGM the shareholders evidenced a serious concern about “money points”, e.g., the increase in expenditures, Board remuneration, dividends, etc. So it’s unlikely they would be indifferent to this spending of their money.  Thus, they must not have known. 

Given the amount concerned, they missed the elephant in the room. 

1. That is, a cancellation of Treasury Shares would cost them perhaps between 12x and 20x the USD 3.5 million proposed as 2018 compensation for the Board. 
2. Or that it is an amount equal to 1.4x to 2.3x the USD 30 million cash dividends to be paid in 2019. 
3. The two data points used to compute those ratios are the FYE 2018 USD 0.33 average price per Treasury Share and an estimated 1Q19 USD 0.22 average price. 

Why?  (Tuition bit starts here). 

Because the gain or loss on Treasury Share transactions does not appear in the income statement. 

And because the decline in equity due to purchasing Treasury Shares occurs upon purchase. It occurs gradually over time.  Not all at once. 

Cancellation of Treasury Share involves accounting entries within the equity account alone.  There is a credit to the Treasury Shares sub-account offset by a debit to Retained Earnings.  There is no net resulting change in the amount of shareholder equity. Thus, the loss is “invisible” to shareholders. Cancellation may, therefore, appear as a “costless” transaction.  It is not. 

Earlier in the AGM meeting Mr. al Seddiqi mentioned the purchases of Treasury Shares as one reason why shareholders’ equity declined along with dividends. Clearly, the implications did not register sufficiently with shareholders.  

AA’s observations. 

1. Investors would be well served by knowledge of the information available in the various financial statements provided in an annual report. One doesn’t need to be a CA or CPA to glean information from these. 
2. Paying close attention to what is said in meetings can also be of benefit. 

To address the first point AA will provide some tuition about sources of information in financials that can help shareholders and others track and understand the impact of non income statement events.  

AA sadly is unable to help on the second as Madame Arqala will testify. 

As noted the Income Statement and Balance Sheet do not provide the information that would be useful to shareholders in analyzing the cost of cancelling the Treasury Shares or the profit and loss earned from trading in them. 

However, the Consolidated Statement of Changes in Owners’ Equity (CSCOE)--also known as the Consolidated Statement of Changes in Shareholders’ Equity--and the Consolidated Statement of Cash Flows (CSCF) do contain useful information.  Information that can be used to analyze other non income statement transactions that affect the value of a company not just those involving Treasury Shares. 

In the CSCOE the total value of purchases and sales of Treasury Shares during the reporting period are clearly stated.  Also one can determine the profit or loss on sales of Treasury Shares during the period.  The value (cost of acquisition) of all Treasury Shares held by the company as of the statement date is also clearly stated. 

Information on how many Treasury Shares are held is disclosed in the Equity Note, at least in the FYE report.  One can use that information to compute an average purchase cost of a Treasury Share and then compare it to the market price to see if there are potential losses or gains in the Treasury Shares account and their magnitude.  And, perhaps, whether Treasury Share transactions appear to have been in the shareholders’ interests. 

To start some accounting basics. 

Entries on the liability and equity side of the balance sheet are the mirror opposites of those on the asset side.  This is to maintain the logic of double entry bookkeeping.  Assets = Liabilities + Equity.  

A purchase of a Treasury Share is recorded as a negative (a debit because it decreases equity). 

A sale is a positive number (a credit because it increases equity).  

A loss on a sale must therefore show up as a negative entry because like any loss it decreases Shareholders’ Equity.  

Keep these basic points in mind as we proceed. 

To make this clearer via some examples.

Open your textbooks (GFH’s FY 2018 AR) and turn to GFH’s 2018 CSCOE on page 9.  

During 2018, GFH purchased Treasury Shares in an aggregate amount of USD 160.973 million (shown as a negative). This is the total price paid for Treasury Share purchases during fiscal 2018 and is recorded in the Treasury Shares sub-account in Shareholders’ Equity. 

GFH also sold an aggregate of USD 133.966 million of Treasury Shares (shown here as a positive number).  Similarly recorded in the Treasury Share sub-account.  This amount ascribed to sales is the original purchase cost of the Treasury Shares sold not the cash received for them. It therefore does not reflect profit or loss but merely the equivalent of the cost of goods sold. Keep that point in mind.

The net of these two resulted in the value of Treasury Shares increasing from USD 58.417 million to USD 85.424 million as shown in the opening and closing negative balances of the Treasury Share sub-account. 

How did GFH do on the sales of Treasury Shares in 2018?  Did it sell them at a profit?  Or a loss? 

It had a loss which was recorded as a decline of USD 3.058 in Share Premium and USD 24.818 million in the Statutory Reserve Account (SRA). Note both figures are presented as negatives in the CSCOE because a loss on the sale of Treasury Shares is the same as any other loss it reduces equity.  

Side comment:  AA is puzzled by use of the SRA to reflect the loss on sale of Treasury Shares.  AA also notes that starting in 1Q2019 GFH began reflecting losses on Treasury Share sales directly to Retained Earnings. This is certainly more transparent regarding profit and loss than the previous year’s entries. There’s that word again (شفافية ). Keep it in mind.  I’m sure we’ll hear it again. It often comes up in regard to GFH. 

From this information we see that the total loss in FY 2018 was some USD 27.876 million.  Or in other words, GFH sold Treasury Shares it previously purchased for USD 133.966 million but only received consideration (presumably cash) of USD 106.090 million. 

You will note that this amount appears in the “Total Change Attributable to Shareholders of the Bank” (TCASB) (on the right on the page) on the line for Treasury Share sales. Looking at the amount shown in TCASB and comparing it to the amount shown as "sales" in the Treasury Shares column gives a very quick insight whether there was a profit or a loss.  If the number in TCASB is less than "sales", there has been a loss.  If it's greater, there is a profit..  

Note: The sub-accounts are displayed vertically as columns, e.g. Share Capital, Share Premium, Treasury Shares, etc.  

We can use a similar method to analyze the cost or loss of cancelling the Treasury shares.  There will be a positive number shown (remember this is the cost of the shares)  in the Treasury Shares sub-account and the same amount though a negative number shown in the Retained Earnings sub-account.  No cash received.  No revenue. The loss equals the cost of shares that are being canceled.  This should appear in GFH's 2Q19 interim financial statements. 

But we can estimate the "loss" now.   Calculate an average price per Treasury Share and multiply times the number of shares to be canceled.  See earlier post here.

This technique can be used with other sorts of transactions. 

Take a look back in the CSCOE in GFH’s 2017 AR to examine the issuance of USD 314.530 million in new shares in exchange for GFH assuming ownership of certain infrastructure and portfolio investments.  That amount (USD 314.5 30 million) appears in the Share Capital sub-account. You’ll notice in the Total Change (again attributable to bank shareholders) column for the line “Issuance of Share Capital” that GFH received value of USD 293.106 million which indicates that shares were issued at a discount. More on that in a post to follow. In the interim some preliminary thoughts from an earlier post.

Here’s another way to think of a Treasury Share sale to understand losses and gains. 

Recall that the original cost of the purchase of a Treasury Share is recorded in the Treasury Shares sub-account (within Shareholders Equity).  When the company sells a Treasury Share it must remove the cost of that share from the Treasury Shares sub-account.  Think of this operation as the equivalent of determining the Cost of Goods Sold (COGS).  Cash or consideration received is the Revenue.  If COGS is greater than; Revenue, there is a loss equal to the difference Revenue – COGS.  If Revenue is greater than COGS, there is a profit equal to the difference Revenue – COGS. 

But unlike other gains or losses which flow through the income statement, including the "comprehensive statement of income" which usually follows the traditional income statement in financial reports, the gain or loss on treasury share transactions is  directly deducted from equity in the case of a loss or added to equity in the case of a profit.  

Now open your other textbook (GFH’s 1Q19 interim statement) and look at the CSCOE on page 4 at Treasury Sales, the negative number appearing in the Retained Earnings Column means the GFH had a loss on a sale of Treasury Shares of some USD 9.574 million.  GFH sold USD 40.86 million of Treasury Shares (COGS) but received only USD 31.286 million (USD 40.86 million less USD 9.574 million) in Revenue (Cash). Notice that USD 31.286 appears in the Total Column Attributable to Shareholders of the Bank (appearing on the right side of the page). 

Let’s turn to the Consolidated Statement of Cash Flows.  In the CSCF one gets the net flow for the year – purchases offset by any sales.  The point here is that if one can see the net cash going out of the company (a net purchase) or cash coming into the company (a net sale).  One can compare the amount to the other cash inflows and outflows during the year. One can do this with Treasury Share transactions and other non-income statement items. 

But of course, you’ll want to look at the detail shown in the CSCOE as a net of USD 10 million could be that there were only USD 10 million in purchases.  Or it could be the net of USD 1,010 million in purchases and USD 1,000 million in sales.  

For example, in GFH’s 2018 AR the CSCF shows net purchase of Treasury Shares of USD 54.883 million in the section “Financing Activities”.  Referring to the CSCOE, we see there were USD 160.973 million in purchases and net sales (after loss) USD 106.090 million.  Confirming our earlier analysis that GFH lost USD 27.876 million on the sales. If you were to merely look at the Treasury Shares sub-account and ignore this number, you'd think that net purchases were USD until you remember that the "sales" shown are cost of goods sold not revenues or proceeds of sales. 

Other Uses:  Under accrual accounting, a firm recognizes income when earned (creating an account receivable) and expenses when incurred (creating an account payable). These recognition events often occur prior to the movement of any cash.  So it’s not uncommon for revenue and thus income to be recognized in one period and received in another in the future.

The CSCF will also show which revenues have been received in cash during the reporting period and which expenses have been paid in cash.  One can also look at revenues that have not been collected to determine whether there will be a cashflow in the future. 

Let's start with expenses and then turn to revenues.

For example, a provision for a legal case is a non-cash charge for estimated future cash payments which may or may not occur. 

A reversal of a provision, e.g., the USD 35.3 debt settlement gain on AHC in FY 2018 (a reversal of a previous legal provision), will never result in a cash inflow. 

A loan provision is established to cover the possibility that the borrower will not pay the loan in full.  It is an estimate of the amount of non-payment.  

A depreciation charge is not paid in cash during the reporting and won’t be paid in the future.  It is the expensing of a purchase of a machine or other “hard” asset made in the past.  That cost is expensed according to estimates of the useful life of the “hard” asset. And there may be more than one depreciation method.  Methods that stretch the charges over many years make income higher.  Methods that accelerate depreciation will make income lower. 

To track receipt of revenues one can use the CSCF to if there are any adjustment to net income.  For example in GFH's 2018 AR, we see that USD 113.1 million in "debt settlement income" was not received in cash.  We can also see adjustments for other items, such as depreciation which is added back.  In general when income is recognized, an account receivable is created.  As the money is collected, the receivable will decrease.  Of course, if there is new income recognized, then that decrease may be partially or fully offset depending on the amount collected and the new amounts recognized. 

How does one dig further?   

One should go to the notes to the balance sheet to see if money was collected. 

Looking at GFH’s 2018 AR we see they booked some USD 121 million in revenue in 2017 for Investment Banking Fees.  A look at Note 16 indicates that this was either all or largely received in 2018 – the receivable for IBF is down some USD 100 million from FYE 2017.  If one looks at GFH’s 2017 AR, Note 11 there is a footnote that USD 104.6 million was received in January 2018. 

If there is a decline in receivables, one can’t just assume that cash was received.  One needs to read the Note (usually Other Assets) to see if there was an impairment provision that accounts for the decline.  Or that these receivables were settled for non-cash consideration, e.g., shares or other investments.  

And then one might want to look at just what that non cash consideration is and whether there is any question about the “value” of these non cash assets both in terms of their credit/investment quality or the time it will take to realize them, that is, to receive cash from them.  

Delayed receipt of payment is a discount in present value terms.  A $100 receivable paid today is worth a lot more than $100 paid five years from today as AA expects the hapless shareholders of Dubious Gas know all too well. 

Knowing these additional sources of information and how to use them can help shareholders and others better understand the performance and health of companies.  And help guide them as to questions to pose to management.

Translation of GFH 2019 Annual General Meeting Minutes - Part 2 of 2

AA Takes a Moment to Reflect on the Nuances of Translation

Arabic is  a Language of Subtle "Taste" Like a Glass of Cold Vimto

And Both are to be Savoured and Enjoyed

Here’s the continuation from Part 1.

As before, if any reader of Arabic sees an error or shortcoming in my translation, please post a comment.  AA would welcome the tuition.

Discussion of Fiscal Year 2018 Financial Statements (Agenda Item #5)  

During the discussion Mr. Ahmad Abdullah asked for clarification on the settlement of the (Villamar) Sukuk.  Mr. Jaliil Aali of KPMG explained that GFH had settled a sukuk issued by a related company at a discount that resulted in a USD 77.8 million profit. 

This would appear to be precisely what was said in the FYE 2018 annual report with no further details provided.  But we don’t know if there were more points that were edited away. 

Mr. Abdullah continued by asking about the increase in personnel expenses and whether it was going to continue.  GFH’s Chairman noted that it included the expenses of KHCB and other companies in the Group.   And that it would continue or not in line with the growth of the Group.  

Responding to a follow up question on this topic by Fadi Majaaly, GFH’s Chairman noted that according to accounting principles, GFH included 100% of KHCB’s personnel expenses in GFH's personnel expenses not just GFH’s ownership share in KHCB (55.54% but not mentioned) and that these and other similar expenses are deducted from profit at the end (presumably a reference to the one line attribution of the share in net income due to “Non-Controlling Interests”.  This one line figure is a net of revenues and expenses as its name indicates). And note well GFH also recognizes 100% of the revenue of consolidated firms which is similarly adjusted via the NCI allocation of net income.

Fadi noted that the y-o-y growth in expense was 18% much above other banks and that these other banks were working to reduce expenses.  That was important because 95% of profit was from debt settlement.  

GFH’s Chairman noted that the profit was not generated by debt settlement but by contracts to acquire companies (capital reorganizations) and the sale of assets to “the company” (unclear what this reference is, but it seems it may be GFH) and the profit was real and that the auditors had agreed to the amounts shown.  

Whatever the case AA doesn’t understand the Chairman’s reply.

First, it is a fact that GFH recorded USD 77.8 million for debt settlement from GH and another USD 35.3 million from AHC. In the first case the amount arises from the difference between the face amount of the Villamar Sukuk and the price at which it was purchased.  The second from a reversal of a  prior year non-cash provision for settlement costs.

As far as other profit associated with the acquisition of GH, GFH had not recognized any change in asset values or good or bad will in connection with that transaction.  Perhaps, it’s a reference to the acquisition of AHC – the other component of the debt settlement income for the year.  If so, the amount doesn’t appear to be material.

In any case if GFH acquired GH, but Al Rajhi did not sell the Villamar Sukuk at a discount.  GFH's FY 2018 net profit would USD 77.8 million lower. 

Mr. Ziyaad alBanaa spoke up to say that there were individuals (presumably shareholders) who had no idea about the matters appearing in the annual report.  GFH’s Chairman noted that some shareholders (AA wants to emphasize these words) were deficient in following and reading the official announcements made by GFH as well as the articles written by GFH’s CEO Mr. AlRayes.  

The CEO then emphasized the need for shareholders to pay attention to official press releases by the Group.

Ziyaad continued that performance  (إنجازات)  should be added at the beginning of the report. (I believe that is a reference to metrics on performance rather than a recitation of other "accomplishments")  Mr. AlRayes referred to a press release the Group published at the Bahrain Bourse with detailed comparisons year by year, quarter by quarter, semi-annually of GFH’s performance, viz. profit, expenses according to the principles set down by the Central Bank of Bahrain.

Next up was Mr. Abdul Muhsin Ad-Darwiish, the representative of Al Rajhi who objected to the Chairman’s comments about shareholders being deficient in reading announcements. His complimented the efforts of GFH and paid tribute to its work, and then continued by complaining that the book value (per share) in 2018 was lower than 2016 and about the purchase of real estate portfolio in 2018

AA believes this is a typo.  In 2017 GFH increased its equity by persuading certain holders of infrastructure investments and GFH funds to swap those fine investments for even finer GFH shares thus increasing the number of shares roughly 63%.  That is dilution with not only a capital “D” but the entire word in capitals.  According to AA's calculations, these shares were issued at an approximate 5%  discount from the value of the assets received (USD 297.502 million) and 7.8% from net proceeds to GFH USD 293.106 million).  AA assumes the USD 4.396 million between the two are expenses associated with the issuance of the new shares. Thus, the 5% discount from par is the better measure of the discount.  Expect to see more on this topic in another post.

Mr. AdDarwiish asserted that there was no clarification of the profit to be obtained on exit (from the real estate purchased) and the transaction harmed “old” shareholders. And that the new shareholders had benefited at the expense of the old for the 2016 recovery of money.

A reference to the 2016 settlement of litigation that added USD 465 million to GFH’s income.  Presumably a reference to the new shareholders having the ongoing benefit as these assets were realized in the future.

And he continued that over 5 years the new shareholders had benefited at the expense of the old shareholders as shown by the decline in book value per share from 0.366 to 0.299 (USD). AA doesn't understand the "5 years" reference.  New shareholders entered in 2017.

Below is a chart that shows GFH’s book value per share, price to book ratio and market price over the period 2014 through 2018. Information from GFH’s website.

It’s not clear to me why Mr. AdDarwiish is focused on book value.  Perhaps he has some doubts—which AA shares-- about the efficiency of local markets and resulting “market” prices.  Or that GFH’s price support activities might distort its share price away from “fair” value.

Yet, when it comes time to sell one’s shares or pledge them to a lender for a loan, market value not the book value is going to be the determinant of value ascribed.

GFH Share Performance
	2014	2015	2016	2017	2018
BVPS	$0.14	$0.31	$0.40	$0.31	$0.29
P/B	1.24	0.38	1.13	1.23	0.83
Price	$0.17	$0.12	$0.45	$0.38	$0.24

Rather dismal performance across the board (read that as a pun if you’d like to).

Turning to Mr. AdDarwiish's first point, GFH's Chairman apologized for the misunderstanding noting that he had not meant that all shareholders weren’t reading (the press releases and other documents issued by GFH) but only some. (As outlined above, the minutes state that Mr. al Seddiqi did say "some shareholders" earlier).

He then continued noting the share repurchases and cash distributions were responsible for reducing the book value. And that if we wanted to grow and expand we would need to increase cash distributions and thus the book value per share will go down.  He also commented that there were profits in 2016, 2017, and 2018 which increased book value per share (BVPS).

This is patently absurd if we look at the change from 2016 to 2018. BVPS has clearly decreased. 

One can compare the relative impacts by looking at the change from 2016 to 2017 (dilution) and 2017 to 2018 (treasury shares). The impact of each is clear. 

As to distributions, if the number of GFH’s shares does not increase, then unless GFH pays out more in dividends than that year's net income, dividends will not cause book value per share to decrease. BVPS may not increase as fast it would if less dividends were paid out but it won't decrease. A key point here is that the dates used for comparison must be equivalent.  One cannot compare BVPS at FYE BV to BVPS on the ex-dividend date. 

That is less an issue with GFH.  With over 3.6 billion in shares and dividends per share at say 10% of par or USD 0.0265 per share dividends are unlikely to have an effect that most shareholders are going to notice.

As to Treasury Shares, while GFH did waste (sorry "invest") a lot of shareholder money with its excellent misadventure in Treasury Shares, the effect of the purchase on share book value was minuscule compared to the impact of increasing the number of shares 63% in 2017.  

Clearly, the trading in Treasury Shares caused real harm to shareholders.  By selling Treasury Shares below their purchase price as discussed here and then cancelling them as discussed here.  

It is unclear to me what he means by increasing cash distributions.  Is he referring to the fact that GFH needs to pay out more dividends and thus book value will not grow as much?  This is an answer to a different lament than book value going down.

One might ask if GFH wishes to grow and expand, should it therefore limit dividends and treasury share purchases to husband cash for investments?

On the other hand, if GFH makes (buys) new investments, there should be no impact on equity if it funds the purchase by using its cash.  The new investment on the books is offset by a decrease in cash. 

If GFH funds the investment with a loan, then loans will increase.

In neither case is there a change in equity. Equity will change when profit or loss is recorded on the new investments.

If GFH issues new shares for the new investment as it did in 2017, then yes book value per share will go down unless the seller agrees to pay more than book value per share for the new shares.

Or in the case where Treasury Shares are used as compensation, book value will not go down, if value of a Treasury Share is considered to be  more than the greater of (a) BVPS and (b) cost of acquisition of the Treasury Share.

If on the other hand, Mr. al Seddiqi is referring to the need to hire additional staff and incur other additional expenses, this should result in a reduction of net income which wouldn’t reduce book value per share but just moderate its growth unless of course such additional expenditures resulted in a net loss, i.e.  expenses exceed revenues.

Mr. AdDarwish interrupted him disagreeing with his view stating that an increase in book value was a profit for him.

Mr. al Seddiqi commented that if he followed the financial statements from 2016 to 2018 he would see there was profit that went to share book value, but then there were cash distributions and treasury share transactions that reduced it (again the argument from above which ignores the massive dilution in 2017) and that there was a profit in 2016, 2017, and 2018 and that value went to the shareholder.

Mr. AdDarwish expressed his opposition to the Chairman’s view saying that the real estate portfolio (AA believes this is a reference to the real estate obtained for the share conversion) was a harm to the old shareholders and that he believed the profit announced in February contained exaggerations and wasn’t real and that the old shareholders were entitled to the benefits from amounts (settlement) received in 2016..

Mr. al Seddiqi pointed out that GFH’s operation and financial statements were subject to supervision by the CBB and the Bahrain, Kuwait, and Dubai stock markets.  If there was anything confusing or erroneous in what GFH published, it would correct it immediately. (An answer to the doubt raised on the accuracy and "realness" of GFH's reported income).

He also commented that GFH was bound by law to allocate the 2016 settlement to shareholders at that time (presumably when settlement was received).  He noted that the board had a duty to recompense shareholders but because it is a bank is subject to financial solvency (ratios) that it must keep.

This appears to be a reference to GFH’s inability to dividend out the full amount of the  settlement because if it did, it would breach these limits. Most likely capital adequacy ratios. There is also the issue of when the settlement assets actually turned into cash. That did not happen immediately on receipt.  Once one becomes a shareholder, one is entitled to profit on assets the company held before one owned shares.  The theory being that current shareholders will factor that into the price of the shares that they sell.  Here the shares were issued by the firm after receiving shareholder approval at the EGM in 2017.

One very important thing to note is that at the 2017 AGM for FY 2016, GFH's shareholders voted to increase the proposed cash dividend from 10% to 12% of par.   The Central Bank of Bahrain did not approve the increase.  Readers may draw their own conclusions why the CBB refused.

He then asked Mr. AdDarwiish that if he had any proposals to make regarding the old shareholders, he should write to the supervisory organizations with a copy to the Board.

After this topic was finished, Mr. Fadi AlMajaaly asked about the USD 150 million acquisition of The Entertainer.  Mr. al Seddiqi replied that GFH was selling shares to other shareholders and had earned some USD 15 million in profit on these sales with another USD 10 million to come in FY 2019.  At present GFH owns 10% of The Entertainer.

Next came the “adding or submission of notices” ( أضاف ملاحظة  )  by shareholders.

AA believes but doesn’t know that this is the presentation of written statements by shareholders recommending actions or registering objections so that these become an official part of the record.  Such written documents have more legal force than verbal statements which may be construed as questions or expression of feelings rather than formal requests for action or formal objections.

Mr. Ahmad Abdullah noted the lack of precision and detail in news published by GFH.  The Chairman agreed and ordered the management to produce more transparent and detailed reports in the future.

Mr. Ziyaad AlBanaa asked about the Tunis Project.  Mr. AlRayes noted that this was GFH’s AGM to discuss GFH’s shares.  Discussions on the Tunis Project would take place with individuals later.  (This seems a strange comment.  GFH is majority owner of Tunis Bay. It would seem GFH shareholders would have the right to ask about major shareholdings.)

(اخيرا وليس آخرا ) tip of AA’s tarbush to whoever prepared the minutes for adding this phase (last but not least), Mr. Ali Tariif gave his “notice” which stressed the necessity of lowering liabilities and increasing shareholders’ equity from the decline the previous year.  He also recommended an increase in focus and concern on expenses and on return on shares.  And finally stressed the importance of controlling provisions that lower the value of assets and operating sectors.

The minutes record that the Board took all these comments and notices under advisement/into consideration.

Discussion of 2018 Board Compensation (Agenda Item # 7) 

Mr. Fadi AlMajaaly commented that the proposed USD 3. 5 million was extremely high when compared to the compensation and profits of other firms in Bahrain.  And he pointed out the importance of consideration for the interest of the shareholders as a priority

The Chairman noted that this proposal was subject to shareholder vote. (Presumably to retort that the shareholders' vote would express if the shareholders felt that this compensation was putting shareholders' interests first.)

Mr. Ziyaad AlBanaa proposed that in future years the Board’s compensation be lowered and distributions to shareholders increased.

The AGM approved the Directors’ 2018 compensation.

With some 3.6 billion shares, if board compensation were reduced to zero and the amount "saved" devoted to increasing dividends, USD 3.5 million when rounded up would equal USD 0.001 per share. 

That being said, for what GFH shareholders are getting this compensation seems high.  See my earlier post on comparative board costs.

That was the end of shareholder discussion in the AGM.

Shortly I’ll post on the EGM but that will be more an accounting lesson for shareholders than an extensive translation.

Why?

There wasn’t much discussion and what there was seems to AA to be off point. Some very crucial issues were missed.

The EGM illustrates that GFH's shareholders need more understanding of sources of information on company performance if they are to protect their interests and discharge their responsibilities for corporate governance. AA suspects they are not the only ones.

Translation of GFH 2019 Annual General Meeting Minutes - Part 1 of 2

One of Bashmutargim AA's Finest Bur Least Known  Successes

I Helped a Relative Unknown Become President of Egypt and Keep the Job

Part 2 is here.

In my post “What’s a Board Worth?” I recommended reading the minutes of GFH’s FY 2018 AGM and EGM held 28 March this year.  

At that time I noted that the complete minutes were available only in Arabic and only on the Bahrain Bourse website. Links here:  AGM and EGM.  But the Arabic versions there  are PDFs of an image so those who can’t read Arabic can’t cut and paste into translation software. Not that that technique will be greatly helpful.  

These same minutes are not on GFH’s website.  Nor at the DFM.  On both you will find summaries that just tell you what was approved and omit any details of the accompanying discussion. 

As usual AA has your back, if you can’t read Arabic. Below is a translation/paraphrase. 

Now AA is not James T. Monroe so the translation is a paraphrase and certainly short of his work. That being said, there is little that could be described as maqaamaat (مقامات) in GFH’s financials.

Some preliminary caveats.  AA doesn’t know if GFH voice records its AGM and EGM.  A lot of companies do. That practice makes the later compilation of minutes easier than working from handwritten notes.  

But whether voice recording or hand written notes are used, the minute taker/preparer then goes on to summarize key points. The minutes are not a verbatim transcript of the words actually spoken by participants.  

Bear these two points in mind as they may explain some things that appear to be incomplete or puzzling.  

As well, sometimes detail can be lost or deliberately omitted if the transcriber doesn’t know the topic well. Why raise what you can't explain or express? "Lost in Transcription" as they say.  Once shareholders depart it is not convenient to check with them as to what they meant to say.  That’s an exercise, at least theoretically, for the 2020 AGM for FY 2019.  

As well, while it pains me to say this, you may not want to rely 100% on AA’s translation. If any readers of Arabic out there have a different translation, please leave a comment with your correction.

What follows are excerpts from the complete minutes with a focus on shareholder questions and GFH’s responses delivered by its Chairman Mr. Jassim al Seddiqi.  AA’s comments are in italics to try and make it clearer what’s in the minutes and what’s not.  

Also note if the minutes or AA's translation are incorrect or incomplete, then the comments may be as well.

This was GFH’s second “go” for its AGM and EGM as the first failed to have a quorum.  Second time lucky a quorum of 48.96% of shareholders was obtained.  

Discussion of Board of Directors Report to Shareholders (Agenda Item #2)  

Mr. Ali Tariif started off shareholder comments by lamenting the continuing decline of Khaleeji Commercial Bank.  He encouraged the Board to pay more attention to KHCB. GFH”s Chairman reportedly took his proposal under consideration.  

Auditors’ Report to Shareholders (Agenda Item #4) 

After listening to KPMG’s report as GFH’s external auditors, Mr. Ahmad Abdullah expressed the view that the income from settlement of debts was exceptional income.  (Reading between the lines “RBTL”—a favorite pastime of AA--this would appear to be reference to the fact that it was not normal income nor likely to be recurring.)  

And if it were excluded, then the Group (GFH) didn’t achieve anything (a reference to profit) and there would be expenses only (that is, GFH would have a loss).  

In addressing this point, Mr. al Seddiqi, laid the blame (al-atab) on the auditors (فاجاب بأن العتب على المدققين ) who he said had used “specific principles”  (probably a reference to accounting principles) that didn’t sufficiently explain the income.  

He noted that in 1Q19 the firm would should additional income of this sort in a clearer fashion.  (Note 16 1Q2019 – another debt settlement).  (Presumably to point out that for GFH this sort of income is normal, recurring, and real.)

He commented that GFH was an Islamic investment bank and not a conventional one and thus engaged in contracts like this with income that was “certain/firm”.  

He further noted the settlement of debts referred to by the auditors involved acquiring a real estate firm (unnamed but clearly GH) and debt at a discount.  

Now  if you read auditors’ reports to the shareholders, you will see the statement that management is "responsible for preparing the financial statements" .  That’s everything from the balance sheet through all the notes.  Auditors then audit and comment on those statements. 

Here’s a close-to-home example right here on page 6 from KPMG’s report in GFH’s FY 2018 financials.  

At first blush, it would seem GFH is dodging its responsibility for what it claims is unclear wording.   Trying to shift the blame onto the auditors.  Instead of Brother Jassim squaring his shoulders for a “buck stops here” moment (appropriate because GFH keeps its books in US dollars), we got Trump.  Blame someone else.

To be very clear on this unless there is something very unusual going on GFH would be the original author of the note with the auditors making revisions if they felt those were appropriate.  If GFH’s auditors suggested a change GFH felt was unclear, GFH certainly could raise the point and seek to find wording that the auditors could “live” with.

Additionally GFH has a free hand in the Chairman’s Report to Shareholders and the Management Discussion and Analysis to emphasize its points.  You can look over those for clarification.  AA found none.

Those looking for a silver lining—as AA always does—could read this an indicating that GFH never ever tries to influence its auditors’ work in an attempt to spin things in its favour. 

Others might not read it in this fashion. It would depend, AA thinks, on their assessment of GFH disclosures in the past.  

Shareholder concerns seem well founded to AA.  

GFH should have a core business that covers expenses and generates an appropriate net profit.  Debt settlement gains might make a good but infrequent add-on.  But if firm profitability or a decent return depend on them, then there is something wrong with the business.  

If GFH can’t make an appropriate return from these other businesses and can't "fix" them, then it should exit them and focus on those where it can. 

It may be the GFH’s management not only has the skill to identify and exploit distressed situations but also is able fill the deal pipeline with them. Or perhaps that last skill was the previous management?    

More to come (much more) in Part 2.

Gulf News Reports on UAB's Front-Loaded Loan - Stumping AA

AA's Brother Stumped Again But a Completely 

Different Situation than AA

Under the headline  "UAB front-loads syndicated term loan to $195m" the GCC's newspaper of record, Gulf News reported that

United Arab Bank said it has concluded of its $195 million 2-year syndicated term loan facility, 30 per cent more than the original planned amount of $150 million.

AA is familiar with the term “upsize” used in situations like this.

Front-load generally refers to the paying of fees at inception of a deal or a pattern of interest payments that are initially greater than principal payments.  

For example, a “load” on an investment fund that one pays up front as the price of entry to the fund.  If the load is 2% and you give the investment fund manager USD 100, you actually only invest USD 98.  As an aside, you should avoid funds with front-end loads, unless of course you’re dealing with Bernie Madoff.

The other case is where payments for interest are front-loaded.  

For example, a fixed-rate mortgage where most of the amount of the initial repayments the borrower makes go to paying interest and not reducing principal.

Does the term “front-load” have a different meaning in GCC?  If so, what term is used for the front loaded examples given by AA?