GFH Bank B.S.C. (GFH) Earnings Call Transcript & Summary

Good afternoon to all. This is Surya Hariharan, Head of Financial Control at GFH Financial Group. On behalf of the GFH management team, I would like to welcome you to GFH Financial Group's financial result presentation for the first 6 months ended June 30, 2020. Along with me today on the call is Mr. Hisham Al Rayes, the group CEO of GFH Financial Group and Senior members of the management team. We are pleased to present to you the group's financial results for the first 6 months of 2020, which have marked another period of profitability and contributions from all business lines across the group despite the difficult and challenging operating conditions we are witnessing as a result of the COVID-19 crisis. Throughout the crisis, the management team has been actively monitoring pandemic as it evolves and in response to this has activated its business continuity plan and various other operational and risk management controls to manage the potential business disruption on its operations and financial performance. The first 6 months of 2020 has also witnessed the successful completion of GFH landmark $500 million sukuk. The strong market demand and successful closure of the sukuk reflects the market's growing confidence in GFH. It also provides a reference point for GFH's upcoming phase of its strategic evolution by introducing GFH to the international debt capital markets. Let me start the session with the key performance highlights on the income statement for the first 6 months of 2020. Total operating income of the group was $146.5 million for the 6 months of 2020 compared to $163.5 million, a decrease of 10%. This decrease is primarily due to the global slowdown with the accompanying uncertainties in the economic environment, driven by the impact of COVID-19 pandemic on the general operating environment and markets since early 2020. Total operating expenses of the group was $57.6 million for 6 months of 2020 compared to $48.8 million for the comparative period, an increase of 18%. Group financing expenses increased by 24.7% to $66.9 million for the first 6 months of 2020 compared to $53.7 million for the comparative period, mainly on account of the sukuk that was issued during early 2020. The difficult operating and macro environment that the group is currently facing meant a drop in net profit attributable to shareholders of $15 million in first half of 2020 versus $49.9 million in H1 of 2019, a decrease of 69.4%. Consolidated profit was $20.4 million for first half of 2020 compared to $48.4 million in the first half of 2019, a decrease of 57.9%. This is mainly due to the fair value losses in the treasury portfolio and lower contribution from the group's real estate arm as a result of the strain caused by COVID-19 on the local economy, which has resulted in a slowdown in the sale of real estate [ projects ]. Impairment provisions for the group stood at $1.5 million for the first 6 months of 2020 compared to $12.2 million for the comparative period in 2019, a decrease of 87.3%, primarily due to the lower impairment provisions of the commercial banking subsidiary of the group. Earnings per share decreased in the first 6 months of 2020 to USD 0.0045 from prior period level of USD 0.0145 in line with the earnings decrease. On the balance sheet, the key highlights are as follows. Total assets of the group have increased to $6.1 billion at June 30, 2020, from $5.9 billion at 2019 year-end, primarily on account of increase in liquid assets of the bank. Total liabilities of the group have increased to $3.9 billion at June 30 from $3.4 billion at 2019 year-end, primarily due to the financing obtained by the group through the issuance of its landmark sukuk. This has resulted in a leverage ratio of 3.78x and net leverage ratio of 1.21x. Equity attributable to shareholders of the bank was $853 million at June 30, 2020, compared to $1 billion at 2019 year-end, a decrease of 15% due to the financial impact of COVID-19, resulting in modification losses, commercial banking restructuring activities and recognition of fair value losses and foreign currency translation differences at the group level. Most business lines across the group have delivered robust performance given the current economic situation during the first 6 months of 2020, with further details on the major developments achieved within each business line to follow. Investment banking contributed 28% to the total income of the group, mainly from product placement activities to investors across the private equity platforms and U.S.-based real estate projects. The group's strategy for its treasury business line has shown significant improvement with treasury contributing to 29% of the total income through income from sukuk and structured products. Solid performance from the proprietary investments held by the bank as the business line generated 16% of the total income. Real estate contributed 5% of the total income for the first 6 months of 2020, primarily from sale of development units in Bahrain. In Commercial banking, our subsidiary Khaleeji Commercial Bank contributed 22% of the total income, which has returned the bank to profitability during the first half of 2020 with an annualized return on equity of 12.7% compared to 0.4% in the first half of 2019. GFH's results for the first 6 months of 2020, which translate into an annualized return on equity of 4%, strive to ensure that our robust performance delivers good returns for our shareholders consistently. In the remainder of 2020, we expect all our business lines to continue their robust performance with investment banking closing and placing further unique investment transactions for our investors, real estate business expecting to realize further cash flows and profitability for the group and commercial banking business looking to continue on its path to sustainable profitability. I would like to thank you for your time this afternoon and open the floor for any questions you may have.

We have a question on acquisition of GBCORP. GBCORP is a licensed financial institution based out of Bahrain. They have about $500 million of asset under management. So this acquisition is more in line with GFH strategic vision of acquiring financial institutions in the region. So this helps us build our balance sheet as well as help grow our asset under management business within the group. So with this acquisition, GBCORP becomes a subsidiary of GFH from quarter 2 of 2020. We have another question on Khaleeji's performance. Given the current economic conditions and the current environment that we are operating in, we expect Khaleeji results to be a bit challenging, but they have cleaned up their balance sheet last year. And in this year, they have reached their capital -- they've restructured their capital this year. So they are cautiously optimistic about their performance going forward. We have a question on why our results were delayed. Due to the current situation in the market, there has been a delay in getting the regulatory approvals on our final numbers. So it's a bit unusual in these circumstances. But yes, that's what has happened. We have a question on the capital adequacy. The current capital adequacy on a consolidated basis for GFH is 13.05% for -- as of June 30, 2020. We have a question on if the bank is planning for dividend distribution. I think first half of the year is a bit too early to comment on the dividend distribution for 2020. But I think the policy of the bank is clear. We are and -- I mean for the last 3 years, we have been paying dividends. So [Foreign Language], we'll be probably looking at it in the next couple of quarters. We have another question on the drop in equity from $1 billion to $850 million. As I mentioned in the presentation, this is primarily due to a restructuring that happened at the subsidiary level, plus the losses that the regulator had asked us to take us through equity. These were called as modification losses, and there's also been fair value transactions that has impacted the equity of the group. We have a question on the liquidity of the group. The liquidity of the group actually has gone up compared to the year-end of 2019 by about 10%. So we are comfortable with the liquidity position of the bank. We have another question on a legal case of $5 million and the update on it. We are currently in an enforcement state, so we expect to receive this in the future. We have a question on the NSFR and LCR. Our LCR as of June 30 is 118% and NSFR is at 88%. The CBB had given all the financial institutions in Bahrain a revised threshold for the NSFR and LCR wherein the NSFR was at 80%. So we are compliant with the CBB regulation. We have a question on the cost-to-income ratio. It has slightly gone up during the first half of 2020. This is primarily due to the finance expenses from the new issuance of GFH sukuk and also the income bit of it has gone down because of the fair value adjustments that we have done on our treasury portfolio. We have a question on the ESG guide. We have -- we are in the process of getting the finance review done on the ESG guide. So once we have a full review, we can answer this question about the 32 components that which we will be complying and looking into it. Thank you. Due to the paucity of time, the last question that we have is on our investment in equity structured notes. We've actually taken advantage of the current market or the markets that were there in March, April, where these asset classes were available at a distressed pricing. So we've been able to use -- take advantage of the pricing and increase our treasury portfolio book. Thank you for your time today. If you have any further questions, please contact Investor Relations. And during this current environment, please stay safe. Thank you very much.