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

Good afternoon all. On behalf of the GFH management team, we welcome you to GFH Financial Group's Financial Results Presentation for the Year 2020. I'm Surya Hariharan, Head of Financial Control and GFH Financial Group. Along with me today on the call is Mr. Hisham Al Rayes, the Chief Executive Officer of the group; along with senior members of the management team. In the context of the challenging environment presented by the global pandemic, we are extremely pleased to report another year of profitability that underlines the resilient nature of the group's diversified business lines. As the uncertainty and economic disruption from COVID-19 crisis continues globally, the group has remained fully operational throughout this period, and the management team has been actively monitoring the situation as it evolves. For the year 2020, the group reported consolidated net profit of $49.3 million from $53.1 million, a drop of 7%. As the global market conditions improved during the last quarter of 2020, the group was able to capitalize on the same, which was reflected on the Q4 performance of the group. Consolidated net profit for the fourth quarter of 2020 was $19 million compared to losses of $8.1 million in the fourth quarter of 2019. The group reported net profit attributable to shareholders of $45.1 million for the year 2020 compared to $66 million for the previous year, a drop of 32%. For the fourth quarter of 2020, the group reported net profit attributable to shareholders of $21.93 million compared with $1.5 million in the fourth quarter of 2019. The group's performance for the year 2020 translates into a return on equity of 4.9% with earnings per share of USD 0.0135. Net profit margin of the group was at 13.9% while EBITDA margins continued to be maintained at north of 55%. In terms of segmental performance, all business lines contributed to the results during the year. However, the share of contribution shifted among the business lines based on the impact the industry had from the ongoing crisis. Investment banking contributed 25% to the total income of the group mainly from product placement with investors and structuring fees. Despite the moderate first half of the year, the group capitalized from the market sentiment recovery in the second half of 2020 and was able to place higher number of deals with its loyal investor base. Income from investment banking line was lower compared to the previous year, primarily due to lower number of deals and smaller deal size. Given global market recovery, treasury business line contributed 34% to the total income of the group, primarily improved income from Sukuks and structured products. Treasury performance also improved in the fourth quarter of 2020 due to the improvement in the mark-to-market position of its exposures. Treasury portfolio has seen a year-on-year increase of 15.7%. Proprietary investments and other income continue to contribute 15% of the total income. The performance of proprietary investments business has been better than last year except for the one-off transaction in last year. Real estate contributed 6% of our total income, primarily from sale of development units in Bahrain. Real estate sales has been slow in 2020 with this industry being significantly hit by the pandemic. However, during fourth quarter, the group managed to achieve bulk sales, which helped in contribution from this business line. In Commercial banking, our subsidiary, Khaleeji Commercial Bank, contributed 20% of the total income. The bank has returned to profitability during 2020. Total income of the group was slightly higher at USD 323 million for the year 2020 compared to $321.6 million for the previous year. Total operating expense of the group saw a slight increase of 9.5% at $112 million for the year 2020 compared to $102 million of the previous year. Group financing expenses increased by 22% to $135 million for the year 2020 compared to $111.3 million for the previous year. This is primarily on account of the Sukuk that was issued during early 2020. Impairment provisions dropped by 51% during 2020 with provisions for the group at $26.8 million for the year 2020 compared to $54.3 million for 2019. This was primarily due to lower impairment provisions of the commercial banking subsidiary. Moving to the statement of financial position. Total assets of the group has increased by 10.8% to USD 6.6 billion at 31 December 2020 from $5.9 billion at 2019 year-end. The primary increase is due to the increase in the liquid assets of the group. Liquid assets of the group has increased by 21.5% during 2020. Total liabilities for the group have also increased by 24% to $4.2 billion at the end of 2020 from $3.4 billion at the end of 2019. GFH landmark Sukuk issuance during the beginning of 2020, along with depositors' confidence in GFH, has led to a increase in the financing liabilities during 2020. Equity attributable to shareholders of the bank was $913 million at 31st December 2020 compared to $1 billion at 2019 year-end, a decrease of 9% due to the financial impact of COVID-19, resulting in modification losses, commercial banking restructuring activities and foreign currency translation differences at the group level. The group's capital adequacy ratio remained unchanged at 13.5% for the year-end, and its liquidity ratios were well above the Central Bank of Bahrain's regulatory treasury for the year. The group's total assets and funds under management grew by 20% to $12 billion compared to $10 billion at 2019 year-end. This was in line with the group's strategy to grow the organization inorganically through acquisitions in different related industries and new geographies. Given the challenging and complex environment, we would like to view 2020 as an opportunity where our business model was tested for its resilience, and we are proud of being able to deliver strong results to our shareholders. As part of our commitment to our shareholders, the Board of Directors have proposed a total dividend of $42 million, equivalent to 4.6% yield on the par value of shares, subject to approval at the next AGM. The dividend will be divided into $70 million of cash dividend and $25 million of stock dividends. The yield to market as of today is circa 7%. The group continues to maintain high levels of liquidity, generate deal pipelines, provide uninterrupted access to our investors and function smoothly under the recommended government protocols. Our investment and treasury portfolios continue to be in great shape. And even as challenges continue into 2021, we are well positioned to build on our momentum as we look to accelerate growth in the coming years, in line with our strategy. Although we expect current challenges to continue for the foreseeable future, we look forward to creating value and deliver growth through diversification. And for the dedication, hard work and expertise of our people, along with support of our investors, depositors and shareholders, we remain confident in our own ability to find and leverage opportunities, including those we see for organic and inorganic growth in the forthcoming periods. So thank you for your time this afternoon and open the floor for any questions you may have. Thank you.

[indiscernible] The other questions is why did the group manage to increase the asset library and AUM? Why is there not an increase in the equity? As I mentioned in the presentation, equity, the issue was that there were a couple of differences in terms of the foreign currency translation, and we also have modification losses during the year. These are decentral type of borrowing guidelines for the commercial bank. These need to be taken to return earnings. And hence, the equity was impacted. And we also had a restructuring of the commercial bank equity during 2020, first half of 2020. These are the 3 main factors which impacted the equity. So you're right in your observation that asset liability and AUMs have increased, but equity was impacted because of these 3 transactions. There's another question on can you compare between the key indicators for GFH against Central Bank recommended levels. Central Bank recommended levels for this year was 80%. And NSFR was 80% for the year 2020, 80%. We reported LCR of 240% and NSFR of 96%. In terms of capital adequacy, the Central Bank of Bahrain's regulation is 12.5%. We reported 13.5%. Okay. We have a question on the company has made some investments in technology and fintech related last year. Could you please share, elaborate on the strategy; b, as the group and the Board believe that that's an investment area to go for in the future. So we've started investing from last year in some fintech-related entities in the region and also in U.S. We also participated in some funds which invest in the U.S. bank domain, like Snowflake. So we feel that's the way going forward, and that's something that will add to our portfolio as well as to the bottom line. There's one question, did you DH from the Kuwait market? Not yet. We are in the process of the same. There's another question which is, I'm a shareholder, how to send a proxy for the meeting. We would have the details up on the website pretty soon. There's another question which says, why is GFH not in the top in ESG. I think we mentioned that in a couple of previous investor webcast as well that it's a point noted. The team is working on the same. It's a new domain for us. So we are working on the same. And in [indiscernible] we should be part of the race pretty soon. There's a question on how is the year to market 7%. Well, it's a basic calculation of $42 million of dividends on place market price -- probably GFH market price of 0.65 in the markets. There's another question which says most of these Islamic wholesale banks could not maintain their status and move on to volume for the rule book. We as the management and we as the Board, we take pride in being an Islamic wholesale bank, licensed by the Central Bank of Bahrain. Our investors are also comfortable dealing with us as a bank. So we definitely, for the near future, wouldn't think of downgrading. We see a lot of opportunities. And considering a lot of our peers have moved into investment Category 4, we see the space is much more interesting for us to be right now. In the interest of time, we'll take one more final question, which is how much cash does the company have today? And what's your plan for the cash in 2021? As of today, we have in our liquid portfolio roughly about $2.3 billion. The plan for -- the liquidity plan is to use this for our treasury portfolio, and the Board has also given us a mandate to use this for inorganic growth, which shall be through acquisitions and maybe in different geographies and different related industries. So that's a high-level plan of the liquidity that will be used. Okay. So we thank you for your time today. Please, you can reach out to our investor website for any questions you might have, further questions you might have. We'll be happy to answer them. Thank you very much.