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

Welcome to GFH Financial Group's results presentation for the first 9 months of 2022. My name is Suryanarayanan Hariharan. I'm the Chief Financial Officer at GFH. And today, I'm joined by my colleagues from the senior management team on the call. The third quarter of 2022 continued the spillover from the previous quarters of the year in terms of the macroeconomic and geopolitical uncertainty, market volatility and its effect on the investor sentiments. Amidst this disruption in the market, we at GFH stuck to our strategy during these demanding times, and have remained focused on drawing on our core strengths to execute our plans. Supporting ongoing progress during the quarter was solid performance by each of the group's core business lines along with diversification of the group's portfolio in well-performing markets and sectors in the U.S., U.K. and Europe. For the third quarter of 2022, we have reported an 8.3% increase in our shareholders' profit compared to third quarter of previous year. With this, our 9-month shareholders' profit was USD 66.2 million, up 9.8% from the comparative period shareholders' profit of USD 60.3 million. Key highlights of our performance for the first 9 months of the year compared to first 9 months of 2021 were as follows. Increase in net profit attributable to shareholders by 9.8% to USD 66.2 million compared with USD 60.3 million. Consolidated net profit for first 9 months of this year increased by 4.7% to USD 71.5 million compared with USD 68.3 million. Total income for this year was USD 294.2 million versus USD 270.6 million for the 2021 period, an increase of 8.7%. Total expenses and impairment for the period were down 19% to USD 84.3 million from USD 104.1 million for the same period of 2021. Earnings per share for the period was USD 1.91 compared to USD 1.76 for 2021 period. Key highlights of our performance for the third quarter of 2022 compared to a similar period in 2021, whereas follows. Increase in net profit attributable to shareholders by 3.4% to USD 24.1 million compared with USD 23.3 million. Consolidated net profit for third quarter of this year increased by 8.3% to USD 26.1 million compared with USD 24.1 million in the comparative period of 2021. Total income for the third quarter of 2022 was USD 111.1 million versus USD 89.6 million for the 2021 period, an increase of 24%. Total expenses and impairment allowances for the current quarter was down 9.8% at USD 27.6 million compared to USD 30.6 million during the same period of 2021. Earnings per share for the period was USD 0.73 compared to USD 0.60 for the third quarter. Moving on to the balance sheet. The total -- the group's total assets on 30th September 2022 was USD 9 billion compared with USD 8.08 billion on 31 December 2021, an increase of 11.4%. Similarly, the group's liabilities grew from USD 5.6 billion as at 2021 year-end to $8 billion at end of 30th September 2022. The liabilities raised through money market funds have been deployed in the liquid net asset portfolio of the bank. From a total asset and funds under management perspective, we have grown from USD 15 billion at year-end 2021 to USD 16.4 billion at 30th September 2022, a growth of 9%. This was due to the organic growth of the new products launched by the bank and inorganic growth through the acquisition of Student Quarters and Big Sky, 2 asset managers based out of the United States of America. Total equity attributable to shareholders remained stable at USD 0.96 billion at 30th September 2022 compared to year-end 2021. The primary movement in shareholders' equity was due to the current year's profitability, changes in treasury shares, dividend appropriations and changes to fair value of our treasury portfolio. Our performance for the 9 months translates into an annualized return on equity of 8.9% and annualized return on assets of 1.1%. Turning to regulatory ratios. Our capital adequacy ratio was at 13.07%, liquidity coverage ratio at 142% and net stable funding ratio at 102%. All our regulatory ratios are above the prescribed threshold by the Central Bank of Bahrain. Looking at each of the business groups, some of the highlights for the third quarter of 2022 were as follows. Investment Banking, which is our core business line, contributed 29% of the total income of the group for the first 9 months of 2022. GFH was successful in placing 2 deals in the real estate space and 2 deals in the private equity space during the third quarter of 2022, generating an income of circa USD 29 million for the quarter. With this, the group recorded a total income of USD 73.7 million for the first 9 months of the year. The Investment Banking income grew by 27% compared to the same period of 2021. We continue to benefit from the acquisition of a number of international asset managers who have not only enabled us to bring better opportunities to our astute base of GCC investors, but also generate demand from [ interested ] investors for opportunities we identify in the Gulf region. Moving on to Commercial Banking. We have realized solid gains from our Commercial Banking subsidiary, Khaleeji Commercial Bank, which recorded a net profit of USD 10 million following a successful restructuring a couple of years ago. RSRED and Khaleeji Commercial Bank has enhanced our diversity of results. Khaleeji Commercial Bank performed better than the previous periods, with its gross net performing and nonperforming financing dropping to 6.53%, and its return on average equity improved to 9.9%. Khaleeji Commercial Bank gross income contributed 11% of the total income of the group. In terms of the proprietary and co-investment business line, during quarter 1 of 2022, one of the significant milestone for the group was the launch of Infracorp, which specializes in investing and managing sustainable infrastructure and leadership assets. The group continues to benefit from its investment in Infracorp along with its other co-investments. Income from this business line contributed 31% to the total income of the group. This business line has helped us in diversifying our sources of income in this challenging market environment by filling up for the change in contribution from the other business lines. Treasury portfolio contribution dropped during the first 9 months of 2022 compared to the same period of 2021 by 22%. Income from treasury portfolio would have been higher but was impacted by the mark-to-market losses in the portfolio. Treasury and other income contribution dropped to around 29% of the total income of the group. We continue to monitor the markets closely, and accordingly evaluate our strategy relative to this business. The current slide talks about the performance of the group for the 9-month period and for the 3-month period compared to the comparative period of 2021. Moving on to the slide, which talks about the growth in our balance sheet. So as you can see from the slide, our assets has grown by about 10% in the past 1 year, and our liabilities have grown by roughly about 14% in the past 1 year. Slide 6 talks about the growth in our total assets and AUM over the period of the last 3 years. So we've had a CAGR of 20% growth in our assets plus AUM over the past 3 years. We've also given a brief breakdown of our industry distribution and geographical distribution of our AUM, currently. All our business lines have gained significant traction during the period as part of our initiative to build skill sets and specialization in certain industries and markets along with inorganic growth in our assets under management. We have acquired a majority stake in Big Sky Asset Management, a U.S.-based asset manager. Our Commercial Banking subsidiary, Khaleeji Commercial Bank, has continued to increase its contribution after a successful restructuring. And Infracorp, which was launched in January of this year, continues to perform better in the first 6 months of its operations. Globally, while no one is immune to the macro environment, we at GFH are executing our strategy, and focus on delivering consistent and attractive returns to shareholders. Currently, our focus is in the Gulf markets, especially the Kingdom of Saudi Arabia and the UAE due to their steady growth, and in light of increased government spending on projects. With the rising interest rate environment, we are also continuously evaluating our deal pipelines and actively pursuing organic and inorganic growth with an eye towards delivering greater value for our investors and shareholders during the last quarter of 2022. I would like to thank you for your time this afternoon and open the floor for any questions you may have. Thank you.

Yes. We have our first question which is, what is the expectation for both of Commercial Bank and Infracorp company? In terms of the performance that you've seen over the last 3 quarters, in Commercial Bank, we are expecting them to grow at a similar rate going forward. In terms of Infracorp, it's a new company that was set up during 2022. The first 6 months' results have been very encouraging, and we hope that they continue to have the same similar performance going forward. There are a couple of questions, and probably I'll merge them, and both the questions are around the future acquisitions and regions and strategy relating to that. We -- I mean from end of 2021 and during 2022, GFH has been looking at various asset managers across the globe, and these are part of our inorganic growth acquisition strategies. And this would continue. We would probably look at them in the region as in the GCC, and we also look beyond. And this is like a mandate and a strategy that is driven for us from a perspective of increasing our asset under management and also building on our skill sets within the region and outside. There's another question which talks about income contribution from proprietary and co-investments has doubled to around 30% in the last 2 quarters, can we assume this contribution going forward? Well, that is the plan. And I think a major portion of that comes from our newly spun-off company called Infracorp. This has helped us monetize our real estate asset base. So that's been a very good contribution towards GFH's bottom line, and we hope to have that continue going forward. There's another question in terms of -- which business segment is most profitable in terms of return on investments? Given the nature of Investment Banking as a business line, it's an asset-light model and an equity-light model. So that is the one which has a higher return on investment, currently. A couple of questions. Are we on track to achieve AUM target of USD 25 billion? We have grown 20% CAGR over the past 2, 3 years. We are currently close to $17 billion in terms of assets and AUM. With our inorganic growth and organic growth, we are targeting -- and I think we have kept the target impact of reaching that target. In terms of -- there's another question which talks about any plans to revalue the real estate books, currently valid at cost. I think that's the prudent measure that we've decided to go ahead with. I don't think we would change that anytime in the 10 year -- in the near future. There's another question on any plans to further enhance ESG practices. As we speak of this, we've been mandated by the Board to take this initiative pretty much seriously, and we've got some resources that we have hired to take this forward. There's another question which says, how does the real estate spin-off in March 2022 affect your P&L and balance sheet? Well, during the spinoff, this was a P&L-neutral transaction. What it has helped us as GFH is that we've been able to shift the real estate portfolio into a very focused kind of a company. We've got dedicated resources who are experienced in monetizing these assets, and that has helped GFH going forward in terms of changing the real estate assets, which were there as part of their balance sheet previously, into monetized yielding assets. We now own Sukuk and equity in a company called Infracorp, which is more idling for us. So what it has done from a quality of income perspective is that it has moved us from nonyielding portfolio to be more monetized-yielding portfolio. There's a question on the size of Treasury portfolio increased by 37% year-on-year, however, its contribution has reduced significantly. Yes, this -- as you mentioned, the money that we take on behalf of the money market funds is deployed into the liquid portfolio of the bank -- or the Treasury portfolio of the bank. However, given the market condition, we have taken close to about USD 38 million of mark-to-market losses on our Treasury portfolio through our P&L, and that has had an impact on the yield that we have [ raised ] from our Treasury portfolio. There's another question which says, are you comfortable with the provision and coverage of the commercial bank? Well, yes, I think we are in line with most of the banks in Bahrain. They are roughly at -- so I think they are more in line with most of the banks in Bahrain. There's another question on Treasury, which says, how much percentage do we have now? We have roughly about 8.9% of Treasury [ shares ]. So thank you very much for your time this afternoon, and hope to catch up with you guys during the next quarterly webcast. Thank you for your time. Thank you very much.