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

Good afternoon, and a warm welcome to GFH Financial Group's results presentation for the 9 months of 2023. My name is Surya Hariharan, and today, we will present the financial information of GFH Financial Group for third quarter of this year as well as for the 9 months of 2023. Amidst geopolitical tension, high profit rate environment and global market uncertainties, we at GFH continue to report another quarter of positive performance. Let me provide you with the key highlights achieved by the Group for the third quarter of 2023 in comparison to comparative period of 2022. Net profit attributable to shareholders of USD 24.3 million, up by around 1%. Consolidated net profit for the period of USD 23.9 million, a drop of 8.4%. A rise in total income for the period by 32.9% to USD 87.6 million, primarily from growth in the investment banking business line of the Group. Increase in operating expenses by 60% during the period to USD 63.7 million. Operating expenses of the newly acquired subsidiaries contributed primarily to this increase. Increase in finance expenses in line with the rising rate environment to USD 15.2 million during Q3 of 2023 from USD 12.2 million in Q3 of 2022. Growth in total assets by 7% to USD 10.5 billion from USD 9.76 billion at end of 2022. Depositor and investor confidence reflected the growth in financing liabilities from USD 8 billion at the end of December 2022 to 8.5 billion at end of 2023, an increase of 6%. Capital adequacy ratio has steadily improved during the year to 15.6% at the end of December -- at the end of September 2023. In terms of the key highlights for the 9 months of 2023, following other details in comparison to 9 months of 2022. Net profit attributable to shareholders of USD 78.9 million, a growth of 19%. Consolidated net profit for the period of USD 81 million, an increase of 13.3%, increase in total income for the period by 38.8% to USD 281.3 million. Increase in operating expenses by 43% during the period to USD 120 million. Increase in finance expenses to USD 46.5 million during the 9 months of 2023 from USD 32.3 million in the comparative period of 2022, an increase of 44%. Net debt-to-equity ratio increased from 3x at the end of December 2022 to 3.2x at the end of September 2023. The Group had a positive net operating cash flow of USD 546 million as at 30th September 2023. Total assets and assets under management increased to USD 19 billion. Having a diversified group of activities has helped the Group during this year as contributions from each of the business lines has streamlined the profitability of the Group. Highlights of the contribution by each of the business lines were as follows. Investment banking. For the third quarter of 2023, investment banking, which remains our core business line, contributed roughly 87% of the total income of the Group. During the third quarter, the Group subsidiary, GFH Partners, successfully closed 3 new transactions, the U.S. Opportunistic Fund, U.S. Student Housing Fund and Saudi Food Logistics Fund, that will provide investors with a diversified range of opportunities. Along with the contributions for the first half, investment banking income contributed about 63% of the total income of the Group for the 9 months of the year, a growth of 124% compared to 9 months of 2022. Commercial banking. During the third quarter of 2023, the Group's commercial banking business, Khaleeji Bank B.S.C., reported continued profitability resulting from a strategy focused on the expansion of partnerships, ongoing digital transformation and alignment of the business model with current trends and developments. The revenues from Khaleeji contributed around 8% of the total income for the Group for the third quarter of 2023. For the 9-month period, Khaleeji reported a net profit of USD 24.95 million, which was 13.59% lower compared to 9 months of 2022. Total income for Khaleeji increased mainly due to an increase in income from financing and sukuk assets as well as other fees and income. For the 9-month period of 2023, Khaleeji's income contribution to the Group's total income was at 18%. Treasury and proprietary investments. The Group's performance in its treasury and proprietary investment activities was supported by a largely conservatively positioned treasury portfolio but was impacted by higher funding costs and general market movements during the quarter. This business line contributed 5% of the total income for the Group for the third quarter and 19% of the total income for the 9 months of 2023. Treasury and proprietary income saw a drop of 16% during this year compared to the previous year. Looking ahead, GFH seeks opportunities to lock in higher yields for the treasury portfolio and diversifying its funding sources to support the Group's growth. Total cost. Total costs for the Group, including finance expenses and impairment allowances, were impacted by a higher cost of funds and the cost from the newly acquired subsidiaries during the later part of the previous year. Total expenses excluding impairment allowances have increased by 27% for the 9-month period of 2023 compared to the previous comparative period. Turning our focus to the balance sheet, following are the key highlights for the period ended 30th September 2023. The Group's total assets at end of September 2023 was at USD 10.5 billion compared with USD 9.76 billion on 31 December 2022, an increase of 7%. This increase is primarily due to the increase in investments in the treasury portfolio, which in turn is driven by the higher money market and [ waka ] enforced on the depositors. The Group's liabilities decreased from USD 7.5 billion as at 2022 year-end to $6.4 billion at 30th September 2023. However, the Group's balance of equity of investment account holders has increased from USD 1.2 billion at 2022 year-end to USD 3.1 billion as of 30th September 2023. This trend depicts a shift in the nature of liabilities being raised from the investors. Total equity contributable to shareholders remained stable at USD 994 million as of 30th September 2023 come -- from USD 997 million at 31 December 2022. The primary movement in shareholders' equity was the current period's profitability and changes in the movement in treasury shares. Our capital adequacy ratio has continued to improve over the quarters during the year and is currently at 15.6% as at 30th September 2023. Liquidity coverage ratio at 227% and net stable funding ratio at 106% are above the prescribed thresholds. Our performance translates into an annualized return on equity of 10.6% and return on assets of 1%. In a nutshell, third quarter of 2023 saw the Group make further progress across our business lines as we work to maximize the value of our investments and continue to act on new opportunities in line with our strategy and focus on attractive, defensive sectors, such as health care, life sciences, education and food logistics. We also continued our focus in Saudi Arabia and undertook a number of unique opportunities in the Kingdom, including those in the health care sector, leveraging industry expansion resulting from the Kingdom's Saudi Vision 2030 economic development strategy. While a high interest rate environment has put pressure on the performance of our business lines, we have been able to realign the funding strategies and capitalize on alternative strategies to mitigate the rising funding cost impact. The Group's overall growth, however despite challenging market conditions, reflects its resilience and the success of our strategy which is concentrated on securing opportunities in defensive sectors and continued pursuit of diversification. We enter the final months of 2023 with an attractive pipeline of opportunities in core sectors and markets where we have expanded our presence and are growing our portfolio of income-yielding assets to generate even greater value for our investors and shareholders for the remainder of the year and beyond. We look to close the year with progress across each of our business lines and priority markets with an emphasis on further growth of our investment portfolios in the GCC and U.S. I would like to thank you for your time this afternoon and open the floor for any questions you may have.

Thank you. We've received a couple of questions. Let me start from the first one. What is the reason for a decrease in profits for Khaleeji Bank? In line with other banks also in Bahrain and in the region, Khaleeji Bank has also been impacted by the higher cost of funding, and that has been the primary reason for shrinking their profits for this quarter of 2023. There's another question which says, what is the reason for the cause for the drop of treasury profits? I think it's in line with what I mentioned about Khaleeji Commercial Bank as well. The current high rate of environment has presented us with lower opportunities in terms of where we can deploy this to make the adequate spread we want. And hence, given the current environment, we have tried alternative strategies in terms of funding and in terms of deployment. And hence, it is profitable business line for now, but the higher cost of funds have definitely had an impact on our costs. We have another question, which says, are we mainly dependent on investment banking? investment banking remains to be the core of GFH. That's one line which is what we are known for. Our investors have been presented with different opportunities and deals, diversifying deals across GCC and across U.S. and U.K. So that remains to be our core business line. We've been able to get a lot of good opportunities which we have presented to our investors. I think it will still continue to remain a substantial percentage contribution to our income going forward. I think we have one more question that says, what is the main reason for no growth in net profit in Q3 compared to last year? As we mentioned, the two business lines, which is commercial banking and treasury, were heavily impacted by the rising cost of funds. This has had some impact on the profitability for the quarter. Going forward, the pipeline looks strong for us, and we shall, inshallah, try to achieve the numbers that we internally desire to achieve for this quarter. Thank you. There's one more question on the increase in operation cost. So GFH had acquired a couple of asset managers during the later part of last year, so the cost for these entities started accruing to GFH from Q4 of 2022. So when you look at the comparative statements, for this year, you have the cost compared to no cost being there in Q3 of 2022. There's another question on projected revenue growth. Unfortunately, I would not be able to give any forward-looking statements and forward-looking numbers. In terms of GFH plans to list in the KSA stock market, I think this was announced by the senior management some time back, and we still continue to have the plans for the same. There's another question on what is the plans for the liquidity in the Group? We view the liquidity as part of our treasury portfolio, so we look for opportunities in the treasury space for deploying these funds. So this is a moving treasury number which would be deployed into suitable opportunities within the treasury space. There's one more question that says, what is the purpose of buying back 10% of the shares? The buyback of treasury shares is in line with the approval that we've received from our shareholders during our last AGM, where we will use it for two purposes. One is for strategic transactions, so we use it as a currency for strategic transactions; and second is for market price-making. So this 10% shares that we have bought back is more towards the strategic transactions that we intend doing. I think there's one question that says, is there any plans to sell 10% shares you have? Treasury shares like before? And I just mentioned, the treasury issues that we have acquired is in line with the approvals that we have from the shareholders, which we will primarily use for strategic transaction that the Group's intended to do. Thank you very much for your time this afternoon. We will have the next one post the Q4 results. Thank you very much for your time. Have a very good day. Thank you.