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Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, today announced that it has affirmed GFH Financial Group’s (GFH or the Bank) Long-Term Rating at ‘BB’ and the Short-Term Rating at ‘B’.
The Outlook for GFH’s ratings remains ‘Stable’. The ratings are supported by the Bank’s successful implementation of its recent strategy to convert to a financial group, improved and satisfactory liquidity, low debt and leverage, and increased profitability at both the operating and net levels in H1 2017. The Bank’s focus on income-generating investments, planned acquisition of financial services assets and value-accretive exits are expected to reduce earnings volatility in the future. The major constraining factors are Bahrain sovereign risk (Bahrain ratings ‘BB+’/’B’/’Stable’), and the increased and high concentration particularly in the real estate sector. The other constraining factor is the drop in capital adequacy in H1 2017 due to considerable growth in total risk weighted assets (RWAs). However, the capital adequacy ratio (CAR) remains satisfactory and management is expecting to monetise a part of its education portfolio investments during the second half of 2017, which will lift CAR. The challenging regional economic environment and increased credit risk driven by the fall in oil prices remains another constraining factor.
GFH has made considerable progress on its communicated strategy of 2014-2017, which involved transforming from a pure investment bank to a fully integrated financial group. The Bank has increased its stake in its commercial banking subsidiary, Khaleeji Commercial Bank, as well as modified its strategy within investment banking to focus on cash-yielding private equity businesses within stable sectors such as healthcare, education and consumer retail, as well as income-producing real estate assets across the US & Europe. GFH also owns a significant land bank, comprising prime properties across the GCC, Africa and India and is aiming to monetise values by employing a capital-light model alongside key JV partners and contractors.
GFH’s balance sheet liquidity has increased to a satisfactory level in recent periods, notwithstanding a marginal decline in the net liquid asset ratio in H1 2017. More positively, GFH’s debt service capacity has improved as borrowings are paid down and/or refinanced. As a matter of internal policy, GFH has curtailed new borrowings as clearly evidenced by the low levels of debt. Leverage also continued to be maintained at a rather conservative level as indicated by the ratio of total debt to total capital.
In March 2017 the board of directors approved the increase in GFH’s authorised share capital to $2.5 billion from $1.5 billion. In turn, GFH launched a strategic initiative to issue new shares for the acquisition of a number of infrastructure projects. The infrastructure shareholders’ holdings were acquired in return for a pre-determined number of GFH shares. As a result of these acquisitions in H1 2017, concentration in development properties (real estate) – mostly in India, Africa and the GCC - increased significantly due to the consolidation of these entities. In turn, the already high sector concentration risk particularly to the real estate sector rose further. With GFH now firmly in control of these projects, the Bank does not rule out an opportunistic sale of these assets over the medium term. The current strategy is to proceed with the development of the projects but with minimum injections of cash by partnering with reputable contractors to develop the land bank in exchange for a revenue share.
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