Fitch Affirms GFH Financial Group at 'B-'; Outlook Stable
KEY RATING DRIVERS - IDRs
GFH's IDRs reflect the substantial illiquid legacy real estate investments it still carries on its balance sheet, which do not yet generate much income, the limited track record of consistent profit and cash flow generation and the still early stage of development of the bank's business model. The ratings take into account GFH's success in raising capital in 2014, its improved funding and liquidity profile and the limited progress it has made so far in building a profitable and cash flow generative business.
GFH's balance sheet still has high single name and sector concentration, with a significant proportion of assets consisting of real estate properties, securities (equity stakes) in real estate related projects or legacy loans related to real estate. GFH is planning to complete these real estate projects and either sell them (profitably) or retain them as an income-producing asset. While Fitch notes that some progress has been made on a number of these, completion and eventual exit will take many years. Therefore, these could still represent challenges for the group and constrain its financial profile for some years.
Fitch considers that GFH's liquidity, leverage and funding profile have stabilised and should provide some flexibility to work out legacy asset exposures, although GFH's capacity for continued operation is vulnerable to deterioration in the business and economic environment. Rating constraints include profitability that remains weak and volatile and is unlikely to improve materially and sustainably until significant balance sheet and business model reshaping has taken place.
GFH is an Islamic investment bank, established in Bahrain in 1999 to focus on investments in the GCC and MENA region. Its strategy is to transform itself into a financial services group, with its subsidiary Khaleeji Commercial Bank (a Bahrain-based Islamic bank focused on real estate) a cornerstone of this approach. GFH has undertaken a rebranding exercise and is focused on strengthening its brand and rebuilding its franchise, which was affected during the financial crisis, to rebuild the confidence of its clients, investors and financing banks, and to focus on more liquid and income-generating assets.
Any upside to the ratings would require continued successful implementation of GFH's new strategy; evidence of solid and consistent profitability and more stable cash flows as part of a viable business model. A key consideration will be management's success in developing and exiting legacy real estate projects to the extent that they become a less significant component of the asset profile.