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GFH Financial Group – Ratings Affirmed
(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of GFH Financial Group (GFH) at ‘BB-’ and ‘B’, respectively. The Outlook on the LT FCR remains Stable.
The ratings remain underpinned by GFH’s adequate liquidity and low refinancing risk, alongside good debt service record, and reasonable diversification of assets by geography. The improved capitalisation, including high Tier 1 component, and satisfactory profitability (even during the pandemic) also support the ratings. The factors constraining GFH’s ratings are the challenging operating environments across the GCC, including elevated credit and geopolitical risk in the face of an uncertain global economic outlook. Additional rating constraints are the reliance on wholesale funding as well as the concentrations seen in assets and liabilities, despite declines. A credit vulnerability is the level of asset encumbrance as this limits the Bank’s financial flexibility to some degree.
GFH continues to strengthen core businesses, invest in human capital and infrastructure, and improve risk and compliance functions. The institution is well managed and business strategy is effectively executed as a fully integrated Sharia’a compliant financial group. In turn, this has helped GFH build a successful GCC-based business franchise. Notwithstanding a mild contraction in H1 24, the balance sheet has expanded steadily over the last four years, including at the retail bank subsidiary Khaleeji Bank (KB) in Bahrain (the latter contributed 36% to consolidated assets in H1 24). The expansion seen was in part driven by the launch of new business segments notably lower risk treasury activities. This has moderately diversified risk assets and revenue streams and, consequently, improved GFH’s risk profile over recent periods. That said, the wholesale nature of the business model continues to pose a credit challenge given the attendant funding and asset concentration vulnerabilities. These risks are partially mitigated by the geographically diversified balance sheet (ca 40% of assets and liabilities are derived from outside Bahrain − notably other GCC countries). This factor has enabled GFH to demonstrate a significant degree of resilience throughout economic cycles.
The strategic importance given to improving liquidity by building the treasury and money market activities – and diversifying away from real estate assets – has reduced to some degree the concentration risks in the balance sheet. In turn, the stock of liquid assets − mainly government and quasi government sukuk (mainly Bahrain, Oman and, to a lesser degree, UAE & KSA) as well as cash and bank placements – remain at a satisfactory level. The liquidity position is a credit strength and we expect this factor to continue to support the ratings in the short to medium term. Bahrain sukuk can be repo’d with the Central Bank of Bahrain (CBB) in response to cash requirements.
Liquidity is carefully managed as this – as well as maintaining an appropriate funding structure − remains crucial for debt service under both normal and distressed conditions. This factor supports the ratings and is an important pillar of GFH’s funding policy, particularly as wholesale banks do not have an official lender of last resort in Bahrain. Debt maturities are within the repayment capacity of GFH and do not pose any refinancing challenges at present. The extended debt maturity profile is a credit positive. The Bank also has access to uncommitted undrawn facilities equivalent to ca USD168mn. The moderate degree of asset encumbrance means that GFH’s financial flexibility is rather limited.
GFH remains reliant on wholesale funding due to regulatory restrictions on gathering retail deposits at the parent level. Placements from financial and non-financial institutions together with equity of investment account holders (EIAHs) remain the largest component of wholesale funding. These funds are sourced predominately from institutions within the GCC region (Saudi Arabia, UAE and Bahrain), and have demonstrated a rather high degree of resilience. Although the funding concentration is a credit weakness, this risk factor is partially mitigated by the adequate level of liquid asset holdings. We anticipate funding concentrations to persist in the short to medium term.
In contrast with prior years, GFH did not report a single large exposure in excess of CBB’s regulatory limit of 15% of the capital base in 2023. Although Bahrain government sukuk was equivalent to about one-third of sovereign sukuk exposure, or 0.56x of total equity at end-June 2024, this asset class is exempt from the regulatory limit. Nonetheless, the exposure can potentially transmit Bahrain sovereign stress to GFH’s balance sheet, with this risk factor partially mitigated by the stable outlook for Bahrain’s sovereign creditworthiness. The treasury segment is considered one of GFH’s avenues for earning stable spread income and is a relatively low risk activity. Although the legacy concentration in the real estate sector has significantly reduced in recent years, exposure was USD1.24bn − equivalent to 108% of total equity and 11% of total assets in H1 24.
The quality of the small financing portfolio is satisfactory and mostly held at the KB level. KB is a Sharia’a compliant universal bank and can raise retail deposits. The bank is supervised and regulated by the Central Bank of Bahrain (CBB), and is deemed of strategic importance to GFH. Given KB’s satisfactory risk profile, this reduces any likelihood of needing parent liquidity or capital support.
Capitalisation and the quality of capital are sound, the latter reflecting a high CET1 component. These factors support the rating. Total CAR improved in 2023 as a result of a significant decline in total RWAs driven by reduced large exposure risk weightage (due to the sale of legacy real estate assets). CBB regulations prescribe an 800% risk-weight for large exposures. Total CAR declined to a still sound 18.1% in H1 24 – well above the regulatory requirement of 12.5% − as total RWAs resumed growth, and provided a moderate capital buffer. The nature of GFH’s business model means that an effective capital buffer is crucial to safeguard the balance sheet against unforeseen losses. GFH expects CAR to hover at about the 19% level at year-end 2024. Internal capital generation improved in 2023, reflecting a mildly lower dividend payout ratio. However, the still generous dividend policy is expected to continue to produce a moderate rate of internal capital generation. Overall capital flexibility is therefore considered adequate in the absence of a major strategic shareholder. We project the balance sheet leverage ratio to remain satisfactory in the short to medium term.
GFH remains a relatively steady performer, with key profitability metrics having improved in H1 24. The earnings volatility seen in the past has reduced in large part underpinned by a more diversified business model. This has helped generate comparatively stable revenue streams, although there remains some degree of reliance on non-recurring transactional banking. Notwithstanding the current geopolitical headwinds, we expect GFH to remain moderately profitable over the short to medium term. Operating income from commercial banking and treasury activities are having a beneficial impact on income generation.
Although the high global interest rate environment negatively impacted GFH’s net financing margin (NFM) in 2022 and 2023 – in part due to significant real estate investments – current year interim results suggest that margin compression has eased. We therefore expect NFM to remain in mild positive territory at year-end 2024. However, operating income is expected to remain skewed toward non-financing income (non-FI), reflecting the fairly small share of net financings in total assets and significant real estate investments. Cost efficiency is satisfactory, while GFH’s modest operating profitability provides just adequate loss absorption capacity.
Rating Outlook
The Stable Outlook indicates that the LT FCR is unlikely to change over the next 12 months. This reflects our view that GFH’s overall risk profile will more than likely remain stable despite the prevailing elevated credit and geopolitical risk factors.
Rating Dynamics: Upside Scenario
There is currently limited upside to the ratings as GFH’s ratings are constrained by Bahrain’s country ceiling (‘BB-’). A higher rating would require a reduction in Bahrain sovereign risk, as well as a significant improvement in GFH’s concentration risks, profitability and, to a lesser extent, capitalisation.
Rating Dynamics: Downside Scenario
Although not our expectation, the LT FCR could be lowered by one notch and/or the Outlook revised to Negative over the next 12 months if GFH’s risk profile and credit metrics deteriorated significantly.
Contact
Primary Analyst: Morris Helal, Senior Credit Analyst; E-mail: ...
Secondary Analyst: Darren Stubing, Senior Credit Analyst
Committee Chairperson: Rory Keelan, Senior Credit Analyst
About the Ratings
The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.
The following information sources were used to prepare the credit ratings: public information and information provided by the rated entity. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2020-23 and H1 2024. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.
The principal methodologies used to determine the ratings are the Bank Rating Methodology, dated 3 April 2019 (see , and the Non-Bank Financial Institutions Rating Methodology, dated 27 April 2022 (see Information on rating scales and definitions, the time horizon of rating outlooks, and the definition of default can be found at Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at
This rating action follows a scheduled periodic (annual) review of the rated entity. Ratings on the entity were first released in August 2013. The ratings were last updated in October 2023. The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure. The ratings have been assigned or maintained at the request of the rated entity or a related third party.
Conditions of Use and General Limitations
The information contained in this publication including opinions, views, data, material and ratings may not be copied, distributed, altered or otherwise reproduced, in whole or in part, in any form or manner by any person except with the prior written consent of Capital Intelligence Ratings Ltd (hereinafter “CI”). All information contained herein has been obtained from sources believed to be accurate and reliable. However, because of the possibility of human or mechanical error or other factors by third parties, CI or others, the information is provided “as is” and CI and any third-party providers make no representations, guarantees or warranties whether express or implied regarding the accuracy or completeness of this information.
Without prejudice to the generality of the foregoing, CI and any third-party providers accept no responsibility or liability for any losses, errors or omissions, however caused, or for the results obtained from the use of this information. CI and any third-party providers do not accept any responsibility or liability for any damages, costs, expenses, legal fees or losses or any indirect or consequential loss or damage including, without limitation, loss of business and loss of profits, as a direct or indirect consequence of or in connection with or resulting from any use of this information.
Credit ratings and credit-related analysis issued by CI are current opinions as of the date of publication and not statements of fact. CI’s credit ratings provide a relative ranking of credit risk. They do not indicate a specific probability of default over any given time period. The ratings do not address the risk of loss due to risks other than credit risk, including, but not limited to, market risk and liquidity risk. CI’s ratings are not a recommendation to purchase, sell, or hold any security and do not comment as to market price or suitability of any security for a particular investor.
The information contained in this publication does not constitute investment or financial advice. As the ratings and analysis are opinions of CI they should be relied upon to a limited degree and users of this information should conduct their own risk assessment and due diligence before making any investment or other business decisions.
Copyright © Capital Intelligence Ratings Ltd 2024
The ratings remain underpinned by GFH’s adequate liquidity and low refinancing risk, alongside good debt service record, and reasonable diversification of assets by geography. The improved capitalisation, including high Tier 1 component, and satisfactory profitability (even during the pandemic) also support the ratings. The factors constraining GFH’s ratings are the challenging operating environments across the GCC, including elevated credit and geopolitical risk in the face of an uncertain global economic outlook. Additional rating constraints are the reliance on wholesale funding as well as the concentrations seen in assets and liabilities, despite declines. A credit vulnerability is the level of asset encumbrance as this limits the Bank’s financial flexibility to some degree.
GFH continues to strengthen core businesses, invest in human capital and infrastructure, and improve risk and compliance functions. The institution is well managed and business strategy is effectively executed as a fully integrated Sharia’a compliant financial group. In turn, this has helped GFH build a successful GCC-based business franchise. Notwithstanding a mild contraction in H1 24, the balance sheet has expanded steadily over the last four years, including at the retail bank subsidiary Khaleeji Bank (KB) in Bahrain (the latter contributed 36% to consolidated assets in H1 24). The expansion seen was in part driven by the launch of new business segments notably lower risk treasury activities. This has moderately diversified risk assets and revenue streams and, consequently, improved GFH’s risk profile over recent periods. That said, the wholesale nature of the business model continues to pose a credit challenge given the attendant funding and asset concentration vulnerabilities. These risks are partially mitigated by the geographically diversified balance sheet (ca 40% of assets and liabilities are derived from outside Bahrain − notably other GCC countries). This factor has enabled GFH to demonstrate a significant degree of resilience throughout economic cycles.
The strategic importance given to improving liquidity by building the treasury and money market activities – and diversifying away from real estate assets – has reduced to some degree the concentration risks in the balance sheet. In turn, the stock of liquid assets − mainly government and quasi government sukuk (mainly Bahrain, Oman and, to a lesser degree, UAE & KSA) as well as cash and bank placements – remain at a satisfactory level. The liquidity position is a credit strength and we expect this factor to continue to support the ratings in the short to medium term. Bahrain sukuk can be repo’d with the Central Bank of Bahrain (CBB) in response to cash requirements.
Liquidity is carefully managed as this – as well as maintaining an appropriate funding structure − remains crucial for debt service under both normal and distressed conditions. This factor supports the ratings and is an important pillar of GFH’s funding policy, particularly as wholesale banks do not have an official lender of last resort in Bahrain. Debt maturities are within the repayment capacity of GFH and do not pose any refinancing challenges at present. The extended debt maturity profile is a credit positive. The Bank also has access to uncommitted undrawn facilities equivalent to ca USD168mn. The moderate degree of asset encumbrance means that GFH’s financial flexibility is rather limited.
GFH remains reliant on wholesale funding due to regulatory restrictions on gathering retail deposits at the parent level. Placements from financial and non-financial institutions together with equity of investment account holders (EIAHs) remain the largest component of wholesale funding. These funds are sourced predominately from institutions within the GCC region (Saudi Arabia, UAE and Bahrain), and have demonstrated a rather high degree of resilience. Although the funding concentration is a credit weakness, this risk factor is partially mitigated by the adequate level of liquid asset holdings. We anticipate funding concentrations to persist in the short to medium term.
In contrast with prior years, GFH did not report a single large exposure in excess of CBB’s regulatory limit of 15% of the capital base in 2023. Although Bahrain government sukuk was equivalent to about one-third of sovereign sukuk exposure, or 0.56x of total equity at end-June 2024, this asset class is exempt from the regulatory limit. Nonetheless, the exposure can potentially transmit Bahrain sovereign stress to GFH’s balance sheet, with this risk factor partially mitigated by the stable outlook for Bahrain’s sovereign creditworthiness. The treasury segment is considered one of GFH’s avenues for earning stable spread income and is a relatively low risk activity. Although the legacy concentration in the real estate sector has significantly reduced in recent years, exposure was USD1.24bn − equivalent to 108% of total equity and 11% of total assets in H1 24.
The quality of the small financing portfolio is satisfactory and mostly held at the KB level. KB is a Sharia’a compliant universal bank and can raise retail deposits. The bank is supervised and regulated by the Central Bank of Bahrain (CBB), and is deemed of strategic importance to GFH. Given KB’s satisfactory risk profile, this reduces any likelihood of needing parent liquidity or capital support.
Capitalisation and the quality of capital are sound, the latter reflecting a high CET1 component. These factors support the rating. Total CAR improved in 2023 as a result of a significant decline in total RWAs driven by reduced large exposure risk weightage (due to the sale of legacy real estate assets). CBB regulations prescribe an 800% risk-weight for large exposures. Total CAR declined to a still sound 18.1% in H1 24 – well above the regulatory requirement of 12.5% − as total RWAs resumed growth, and provided a moderate capital buffer. The nature of GFH’s business model means that an effective capital buffer is crucial to safeguard the balance sheet against unforeseen losses. GFH expects CAR to hover at about the 19% level at year-end 2024. Internal capital generation improved in 2023, reflecting a mildly lower dividend payout ratio. However, the still generous dividend policy is expected to continue to produce a moderate rate of internal capital generation. Overall capital flexibility is therefore considered adequate in the absence of a major strategic shareholder. We project the balance sheet leverage ratio to remain satisfactory in the short to medium term.
GFH remains a relatively steady performer, with key profitability metrics having improved in H1 24. The earnings volatility seen in the past has reduced in large part underpinned by a more diversified business model. This has helped generate comparatively stable revenue streams, although there remains some degree of reliance on non-recurring transactional banking. Notwithstanding the current geopolitical headwinds, we expect GFH to remain moderately profitable over the short to medium term. Operating income from commercial banking and treasury activities are having a beneficial impact on income generation.
Although the high global interest rate environment negatively impacted GFH’s net financing margin (NFM) in 2022 and 2023 – in part due to significant real estate investments – current year interim results suggest that margin compression has eased. We therefore expect NFM to remain in mild positive territory at year-end 2024. However, operating income is expected to remain skewed toward non-financing income (non-FI), reflecting the fairly small share of net financings in total assets and significant real estate investments. Cost efficiency is satisfactory, while GFH’s modest operating profitability provides just adequate loss absorption capacity.
Rating Outlook
The Stable Outlook indicates that the LT FCR is unlikely to change over the next 12 months. This reflects our view that GFH’s overall risk profile will more than likely remain stable despite the prevailing elevated credit and geopolitical risk factors.
Rating Dynamics: Upside Scenario
There is currently limited upside to the ratings as GFH’s ratings are constrained by Bahrain’s country ceiling (‘BB-’). A higher rating would require a reduction in Bahrain sovereign risk, as well as a significant improvement in GFH’s concentration risks, profitability and, to a lesser extent, capitalisation.
Rating Dynamics: Downside Scenario
Although not our expectation, the LT FCR could be lowered by one notch and/or the Outlook revised to Negative over the next 12 months if GFH’s risk profile and credit metrics deteriorated significantly.
Contact
Primary Analyst: Morris Helal, Senior Credit Analyst; E-mail: ...
Secondary Analyst: Darren Stubing, Senior Credit Analyst
Committee Chairperson: Rory Keelan, Senior Credit Analyst
About the Ratings
The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.
The following information sources were used to prepare the credit ratings: public information and information provided by the rated entity. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2020-23 and H1 2024. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.
The principal methodologies used to determine the ratings are the Bank Rating Methodology, dated 3 April 2019 (see , and the Non-Bank Financial Institutions Rating Methodology, dated 27 April 2022 (see Information on rating scales and definitions, the time horizon of rating outlooks, and the definition of default can be found at Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at
This rating action follows a scheduled periodic (annual) review of the rated entity. Ratings on the entity were first released in August 2013. The ratings were last updated in October 2023. The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure. The ratings have been assigned or maintained at the request of the rated entity or a related third party.
Conditions of Use and General Limitations
The information contained in this publication including opinions, views, data, material and ratings may not be copied, distributed, altered or otherwise reproduced, in whole or in part, in any form or manner by any person except with the prior written consent of Capital Intelligence Ratings Ltd (hereinafter “CI”). All information contained herein has been obtained from sources believed to be accurate and reliable. However, because of the possibility of human or mechanical error or other factors by third parties, CI or others, the information is provided “as is” and CI and any third-party providers make no representations, guarantees or warranties whether express or implied regarding the accuracy or completeness of this information.
Without prejudice to the generality of the foregoing, CI and any third-party providers accept no responsibility or liability for any losses, errors or omissions, however caused, or for the results obtained from the use of this information. CI and any third-party providers do not accept any responsibility or liability for any damages, costs, expenses, legal fees or losses or any indirect or consequential loss or damage including, without limitation, loss of business and loss of profits, as a direct or indirect consequence of or in connection with or resulting from any use of this information.
Credit ratings and credit-related analysis issued by CI are current opinions as of the date of publication and not statements of fact. CI’s credit ratings provide a relative ranking of credit risk. They do not indicate a specific probability of default over any given time period. The ratings do not address the risk of loss due to risks other than credit risk, including, but not limited to, market risk and liquidity risk. CI’s ratings are not a recommendation to purchase, sell, or hold any security and do not comment as to market price or suitability of any security for a particular investor.
The information contained in this publication does not constitute investment or financial advice. As the ratings and analysis are opinions of CI they should be relied upon to a limited degree and users of this information should conduct their own risk assessment and due diligence before making any investment or other business decisions.
Copyright © Capital Intelligence Ratings Ltd 2024
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