July 12, 2017 / 1:45 PM / a month ago

Fitch Upgrades GFH to 'B'; Outlook Positive

(The following statement was released by the rating agency) LONDON, July 12 (Fitch) Fitch Ratings has upgraded GFH Financial Group BSC's (GFH) Long-Term Issuer Default Rating to 'B' from 'B-' and affirmed its Short-Term IDR at 'B'. The Outlook is Positive. The upgrade principally reflects GFH's improved financial position following the settlement of a number of pieces of litigation in connection with previous investment transactions and dealings, strengthening the institution's capital position and reducing associated legacy uncertainties. GFH is an Islamic investment bank, established in Bahrain in 1999 to focus in particular on investments in the GCC and MENA region, many of them in real estate. However, in the wake of the global economic crisis GFH has adjusted its strategy towards the creation of a more diversified financial services group, in which subsidiary Khaleeji Commercial Bank (KHCB) plays an important role. KEY RATING DRIVERS IDRS GFH's Long-Term IDR is based on Fitch's assessment of the group's intrinsic creditworthiness. As a wholesale-oriented bank we do not believe that sovereign support can be relied upon. The litigation settlement in 4Q16, reflected in exceptional income of USD464.6 million, allowed GFH in 2016 to report a much increased consolidated profit of USD233 million (2015: USD12 million), while also recognising impairment allowances of USD221.1 million (2015: USD17 million). GFH should now be left with a cleaner balance sheet as a result, but the charge illustrates the valuation volatility within the asset classes in which GFH has historically invested. The 2016 profit raised equity attributable to shareholders by 30% to USD908 million, and consolidated debt-to-tangible equity is low for a finance business at 1.9x (2015: 1.8x). This is appropriate, however, in view of the ongoing limited liquidity of a number of the group's assets, which include real estate projects whose completion and profitable exit could still pose challenges for GFH for some years. In 2015 and 2016 GFH paid down a substantial part of the secured debt previously held at parent level, significantly increasing its financial flexibility, although asset encumbrance remains. The Positive Outlook reflects Fitch's view of the measures GFH's current management has taken to reshape the group's business model towards a greater focus on income-generating investments, with consequent expectations of more consistent profitability. These include an increasing and generally more stable revenue contribution from commercial banking activities (including KHCB). Fitch also views positively Abu Dhabi Financial Group's presence as a significant shareholder, via its subsidiary, Integrated Capital PJSC. RATING SENSITIVITIES IDRS The ratings could be upgraded if GFH demonstrates a track record of stable profitability and cash flows from a business model less dependent on capital gains. Successful development of legacy real estate projects, and subsequent exit from these illiquid assets, could also be positive for the ratings. Resumed losses via impairment of the group's ongoing real estate exposure, or inability to liquidate other assets received as part of the litigation settlement at the values at which they have been recognised in the balance sheet, could result in the Outlook being revised to Stable, or, if severe, lead to a downgrade. Criteria Variation Fitch rates GFH principally under its Global Non-Bank Financial Institutions Rating Criteria, reflecting its non-bank investment activities. However, as GFH and its bank subsidiary KHCB are regulated by the Central Bank of Bahrain, Fitch has varied its criteria to assess regulation under its 'Global Bank Rating Criteria'. Fitch's assessment of regulation forms part of the overall assessment of operating environment. This variation has not resulted in any change to the rating. Contact: David Pierce Director +44 20 3530 1014 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Eric Dupont Senior Director +33 1 4429 9131 Committee Chairperson Christian Kuendig Senior Director +44 20 3530 1399 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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