Esam Janahi, chairman of Gulf Finance House (GFH), has long been a polarising figure in the region, says the head of one Bahrain-based bank. But he adds: “You cannot deny that, without him, Bahrain would be a very different place.”
The assessment rings true. Bahrain Financial Harbour, one of GFH’s signature projects, which is now home to its head office, has provided Bahrain with much-needed infrastructure to match its ambition to be a modern finance hub for the region. Its launch in 2002 started a wave of development in the kingdom.
“In our case, we have decided that the quicker you take the medicine, the better”
Other high-profile projects across the region, including energy city projects in Qatar, India, and Libya, and the launch of several Islamic banks as offshoots of GFH, have made it one of the region’s best-known institutions. Its success has become symbolic of the success of the country’s banking sector.
But GFH encountered substantial difficulties in 2009 and faces a challenging year ahead. As a result of the fall in the regional property market and a drop in asset values, the bank made a loss of $728m last year, its first annual loss since its inception in 1999.
During the past six months it has also faced the embarrassment of losing Ahmed Fahour, the chief executive officer appointed to turn the bank around, who left in December last year after six months, having had to ask banks for a six-month extension for the repayment of the final $100m of a $300m loan.
Ted Pretty, who was appointed by Fahour in October 2009 to head the investment management arm of GFH, is now acting chief executive of the bank and is expected to take on the role in the longer term.
Pretty has outlined an aggressive plan to sell off assets, cut costs and move into new business areas. “Every bank has to decide what to do in response to this financial crisis,” says Pretty. “In our case, we have decided that the quicker you take the medicine, the better.”
Fahour had already started a plan to rescue GFH, making $50m by selling off part of its stake in Qatari investment bank QInvest, embarking on a $300m rights issue in October 2009 and raising a $100m Islamic loan in November. But, by the time Pretty took over, more needed to be done.
“The capital-raising and selling some of the QInvest stake served to stabilise the business, but there were some major structural things that needed to be addressed,” says Pretty.
In February, he convinced the 32 banks that had lent the $300m due that month to give him an extra six months to repay the last $100m. He has also started talks with lenders of a $100m Islamic loan, $50m of which is due in March, to extend the facility by two years. “Smoothing out our liquidity profile and addressing the lumps in our repayment profile is now one of my prime concerns,” says Pretty.
“This process is painful, but I think it is really important for us in the broader context of the GCC financial markets”
This will involve rapidly reducing the firm’s debt levels. Pretty says that at the end of 2009 the bank had about $655m of debt and this has been reduced to the region of $455m. About $420m of assets have been identified for sale.
“Once we complete some asset sales, I can see our debt dropping fairly quickly to less than $300m,” Pretty says. “Therefore our financing costs will come down substantially, which is just as important as reducing debt levels, and we will have addressed our debt profile over the next three years.”
The first asset sales should be completed by the end of the first quarter of 2010, netting the bank about $250m. The first of these is believed to be the sale of the bank’s 37 per cent stake in the local Khaleeji Commercial Bank, which is estimated to be worth about $130m. A second sale of a property asset is also on track to be completed in the first quarter.
“We have two sales that are well down the track, with due diligence already completed on the first, and the other is progressing fast,” says Pretty.
Other assets identified for sale include all the energy city projects. “We have a buyer with whom we are in the final stages of negotiation for the energy city projects in Libya, India and Qatar,” says Pretty. “The buyer is a government institution, so has the capital to ensure the completion of the projects.”
GFH is also in talks with a separate buyer for the Energy City Kazakhstan project, according to Pretty.
Other assets up for sale include the bank’s stake in the local First Energy Bank, and Asia Finance House. “Some of our lenders are talking about a debt-for-asset swap. If we can manage that, then great, but I want to exit all of the assets up for sale by the end of the year.”
Pretty says that, once the bank starts paying down debt, its Standard & Poor’s credit rating, currently cut to junk at selective default status, should quickly start to rise again.
The reason for the extent of the asset sales is clear. Projects such as the energy city schemes account for a large part of the writedowns that GFH had to incur at the end of 2009.
“GFH has done many significant projects in infrastructure and property and, like many other banks, has had to take these back onto the balance sheet, as the ability to raise additional funds from the market to take these projects to completion has become difficult,” adds Pretty.
In addition to clearing up the balance sheet and paying down debt, Pretty has also outlined plans to make hefty cuts in the operating costs of the bank. Last year, it cost $131m to run the bank, including financing expenses. “Expenses are currently running at about $11m a month,” he says. “My objective is to get that down to about $6.5m a month.”
Part of this will come from reducing the debt financing expenses, but a large portion will come from cutting staff levels. The bank employed about 270 people in 2008. That dropped to 207 at the end of 2009, but Pretty says more cutbacks are to come. “We will see a significant reduction, as it has not been coming down aggressively enough,” he says.
The reduction in headcount will also result in the bank reorganising its Bahrain Financial Harbour head office and subletting some of its unused floor space.
Pretty claims to have already trimmed the costs of the executive level of the business by 60 per cent in two months. Further cuts will be made, particularly among the expatriate workforce. “We will concentrate on reducing the staff numbers of senior expatriates, and rely on natural attrition in the local staff,” says Pretty.
“There are a lot of experienced Bahrainis in the financial sector that could work for us, and they have established networks in the region,” adds Pretty. “In the medium term, I can also see my own role going back to a Bahraini.”
As if restructuring the bank were not enough, Pretty also has to cope with perhaps a greater challenge, delivering new revenue streams. During Fahour’s brief term with the bank, he outlined plans to move away from launching large projects and selling them to investors, and instead concentrating on becoming more of an Islamic investment banking advisory house. However, plans to team up with Australia’s Macquarie to develop the idea were scrapped.
Pretty says GFH will also have to concentrate on launching new projects this year to get revenue. Two projects are currently being worked on, including the launch of an Islamic bank in Syria that will be floated on the local bourse.
“This year is a transition year,” says Pretty. “The model will change, but at the moment we have to look at what we have done well in the past and exploit that, before we can start moving out of areas such as real estate and into other business activities such as asset management, natural resources and transport and logistics.”
He does not expect 2010 to be a transformative period, instead referring to it as a “bridge year”. “I don’t see a huge upturn in the economy in 2010. I think this will be a bridge year between the beginning of the crisis hitting the region and getting to the point where you can return to profit,” he says. “People talk about green shoots, but I think the only green shoots are the improvement you can make to your business model as part of getting ready to return to growth in 2011.” He adds that he expects liquidity to remain very tight throughout 2010, with little improvement on the conditions experienced in late 2009.
Certainly the outlook for 2010 so far does not indicate a year of rapid recovery, and rumours are circulating about more problems yet to be uncovered in Bahrain’s banking sector.
“All eyes in Bahrain are on GFH. If it doesn’t manage to turn itself around, it will be a massive blow for Bahrain and the reputation of the financial sector here,” says the head of a Bahrain bank. “If it does, it will give hope to a lot of other investment banks that are facing similar issues.”
Pretty hopes that by taking the “strong medicine” he has prescribed, GFH will benefit from being the first among many banks that will have to go through a difficult restructuring period. “This process is painful, but I think it is really important for us in the broader context of the Bahrain and the GCC financial markets,” says Pretty. “We are taking hard decisions, which are not popular. We have been among the first in the GCC to do that and are getting beaten up for it. But, over the next few quarters, I forecast that the focus will shift from us to some of our peers, and other banks will come under scrutiny, with people asking why they haven’t taken aggressive steps in relation to their balance sheets and their cost base.”
If that is the case, GFH may find it is moving into the second decade of the 21st century poised to return to growth, while its peers are still struggling with the legacy of the boom and bust of the first decade.