Troubled times for Gulf Finance House

What's Down: Investors warn that Bahrain's Gulf Finance House may be the next shoe to drop after Arcapita Bank enters bankruptcy proceedings.

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Arcapita's filing for Chapter 11 creditor protection has sparked speculation among investors that Gulf Finance House, the investment bank, could be the next to face troubles.

The lender, which has already embarked on an extensive restructuring process and started asset sales, is in a difficult position, said Ahmad Alanani, the senior executive officer at Exotix.

"The company has burned through cash for the last two years," he said. "Cash flow is negative at the moment, and their ability to generate meaningful revenue is non-existent."

The bank reported profits for last year of US$381,000, up from a loss of $349.4 million a year earlier. Most of the company's revenues came from clawbacks of employee share bonus schemes ordered by Bahrain's regulator, writebacks of excess board fees and land sales.

The bank's Dubai-listed shares have risen by 56.6 per cent since the start of the year to79.6 fils each. However, the shares have fallen 12.5 per cent since the start of the month as troubles surfaced at Arcapita.

Gulf Finance House has $237.7m in debts maturing in July and August this year. Auditors from KPMG detailed significant concerns in a report accompanying the bank's annual results, saying its ability to remain in business was dependent on asset sales.

"Due to [a] lack of sufficient liquid assets, and inability of the group to generate sufficient liquidity from its operations, the ability of the group to meet its obligations when due is dependent on a timely disposal of assets," they wrote.

Gulf Finance House's capital adequacy ratio has dipped to 12.41 per cent with dispensations from the central bank of Bahrain, compared to the regulatory minimum of 12 per cent, limiting the bank's ability to absorb further losses, KPMG added.

"These factors indicate the existence of material uncertainties, which may cast doubt about the group's ability to continue," the report said.

While contagion effects from Arcapita's move would be limited, the bank's commencement of bankruptcy proceedings showed Bahrain's government had little stomach to intervene in the financial sector, Mr Alanani added.

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