OREANDA-NEWS. Fitch Ratings has revised Bahrain-based GFH Financial Group BSC's (GFH) Outlook to Positive from Stable, while affirming the group's Long-and Short-Term Issuer Default Ratings (IDR) at 'B-' and 'B', respectively.

The Positive Outlook reflects the measures GFH's management have taken to strengthen the bank's balance sheet by paying down debt, reshaping the business model with a focus on income-generating investments, and consequent improvement (from a very low base) of profitability. Fitch also views Abu Dhabi Financial Group's acquisition of around 12% in GFH via its subsidiary, Integrated Capital PJSC, as a positive development.

KEY RATING DRIVERS

IDRS

The IDRs reflect the substantial illiquid legacy real estate investments GFH still carries on its balance sheet, which do not yet generate income, the still-limited track record of consistent profit and cash flow generation and the still early stage of development of the bank's business model. While progress has been made on a number of these real estate projects, completion and eventual exit will take many years. Therefore, they could still represent challenges for GFH and constrain its financial profile for some years.

The ratings also take into account the improvement in the funding profile of GFH, after paying down a substantial part of its secured debt, and the progress (though still limited) it has made in building a profitable and cash flow-generative business. The improved funding profile should provide GFH with some flexibility to work out its legacy asset exposures, although its capacity for continuing operation remains vulnerable to deterioration in the business and economic environments.

Rating constraints include profitability and cash flow generation that, despite some improvement, remains weak and volatile and is unlikely to improve on a sustained basis until GFH has built up a longer track record of sustainable business.

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.

RATING SENSITIVITIES

IDRS

Upside to the ratings may result from continued positive momentum in the form of 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. A reversal of the progress made including a significant impairment of assets could put the ratings under pressure, although this is not Fitch's base case.