Financial services

The Company

THE COMPANY: Egyptian Financial Group was established in 1984 as a consulting boutique that merged with Hermes Financial in 1996 to form EFG Hermes Holding. In 2007, the company acquired a stake in Bank Audi, a Lebanese commercial bank, mainly to smooth income fluctuations through an integrated banking model. The firm sold its stake in 2010 as it could not achieve a majority and acquired 65% of Lebanese commercial bank Credit Libanais – a stake which now stands at 63.7%. EFG Hermes currently has a direct presence in Egypt, the UAE, Saudi Arabia, Oman, Kuwait and Jordan, and an indirect presence in Morocco, Lebanon, Qatar, Palestine, Bahrain and Iraq. Its activities include brokerage, asset management, investment banking and private equity.

Securities Brokerage

In 2013, brokerage revenue grew 17% y-o-y, contributing 34% to total investment bank revenue. The bulk (i.e., 56%) of brokerage revenue comes from Egypt and 33% from the UAE and Kuwait combined. The company’s brokerage ranked second in the Egyptian main market, securing a market share of 12.6% over the year (including deals). Egypt’s executions in dollars declined 17% during FY13, reflecting an 8.5% decline in total market turnover and a 13.2% depreciation in domestic currency. Executions across the region, however, grew 86% over the year, following rebounding markets.

Asset Management

The segment’s fees and commissions constituted 25% of total investment bank revenue and advanced 71% y-o-y in 2013. Assets under management (AUM) fell to $3bn from $3.4bn at YE12, mainly squeezed by CBE caps on MMFs, redemptions in fixed-income portfolios (one of the firm’s clients decided to manage his fund in-house), and redemptions in regional equity funds.

Investment Banking

Segment revenues dropped 67% in 2013 due to a challenging business environment and the $510m Egyptian Refining Company placement the year before. The IB arm completed five successful transactions in 2013, including a LE600m ($85.2m) rights issuance of Palm Hills Developments, the private placement of Wadi Degla, the acquisition of Al Nakhla Tobacco by Japan Tobacco, the sale of Dubai First to First Gulf Bank, and the listing of the Bank of London and the Middle East on Nasdaq Dubai.

Private Equity

Private equity AUM remained flat, registering $0.69m in December 2013. More recently, management revealed intentions to stop pooling funds while examining investment opportunities as they arise. Fees and commissions increased 22% y-oy in 2013 to LE134m ($19m), at 16% of total revenue.

Commercial Banking

Credit Libanais maintained a deposit market share of 5%, and while deposits remained flat, loans increased 16%, boosting the utilisation of funds. As of December 2013, the LTD ratio rose to 36% from 32% the year before, while security investments remained at 46%. Better utilisation maintained NIMs at 1.75% in 2013 from 1.72% a year before, despite a low global interest rate environment. NPLs declined to 3.4% from 4.0% the previous year, mainly due to write-offs, resulting in provision coverage of 84% by the end of the year (compared to 91% in 2012). The commercial bank recorded 12% bottom-line growth in 2013, further boosting the group’s earnings thanks to LE depreciation. On the group level, EFG Hermes recorded a net loss of LE335m ($47.6m) in 2013, mainly due to a one-off non-cash expense of LE754m ($107.1m) for balance sheet clean-up.

Development Strategy

According to management, the firm will expand its activity in the region, capitalising on stock market recovery and the inclusion of the UAE and Qatar in the MSCI emerging markets indexes. EFG Hermes also sees potential for direct investment opportunities, expressing willingness to venture into this area in light of planned public investments in the region. In early 2014, management announced a LE1bn ($142m) Treasury buyback plan. The first LE450m ($63.9m) tranche was completed in 1H14, with the second LE550m ($78.1m) tranche initially planned to follow in the second half of the year.