EFG-Hermes Holding: Financial services

THE COMPANY: Egyptian Financial Group (EFG) was established in 1984 as a consulting boutique. It 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, to smooth income fluctuations by developing an integrated banking model. The firm sold its stake in Bank Audi in 2009 as it could not buy a majority stake and instead acquired 63.7% of commercial bank Credit Libanais (CL) in 2010. EFGHermes currently operates over 65 subsidiaries in Egypt, the UAE, Saudi Arabia, Oman, Kuwait, Jordan and Lebanon. Its investment activities include brokerage, asset management, banking and private equity.

• Securities brokerage: In 2012, brokerage revenue grew 9% year-on-year (y-o-y) and contributed 40% of total investment revenue. The bulk (75%) of brokerage revenue comes from Egypt. The division’s fees and commissions increased 9% y-o-y in 2012. The brokerage ranked first in the Egyptian market, securing a market share of 29% in Q4 2012. Total executions across the region were flat y-o-y at $18.6bn, in line with the aggregate regional markets volume, which went largely unchanged, rising 2.4% y-o-y.

• Asset management: The segment’s fees and commissions constituted 20% of total investment revenue and advanced 4% y-o-y in 2012, and assets under management (AUM) climbed 4.2% y-o-y to $3.4bn. Appreciation in regional markets added 11.7% to AUM, while redemptions represented -7.6%. Regional redemptions comprised 63% of total redemptions, with the remainder coming from Egypt.

• Investment banking: During 2012, the investment banking team successfully managed to close three transactions, including a $510m placement for the Egyptian Refining Company, which closed in 2012 and is considered the largest private placement to take place in Egypt since 2007. This is in addition to the demerger of Orascom Telecom Holding and Orascom Telecom Media and Technology Holding as well as Al Mokhtabar Laboratories’ merger with Al Borg Laboratories. Revenue from the investment banking operations in Egypt increased 15% y-o-y and contributed 21% of the company’s total revenue from fees and commissions in 2012.

• Private equity: Private equity assets under management reached $680m as of December 2012. Fees and commissions from private equity fell 24% y-o-y in 2012 to LE110m ($16.65m), which comprises 18% of total revenue.

• Commercial banking: EFG-Hermes owns a 63.7% stake in Lebanese commercial bank CL, which maintains a deposit market share of 5%. In 2012 deposits grew 10.6% while loans increased 13.1%. Term deposits expanded 2 pps sequentially to 31% of the total in Q4 2012, which resulted in a higher cost of funding and pressed net interest income growth.

Non-performing loans increased to 3.9% from 3.6% in the previous quarter, which led to higher provisioning charges, and operating expenses grew 13.9% y-o-y. Accordingly, the bank’s net profit dropped 11% y-o-y to LE344m ($49m). At the group level, slow revenue growth reflecting the economic slump across the region coupled with growing expenses caused net profit to decline 28% y-o-y to some LE211m ($30m).

DEVELOPMENT STRATEGY: Recently, the Egyptian Financial Supervisory Authority (EFSA) rejected a request from QI nvest to acquire a majority stake in EFG-Hermes Qatar. In 2012 EFG-Hermes Holding announced that QI nvest would pay $250m for a controlling 60% stake in its Qatari unit, which would act as a holding company for four businesses that EFG-Hermes would divest: asset management, brokerage and investment banking, as well as its infrastructure fund. Following EFSA’s rejection, EFG-Hermes announced a strategy to achieve better financial performance by maximising operating revenue and capitalising on attractive opportunities in the region, decreasing its spending by 35% y-o-y to LE500m ($71.15m) in 2014, and selling unused assets, then offering the proceeds to its shareholders.