EFG-Hermes releases 1Q 09 results

"We are clearly pleased with these results," said Chief Executive Officer (CEO) Hassan Heikal, noting that they came at a time when "our global and regional competitors continued to face significant challenges in the Arab world and beyond. In contrast, our unrivaled footprint, integrated business model and the continued pursuit of a universal banking platform have been key advantages for us over our regional and international peer groups."

That regionalization program continues. EFG-Hermes has hired a CEO for its operations in Saudi Arabia and a new CEO for the Gulf Cooperation Council (excluding Saudi Arabia). The two will join the firm in the second quarter, with both bringing proven global and regional expertise to their posts.

In the first quarter of the year, EFG-Hermes reported total consolidated revenues of EGP326m and net profits after tax and minority interest of EGP140.1m. Revenues from the investment bank, as distinct from other revenue generators such as the firm's stake in Bank Audi, accounted for 72.2% of total revenues, down from 87.6% a year earlier.

The firm noted that net operating profit reflecting the Group's core agency-based business remained above break-even at EGP7.5m compared to a loss of EGP30.3m in 4Q 08. This came in part thanks to decisive cost-cutting measures introduced in the fourth quarter of last year that began bearing fruit in 1Q 09. Fully loaded consolidated total operating expenses decreased 24.1% from 4Q 08 to EGP143m this past quarter.

"We still expect 2009 to be a challenging year, so management is adamant about adhering to cost-cutting measures and continues to be vigilant about both third-party risk and use of the balance sheet," said EFG-Hermes CEO Yasser El-Mallawany. "Our results this quarter are a testament to the fundamental strength of our business model and our emphasis throughout 2008 on regionalizing the business."

Moreover, the firm announced in late April that it had launched the EFG-Hermes InfraMed Fund, a long-term investment fund to finance infrastructure projects in the Southern and Eastern Mediterranean that is targeting a size of more than €1bn. The Fund was launched under the auspices of the Union for the Mediterranean in partnership with major regional public-sector financial institutions.

Also in April, EFG-Hermes launched the Bank Audi Money Market Fund, its first such product with Bank Audi. The firm owns 27.87% of Bank Audi Saradar.

EFG-Hermes' complete earnings report for the first quarter of 2009, with comments and analysis as well as a summary of its highly liquid balance sheet.

First-quarter 2009 operational highlights and business segment review

Group

- The Investment Bank (including net treasury operations) remains the largest contributor to total consolidated revenues, accounting for 72.2% of total revenues, down from 87.6% a year ago.
- Fee and commission income declined as both market volumes and valuations fell across the region throughout the quarter. Notable is that EFG-Hermes' revenue dropped at a slower pace than that at which regional volumes and valuations declined.
- Regional operations accounted for 48.4% of total fee and commission income in 1Q 09, nearly double the 25.9% recorded in the same period last year.
- Revenue consolidated from Bank Audi increased 14.9% over 1Q 08 to EGP85m in the quarter, accounting for 26% of total consolidated revenue (compared with 11.5% a year earlier).
- Profitability came despite 1Q 09 fee and commission income being at one of its lowest levels in the firm's recent history.
- EFG-Hermes' shareholding structure remains dominated by institutional shareholders. At the end of 1Q 09, the top 50 shareholders owned 79% of the firm's equity and included 32 Western institutions.

Brokerage

- Brokerage accounted for 56.2% of the firm's total consolidated revenues in 1Q 09.
- The firm's brokerage arm remained the clear regional leader in 1Q 09, buoyed by its diverse client base, strict corporate governance measures, documentation requirements, and compliance and risk management procedures.
- Brokerage's Seventh Annual One-on-One Conference in Sharm El-Sheikh was held at a low point for financial markets, yet attracted 47 presenting companies and 183 institutional investors, most of them from the United States and Europe.
- In Egypt: Value traded on the EGX was down 4% and volumes off 6.2% compared to 4Q 08 levels. Despite this, the firm's executions on the market grew 18.8% to EGP19bn. EFG-Hermes closed the quarter as the number-one broker on the EGX. Noteworthy is that the retail business is becoming a more important component of Brokerage, with 30% more clients using the Online service in 1Q 09 than used it in 1Q 08.
- In the United Arab Emirates: EFG-Hermes remained the undisputed number-one broker in the UAE in 1Q 09. Despite this, its market shares declined to 9% on the DFM and 14.7% on the ADSM as trading by Western institutional clients came to a near standstill.
- In Saudi Arabia: Total executions by EFG-Hermes are down slightly more than the market average as the Kingdom is dominated by retail activity, a segment Brokerage has not yet fully penetrated.
- In Oman: Brokerage ended the quarter ranked number three in the market with a 19.2% share. The Omani operations have been fully integrated into the EFG-Hermes platform since the beginning of the year.
- In Kuwait: Market share grew to 29.1% in 1Q 09 from 23.5% the previous quarter, with Brokerage oscillating between the number one and number two positions during the quarter. Brokerage's executions in Kuwait fell 33% from 4Q 08 levels, significantly better than the 45.7% market-wide drop in volumes. Integration of EFG-Hermes IFA operations should be accomplished by 3Q 09.

Research

- The Research Division continues to cover the widest range of equities in the MENA region, with a total of 84 stocks from eight countries under active coverage at the end of 1Q 09.
- Research covers all countries with stock markets in the Gulf Cooperation Council (GCC), Levant and North Africa from a macro standpoint and five countries from a strategy perspective. The division benefits from having an on-the-ground analyst presence in all key economies.
- In 1Q09, Research published its latest Egypt Yearbook (January) and supported the firm's headline One-on-One Conference in Sharm El-Sheikh.

Asset Management

- Asset management contributed 22.8% to the Group's consolidated net operating revenues.
- Assets under management (AUM) declined to EGP20.7bn in 1Q 09, down 12.1% from year-end 2008 under pressure from weak global investor sentiment and difficult market conditions that prevented the raising of new assets.
- The drop in AUMs came largely as a result of redemptions (62.4%) on regional funds that were only partly offset by net inflows into money market funds and fixed-income portfolios.
- The MENA Opportunities Fund ended the quarter with $530m under management, while MEDA closed at $321m, both down from approximately $1bn nine months ago.
- The Asset Management team was awarded new mandates worth $55m in the quarter.
- Asset management is heading into 2Q 09 with a client base that includes endowments, family offices, institutional investors and sovereign wealth funds from across the globe.

Investment Banking

- Investment Banking contributed 4.8% of the Group's consolidated revenues in 1Q 09.
- Investment banking continued to face difficult conditions in 1Q 09 due to the near-complete halt in market activity that took hold in the second half of 2008.
- The pipeline for equity offerings remains strong, but poor market conditions and low prevailing valuations forced the Investment Banking team to advise clients to postpone IPOs and equity-raising plans.
- Although the division continues to focus on merger and acquisition (M&A) transactions as a hedge against the slowdown in equity markets, there remains a significant disconnect between buyers and sellers due to both differing points of view on valuations and a lack of adequate financing tools.

Private Equity

- Private equity contributed 16.2% to the Group's consolidated revenues in 1Q 09.
- Funds under management by Private Equity remained unchanged from 4Q 08 at $1.15bn.
- The successful launch of the EFG-Hermes Private Equity InfraMed Fund with leading regional partners in April 2009 marks a turning point in the Private Equity team's strategy to regionalize the business by expanding its investment scope beyond Egypt and North Africa and diversifying its investor base beyond the Middle East and North African region.
- The pipeline for investments continues to grow as the team is currently reviewing several investment opportunities.