EFG-Hermes posts strong quarter-on-quarter results

"The trend across the region is looking better for our industry at the half-year mark than it did at the beginning of 2009. Markets are improving, and so is our operating revenue. That said, we are not about to become complacent: Our program to cut overheads continues. After a record 2008, we remain cautiously optimistic about this year in view of current market volatility. We are building for the long term and will continue our pursuit of a low-volatility universal banking model spanning our unrivalled — and expanding — regional footprint," said Chief Executive Officer (CEO) Hassan Heikal.

Across all of its lines of business, EFG-Hermes is tapping into new business segments, including debt issuance at Investment Banking and the listing of participation notes at Securities Brokerage. The gradual roll-out of a new client relationship management system will allow the firm to provide a more integrated basket of services to its clients as it continues expanding across the Arab world.

In the second quarter of the year, EFG-Hermes reported net consolidated revenues of EGP382m and net profits after tax and minority interest of 176 million.

Total consolidated revenues declined 52.6% from 2Q 08, when revenues were buoyed by a now discontinued proprietary trading strategy that netted EGP152m in revenues and by market conditions that allowed extraordinary gains in incentive fees. Adjusting for those factors, the decline from 2Q 08 is only 19.6% compared with drops of 26.8% in market volumes and 45.6% in market values in the same period.

Revenues from the investment bank, as distinct from other revenue generators such as the firm's stake in Bank Audi, accounted for 70.9% of total revenues, down from 86.4% a year earlier.

A package of cost-cutting measures introduced in the fourth quarter of last year continued bearing fruit in 2Q 09. Although the fully loaded operating expenses increased by 10.8% over 1Q 09 to EGP158m, they have gone down 54.4% from EGP346.7m in 2Q 08. The increase since the first quarter was mainly due to one-off costs relating to third party expenses and legal fees associated with the launch of new products.

"Global investment banks are once again looking to move into our region, and some of our regional competitors are regaining their balance after the financial crisis. Our regional presence, increasingly varied client base and growing array of services are competitive advantages that will springboard us into our next phase of growth,"

said EFG-Hermes CEO Yasser El-Mallawany.

Year-to-date, EFG-Hermes Investment Banking has closed a string of transactions including two cross-border deals worth a combined $1.8bn and a $1.1bn debt issue. EFG-Hermes Securities Brokerage closed 2Q 09 as the leading brokerage in Egypt and the United Arab Emirates (on both the Dubai Financial Market and the Abu Dhabi Stock Market), while its Kuwaiti operations oscillated between the number one and number two positions during the quarter. EFG-Hermes Securities Brokerage is also ranked as the number four broker in Oman.

EFG-Hermes' complete earnings report for the second quarter of 2009, with comments and analysis — as well as a summary of a balance sheet that is strong, liquid, unleveraged and free of toxic assets — may be viewed on the firm's website.

Second quarter 2009 operational highlights and business segment review

Group

- The Investment Bank remains the largest contributor to total consolidated revenues, accounting for 70.9% of total revenues, down from 86.4% a year ago.
- Total revenues booked from the Investment Bank (as distinct from the Group's stake in Bank Audi) increased 14.9% over 1Q 09 to EGP271m. This is naturally well below the 2Q 08 level of EGP697m. Total fee and commission income increased 45.4% over 1Q 09.
- Regional operations accounted for 53.6% of total fee and commission income in 2Q 09, down from the 59.2% a year earlier.
- Revenue consolidated from Bank Audi increased slightly to EGP109m, but its contribution to total revenue increased to 28.4% from 12.6% in 2Q 08 as total fees and commissions more than halved, contributing only 57.4% to total revenues compare with 70.6% a year earlier.
- Excluding the effect of the firm's now-discontinued proprietary trading strategy and adjusting for gains in realized incentive fees, net profit after tax and minority interest declined only 3% in 1H 09 while revenues declined by 52.6% over the same period.
- EFG-Hermes' shareholding structure remains dominated by institutional shareholders. At the end of 2Q 09, the top 50 shareholders owned 77.5% of the firm's equity and included 29 Western institutions and fund managers.

Securities Brokerage

- Securities Brokerage remained the key contributor to core fee and commission revenues, accounting for 66.6% of the firm's total operating revenues in 2Q 09.
- With volumes across equity capital markets increasing an average of 43.4% and EFG-Hermes maintaining its market shares in key territories, Securities Brokerage's revenues nearly doubled over 1Q 09 levels to EGP126m.
- Although sentiment among institutional clients (Securities Brokerage's primary target audience) was mixed, increasing online and retail operations have supported Securities Brokerage's revenues.
- After the successful hosting of the first Egypt Capital Markets Day (CMD) at the London Stock Exchange (LSE) in 4Q 08, EFG-Hermes Securities Brokerage partnered with the LSE to hold the first MENA Financial Institutions CMD and first Saudi CMD in June 2009.
- In Egypt: Value traded on the Egyptian Exchange was up 32% while volumes grew 173.9% compared to 1Q 09 levels. EFG-Hermes' executions on the market grew 126% from the previous quarter to EGP43bn, resulting in a 40% market share and a number one position. As retail has grown in importance to Brokerage, both Call Centre and Online activities picked up in 2Q 09. Online users grew 38.6% over 1Q 09 and total commissions from Online more than doubled in the same period.
- In the United Arab Emirates: The division maintained its number-one ranking on both the DFM and ADX despite declining market share that came as core institutional investors shied away from the markets. Total executions in 2Q09 nearly doubled over 1Q 09 levels to $2.4bn as market volumes grew 113% and market volumes rose 153%. Online trading in the UAE has picked up with an average commission well above that charged for normal brokerage activities.
- In Saudi Arabia: Total executions grew 11.8% in 2Q 09 to SR3.2bn but have not matched growth in market volumes as retail dominated activity on the exchange. The listing of participation notes will play a key role in increasing the Group's market share going forward.
- In Oman: Although not yet back to 3Q 08 levels, total executions by EFG-Hermes Securities Brokerage increased 101.5% over 1Q 09 to OR135m. The firm ended the quarter as the number four broker on the exchange.
- In Kuwait: Volumes in Kuwait, the second-largest market in the region after Saudi Arabia, ended 2Q 09 up sharply over the previous quarter, although valuations increased only 19.8% over 1Q 09. EFG-Hermes IFA's executions nearly tripled over 1Q 09 to KD2.83bn as market share grew to 30.2%, its highest level since EFG-Hermes entered the market. This positioning was supported by the slow return of foreign institutional clients to the market as well as the firm's increasing penetration of retail and high net worth segments.

Research

- The Research Division continues to cover the widest range of equities in the MENA region, with a total of 87 stocks under active coverage at the end of 2Q 09, up from 75 a year earlier.
- Research covers all countries with stock markets in the GCC (Gulf Cooperation Council), 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.
- Research reached record publication levels in 2Q 09 with 150 reports (1,201 pages), up from 105 reports (1,010 pages) the previous quarter and 143 reports (1,464 pages) in the first half of 2008.

Asset Management

- Asset Management contributed 18% to the Group's consolidated net operating revenues.
- Assets under management edged up 8.4% to $3.982bn in 2Q 09 from $3.673bn at the end of the previous quarter. Some $330m of that increase was related to market effect.
- Net cash outflows were minimal over the quarter ($20.6m), with Egypt-centric funds and portfolio witnessing a new cash inflow of $16.3m while funds and portfolios with regional focus saw net cash outflows of $36.9m, the bulk of which was institutional money being pulled out of the region.
- AuMs are down 48.4% from the all-time high of $7.72bn at the end of 2Q 08, with 53.4% of the decline being the result of falling market valuations.
- In 2Q 09, Asset Management launched the Bank Audi Money Market Fund at EGP139m and also began managing in June the HSBC Amanah Gulf Fund. The division launched its Saudi onshore fund in May. Throughout the quarter, it booked $51m in new equity and fixed-income portfolios to be run both in Egypt and regionally.
- Asset management is heading into the second half of 2009 with a client base that includes endowments, family offices, institutional investors and sovereign wealth funds from across the globe.

Investment Banking

- Investment Banking contributed 3.9% of the Group's consolidated operating revenues in 2Q 09.
- Throughout second quarter, Investment Banking continued to build a very healthy pipeline of initial public offerings (IPOs) out of the region as a whole, but those mandates are likely to remain on hold for the remainder of the year unless a major shift in market sentiment takes place.
- The team has recently closed two significant cross-border merger and acquisition (M&A) deals, including the $1.6bn merger between Palestine Telecom (PalTel) and Zain Jordan, the region's largest M&A transaction in 2009 to date. In early July, Investment Banking advised Actis on its $243m acquisition of a 9.3% stake in Commercial International Bank, the largest M&A deal in Egypt so far this year.
- The team also advised a petroleum company on a $1.1bn debt arrangement that is likely to be one of the largest debt facilities of this year. The drawdown of the loan, and hence EFG-Hermes' fees, is expected before the end of 3Q 09.
- Complications during the document finalization stage in the $460m acquisition of the third Iranian mobile telecoms license by Etisalat saw that deal called off.

Private Equity

- Thanks to cautious and timely investment decisions in 2008, Private Equity has significant liquidity to invest, no leverage issues and a solid portfolio of existing assets.
- Private equity contributed 11.5% to the Group's consolidated operating revenues in 2Q 09.
- Funds under management by Private Equity that earn management fees dipped to $1.029bn at the end of 2 Q09 from $1.15bn at the end of the previous quarter as distributions from the Sahara North Bahriya SPV and Horus II took place.
- Horus II distributed $27m (17.6% of capital committed) during 2Q 09 as it concluded several profitable exits that bring capital distributions to date to 96% of the Fund size.
- Finalization of the structure of the InfraMed Fund gave EFG-Hermes operational and managerial control of an Egypt-dedicated infrastructure fund.
- Rising valuation expectations from the February-March lows have led the team to see opportunities in both the early-stage growth capital space as well as opportunities from forced sellers. Fundraising continues to be challenging for generalist funds and EFG-Hermes Private Equity's current focus remains on deal-specific fundraisings and specialized funds.