EFG Hermes reports profits of EGP 48 mn during 2Q2016

Big 5

EFG Hermes, the Arab world’s leading financial services corporation, reported today group earnings from continuing operations of EGP 48 million for the second quarter of 2016.

Operating revenue for the period stood at EGP 288 million, up 10% year-on-year on the back of higher fee and commission income, including rising contributions from the company’s leasing business and additional revenue from the recently acquired microfinance player Tanmeyah.

Importantly, the company completed the sale of the majority of EFG Hermes’ stake in Crédit Libanais during 2Q16, unlocking in the process considerable value for EFG Hermes shareholders.

“Our concerted effort to build a strong non-bank finance institution to complement our region-leading investment banking activities is tangible in this quarter’s results,” said EFG Hermes Group Chief Executive Officer Karim Awad.

“Our revenue mix in the second quarter includes important contributions from both EFG Hermes Leasing and Tanmeyah. We see this trend accelerating in the coming period as we continue building our non-bank financial services into Egypt’s premier offering in the category, providing our diverse client base an expanded range of services.”

The completion of the sale of 44.3% of Crédit Libanais has resulted in the full deconsolidation of Crédit Libanais from EFG Hermes’ financials, a development that Awad said “significantly simplifies our operations to our core activities.”

That said, EFG Hermes’ consolidated results for the quarter do not reflect the EGP 525 million gain from the sale of 44.3% of Crédit Libanais, with this amount being booked only on the company’s standalone financial statements.

However, the firm’s consolidated earnings do reflect a one-off tax expense in Egypt associated with that gain that is reflected as a loss from discontinued operations. EFG Hermes is continuing with its effort to divest its remaining 19.5% stake of Crédit Libanais shares.

Second quarter results include the seasonal effect of Ramadan and the beginning of summer, traditionally slow periods for capital markets in the Middle East and North Africa. Despite the slowdown in activity market-wide, the firm reported only a 3% year-on-year decline group earnings from continuing operations at EGP 48 million.

Meanwhile, the 10% year-on-year rise in revenues to EGP 288 million comes on the back of a 14% rise in fees and commissions, which closed the period at EGP 271 million.

“Revenue growth was driven by our strategy of allocating capital to the building of our non-bank finance services in Egypt as we focused in tandem on growing our traditional capital markets business across the region,” Awad noted.

EFG Hermes continued to maintain a flexible cost structure in 2Q2016, keeping employee expenses as a percentage of revenue below the 50% mark, as has been the Group’s target since 2014.

Notably, the firm’s cash net operating profits rose 11% year-on-year when non-cash charges related to the depreciation of leased assets at the Leasing business are excluded.

“We now look forward to a very busy second half that will see us focus on implementing our previously announced strategy that aims to further enhance our product offering and our geographical presence as we continue to strive towards creating more value for all of our stakeholders,” Awad concluded.

Key Operational Highlights

The Securities Brokerage was again the region’s largest securities brokerage in 2Q2016 despite the impact of the month of Ramadan, which saw volumes decline in a number of regional markets.

The firm closed the quarter as the number one-ranked broker on four regional exchanges and ranked number two in a further two makers. The firm was top-ranked in Egypt (EGX, 34.6% market share), Abu Dhabi Exchange (ADX, 29.7%), Nasdaq Dubai (65.4%) and Kuwait (25.7%).

Securities Brokerage was ranked second in Dubai (14.2%, up from sixth place in 1Q2016) and Oman (27.1%). It was moreover the fifth-ranked non-bank broker in Saudi Arabia. Also in the second quarter, EFG Hermes Securities Brokerage executed the successful IPO of Cleopatra Hospital Company SAE.

Investment Banking was sole global coordinator and book runner for Cleopatra Hospital Company’s USD 41 million initial public offering on the Egyptian Exchange, the team’s second healthcare IPO in one year.

The transaction’s institutional offering was 6.7x oversubscribed and the retail offering 28.6x oversubscribed; in total, the transaction was 10.0x oversubscribed, generating demand in excess of USD 406 million.

Also in 2Q2016, Investment Banking closed the sale in Egypt of Medsofts Group to Archer Daniels Midland, one of the world’s largest agricultural processors and food ingredient providers.

Finally, the firm booked in the quarter fees from the successful USD 127 million IPO of cheese maker Domty in 1Q2016, where EFG Hermes was sole global coordinator and book runner. With stabilization mechanics related to the transaction running well into the month of April, fees were booked only in the second quarter.

EFG Hermes Asset Management had assets under management of USD 2.0 billion at the end of 2Q2016, down 13.7% quarter-on-quarter, with Egypt outflows representing c.80% of the total outflows seen during the quarter.

Moreover, around 50% of the total asset base is denominated in Egyptian pounds; the devaluation of EGP during 1Q16 accordingly had a negative impact on the size of the AuMs.

To eliminate the impact of the devaluation on reported AuMs, we report them separately: Egypt based AuMs declined 22% Q-o-Q to EGP8.5 billion, mainly on the back of outflows. Regional equities lost 5% Q-o-Q to stand at USD1.1 billion at the end of 2Q16.

Meanwhile, AuM at Private Equity closed at USD 1.1 billion at the end of 2Q2016, more than double the USD 0.5 billion at the end of the previous quarter, as its infrastructure platform finalized the acquisition of an EUR 550 million, 49% stake in EDPR participaciones, which includes a 664MW operational pan-European portfolio from EDPR.

The stake was acquired by Vortex II, an SPV managed by EFG Hermes. The Vortex platform now manages EUR 770 million of AuMs with a generation capacity of 457 MW. Meanwhile, ECP II GP completed its full divestment from Kandil Steel Holding, it’s final investment. The GP is distributing the last distribution to LPs and expects to finalize liquidation of the fund by 4Q2016.

The award-winning Research department’s coverage universe stood at 149 companies at the end of 2Q2016, having initiated coverage of six companies in the second quarter and now covering c. 60% of the aggregate regional market capitalisation.

Research covers nine economies from a macro perspective and nine in terms of regular strategy notes. The team played a significant role in the successful IPO of Cleopatra Hospital Company, providing investment research and marketing roadshows.

EFG Hermes Leasing closed second quarter of the year in sixth place with a 6% share. The division continued throughout the quarter to both grow the business while taking steps to mitigate risk from any unexpected rate hikes.

The company finalized in April 2016 the second of two transactions that have together given it 94% ownership of Tanmeyah Micro Enterprise Services, Egypt’s leading private-sector microfinance company.

EFG Hermes is now integrating Tanmeyah into the business and is focused on developing both funding for the operation and the development of a new offloading mechanism compliant with the new Micro Finance Act.