EFG-Hermes: net profits 38% up in Q2-2015

By Yomna Yasser On Aug 12, 2015

Despite very challenging market conditions, EFG Hermes continues to deliver strong financial results, with net recurring profits up 38% Y-O-Y, excluding one-off gains recorded in the second quarter of 2014.

EFG Hermes, the Arab world’s leading investment bank, reported Tuesday net profit after tax and minority interest of 125 million Egyptian pounds (US$16 million), a gain of 38% year-on-year if the Investment Bank recurring earnings are normalized by excluding one-off gain related to the sale of EFG Hermes’ stake in Sixth of October Development and Investment Company (SODIC) in 2Q 2014.

This quarter reflects an outstanding operational performance despite exceptionally challenging market conditions and marks the sixth consecutive quarter in which the Group has delivered net profits in excess of 100 million pounds.

The results come as strong headwinds created by low oil prices and geopolitical developments continue to have a direct impact on capital market activities across the Middle East and North Africa.“Despite unfavourable market conditions, EFG Hermes still generated healthy profits for its shareholders with our team delivering a 41% net operating profit margin, aided in large measure by the execution of a strong investment banking pipeline, continued commitment to cost discipline, and a stronger performance by our commercial banking arm,” said EFG Hermes CEO Karim Awad.

Management notes that the one-off gain of 97 million pounds booked in 2Q 2014 from the sale of a non-core investment in (SODIC) skewed 2Q 2014 figures as compared to profits reported in 2Q 2015, which purely reflect recurring, operational activities. The Group reported a net profit after tax and minority interest of 125 million pounds, down 33% Y-o-Y on the reported profits of 2Q15, but up 38% if the one-off gain from the SODIC stake sale is excluded and the growth is measured on a recurring profits basis.

The Investment Bank’s NPAT would be flat year-on-year at 49 million pounds in 2Q 2015, if the one-off gain generated by the SODIC stake sale were excluded from 2Q2014 net profits, a strong performance in light of the very difficult capital market conditions across all operating markets.A strong performance from the Investment Bank saw EFG Hermes close two IPOs and one rights issue during the quarter, while its Brokerage division ranked number one in five regional markets, including Egypt, Abu Dhabi, Nasdaq Dubai, Kuwait and Oman. Also notable: EFG Hermes launched a wholly-owned leasing subsidiary at the end of May 2015 that is already ranked fifth in contracts booked during June 2015. Revenue at the Investment Banking division soared 63% year-on-year in 2Q2015 to 72 million pounds; however, total fee and commission revenue for the Investment Bank platform closed down 20% Y-o-Y at 234 million pounds. This came principally on the back of lower revenue generated from Asset Management as market movements resulted in lower performance fees, while the Brokerage division’s improved rankings across its footprint could not make up for the significantly lower daily traded volumes across most markets in 2Q2015.

Against that backdrop, the Investment Bank’s total operating expenses declined 21% Y-o-Y to 174 million pounds in 2Q15 on lower employee expenses. The ratio of employee expenses to operating revenues stood at 48% in the quarter.

Meanwhile, Crédit Libanais posted a net profit after tax of US$18.3 million, up 58% Y-o-Y in 2Q15, driven largely by healthy growth in net interest income, higher trading income, and better cost management. The Bank’s ROAE rose to double digits at 10.3% at the end of 2Q15.

Key Operational Highlights

·Despite retreating markets and declining trading volumes, Securities Brokerage was again the number-one ranked broker by market share of executions on the Egyptian Exchange (EGX, with a 32% market share). The division was also ranked number one on the Abu Dhabi Exchange (24%), Nasdaq Dubai (38% market share), Kuwait Stock Exchange (28% share) and Muscat Stock Market (30% share). The EGX and Dubai Financial Market (where the firm has a 12% market share) together accounted for 55% of total commissions generated by the Brokerage division in 2Q2015. The division continued to lay the groundwork for the 2015 EFG Hermes London MENA Conference to be held in September, the premier fall investor conference for the Arab world and the largest MENA-dedicated conference to take place in London each year.

·Investment Banking successfully closed and executed two IPOs and one rights issues in 2Q2015, in addition to laying the groundwork for an IPO executed in the third quarter, closure of another rights issue and making progress on a number of high-profile M&A transactions in both the GCC and Egypt. The team acted as Joint Global Coordinator and Book Runner for the highly successful US$267 million IPO of EDITA Food Industries, which was 12x oversubscribed and is now traded on the EGX as well as the LSE (GDRs). In parallel, the same team that helped create Integrated Diagnostics Holding (IDH) via the merger of Al Borg and Al Mokhtabar Labs in 2012 served as Joint Global Coordinator and Book Runner for IDH’s US$334 million IPO. The 11.3x oversubscribed offering was the first primary listing of an Egyptian company on the LSE and the largest IPO of an Egyptian corporation since 2007. The team also closed a US$126 million rights issue for GB Auto as sole Finance Advisor (fully covered in the first subscription round).

· At EFG Hermes Asset Management, AUM rose 4.4% Q-o-Q in 2Q2015 to US$3.0 billion, driven by both appreciation of markets and net inflows. The Muscat Capital IPO Fund launched earlier in 2015 with EFG Hermes KSA as an investment manager, recording major net inflows reaching US$50 million at the end of 2Q 2015. This fund primarily invests in Sharia-compliant IPOs and newly listed companies in the Kingdom of Saudi Arabia. Also in Saudi Arabia last quarter, the division announced the launch of Hasaad with a launch date of 1 July 2015, a Sharia-compliant freestyle Saudi equity fund in KSA. The push for KSA products came as the Kingdom opened at the end of 2Q2015 to qualified foreign investors. Hasaad is geared toward local and regional investors seeking superior Sharia-compliant returns.

·Meanwhile, AuM at Private Equity were stable Q-o-Q at US$0.7 billion. The Private Equity team will continue its divestment strategy of ECPIII, seeking lucrative exits while at the same time pursuing its investment themes in infrastructure, yielding assets and consumer plays.

·The award-winning Research department’s coverage universe stood at 134 companies at the end of 2Q15, representing c. 55% of the aggregate regional market capitalization, with further coverage of 11 economies from a macro perspective and eight in terms of regular strategy notes. EFG Hermes Research also played a significant role in providing investment research and marketing roadshows for the Investment Banking’s IPOs concluded in the quarter. Notably, EFG Hermes was the only research house in the Arab world to have ranked on Institutional Investor’s Europe, Middle East and Africa (EMEA) Research Team for 2015. The finish on the leaderboard is the best-ever performance by a MENA research house on the industry’s most-followed ranking of sell-side analysts. The division was the top-ranked MENA Equity Strategy team, while the Consumer / Nondiscretionary team made their debut on the team list in the runner-up position, giving EFG Hermes a twelfth-place overall finish.

· EFG Hermes Leasing, a wholly-owned subsidiary with capital up to 100 million pounds, began full operations in the quarter, closing the month of June already ranked fifth in terms of deals booked. Management accordingly believes that the quality of the sales team pipeline and its rapid turnaround time will be competitive advantages going forward.