EFG Hermes, the leading investment bank in the Arab world, reported a nearly three-fold year-on-year rise in Group Net Profit After Tax and Minority Interest to EGP119m on Total Group Operating Revenues of EGP563m.
Notably, the Investment Bank made a strong contribution to both bottom-line profitability and to a 14% rise in Group Operating Revenues. In the quarter just ended, the Investment Bank contributed EGP60m to Group Net Profit After Tax and Minority against a loss of EGP31m in 1Q13.
The significant pickup in the profitability of the Investment Bank owes to both the impact of cost optimization measures and higher revenue generated from core business activities. The Investment Bank’s operating revenue increased 27% year-on-year to EGP246m. Excluding the capital market activities, the core businesses of Advisory, Securities Brokerage, Asset Management and Private Equity generated 46% of their revenues from regional operations, with the remaining coming from operations in Egypt.
Core lines of business continue to enjoy market-leading positions in Egypt and a growing share of market activity in the GCC. Cost optimization effort, meanwhile, saw the ratio of employee costs to revenues decline to 49.8% in 1Q2014, a range that Management will continue to try to target going forward. By comparison, the ratio of employee costs to income stood at 72% in 4Q2013 and 69% in the same quarter of last year.
As a result of cost optimization and the pickup in revenues, Net Operating Profit at the Investment Bank has risen c. 17x from 1Q2013 to EGP87m.
The Commercial Bank, meanwhile, contributed EGP59m to Group Net Profit After Tax and Minority as better net interest income and fee and commission income largely offset the impact of lower trading income. In line with a strategy to control costs and maximize shareholder value announced in May 2013, EFG Hermes returned EGP425m to shareholders in the first quarter through a share buyback and continued to dispose non-core assets, including the recent divestment of most of its stake in leading Egyptian real estate developer Sixth of October Development and Investment Company (SODIC).
Key Operational Highlights
•Securities Brokerage was once more the number-one ranked broker by market share of executions on the Egyptian Exchange (EGX) and assumed the top position on the Kuwaiti Stock Exchange while maintaining a leading position in other regional markets. The division saw total executions rise 71% quarter-on-quarter and 122% year-on-year to $12bn in the first quarter. Regional operations accounted for 44% of total Securities Brokerage Revenues in 1Q2014.
•Investment Banking is in the process of concluding its first transaction in Sub-Saharan Africa, advising Al-Futtaim Group on the acquisition via public tender offer of CMC Holding, the largest automotive distributor in Kenya. The tender offer closed during the first quarter with a large acceptance rate of 91% with transaction execution and completion expected to take place in the second quarter of 2014. Meanwhile, in another regional transaction, the team advised a group of prominent regional investors on the acquisition of the third largest offshore accommodation vessels operator. The team continues to be focused on growing its regional footprint during the coming period while continuing to maintain its leading share of the Egyptian market. More importantly, it has built a very strong pipeline of transactions, some of which are expected to close during 2Q2014.
•AUM grew 5% quarter-on-quarter at Asset Management as a 7% appreciation in Egyptian and regional markets offset a 2% net outflow of AUM, most of which came in the form of redemptions on local equity funds and outflows from Egyptian money market funds. Asset Management’s client base remains well diversified.
•Meanwhile, AUM at Private Equity stood at $0.6bn. Following up on the Division’s new strategy, the team is actively reviewing new investment opportunities as well as negotiating a number of exits at different stages from the existing portfolio. Most recently, Private Equity exited its 19% stake in leading regional jeweller Damas via sale to majority shareholder Mannai Corporation in an all-cash transaction valued at USD 150m. The exit generated a c. USD 65.4 cash gain, implying a cash-on-cash multiple of 1.8x and an IRR of 37.8%.
•The region’s award-winning Research house covers 132 equities representing c. 59% of the aggregate regional market capitalization, with further coverage of 11 economies from a macro perspective and eight in terms of regular strategy notes.