Efg-hold.gdr S Regulatory News (EFGD)

RNS Number : 0957R

EFG-Hermes Holdings SAE

16 August 2010

 

2Q2010 Earnings Release - 15 August 2010

Performance at a Glance

 

Table 1: Operational Indicators

Please refer to the attached pdf

Sources: EFG Hermes audited financial statements and management accounts

 

 

Table 2: Financial Indicators

Please refer to the attached pdf

* includes EGP716.6 million in 1H2010 being capital gain on the sale of the stake in Bank Audi and EGP193.8 million in 1H2009 (EGP108.8 million in 2Q2009) being share of profit of associate

Sources: EFG Hermes audited financial statements and management accounts

 

 

 

 

 

Please refer to the attached pdf

 

Sources: EFG Hermes audited financial statements and management accounts

 

 

 

 

 

1H2010 in Review

 

n Volumes traded decline 50% on average in 2Q2010 over 2Q09 levels and valuations were nearly flat. The regional capital markets were affected by the global capital market turbulence onset by the Greek financial impasse. On a semi-annual basis, volumes traded and valuations on the regional markets on average declined over 1H09 levels, decreasing close to 40% and 4% respectively in 1H2010;

n Total net consolidated revenue for 1H2010 nearly doubled over 1H09 to EGP1.413 billion up from EGP711 million (growth is 34.4% if capital gains resulting from the sale of the Bank Audi and the revenue booked from the investment during 1H09 are set aside). Ona a quarterly basis total net consolidated revenue for 2Q2010 decreased 9.8% over 2Q2009 to EGP346 million both as a result of the decline in volumes traded on regional capital markets coupled with the loss of the revenue as a result of sale of the stake in Bank Audi that had booked EGP108.8 million in 2Q09. ;

n Total fee and commission income remained the core component of the Group's revenues. On a semi-annual basis, total fee and commission revenue increased 18.3% in 1H2010 over 1H09 to EGP472 million on the back of closing several Investment Banking deals during 2010 and Private Equity success fees. During 2Q2010 fee and commission revenue accounted for 59.2% of the net total revenues for the quarter and declined 10.6% over 2Q09 to EGP205 million in 2Q2010 compared to around 50% declines in volumes traded on the regional capital markets over the similar period;

n Setting aside the capital gains earned on the sale of the stake in Bank Audi during 1Q2010, revenues from Capital Markets and Treasury operations increased 88.5% from EGP119 million in 1H09 to EGP224 million in 1H2010. Revenues booked from the Capital Markets and Treasury operations more than tripled over 2Q09 to reach EGP141 million in 2Q2010 on the back of sizeable FX gains resulting from the depreciation of the EGP as well as a net of EGP58 million of net interest income booked during the quarter;

n Fully loaded total operating expenses increased 32.3% to EGP405 million in 1H2010 up from EGP307 million in 1H09, the bulk of which were costs relating to the fee and commission business as the full effect of the renewed management incentive scheme filtered in. On a quarterly basis, operating expenses followed the same trend as the semi-annual comparison, increasing 25.75% over 2Q09 levels to EGP200 million in 2Q2010;

n Net operating profits more than doubled over 1H09 levels to EGP1.008 billion in 1H2010 up from EGP404 million in 1H09, mainly as a result of the sale of the Bank Audi stake in 1Q2010 that booked total gain on the sale of EGP716.6 million. Adjusting for the sale of the Bank Audi stake, net operating profit decreased 28% over 1H09 level to EGP291 million with a net profit margin of 41.8% (but up from 40.8% if 1H09 performance is adjusted for revenues consolidated from the investment in Bank Audi). Net operating profit for the Group decreased 34.8% to EGP146 million in 2Q2010 down from EGP224 million in 2Q09 corresponding to net operating margins for the Group of 42.1% in 2Q2010 down from 58.4% in 2Q09;

n Net profit after tax and minority interest increased 82.3% over 1H09 levels to EGP580.3 million in 1H2010. Given that EGP382.7 million relate to the net capital gain on the sale of the Bank Audi stake in 1H2010 and EGP193.8 million relate to the revenues consolidated from the investment in Bank Audi during 1H09, net profit after tax and minority interest increased to EGP197.6 million, up 61.1% from the EGP122.7 million booked during 1H09. Net profit after tax and minority interest increased to EGP96.7 million in 2Q2010, up 43% over 2Q09 net profit after tax and minority interest (adjusted for revenues consolidated from Bank Audi in 2Q09);

n Regional operations (non-Egypt related operations) accounted for 37.6% of the total fee and commission income in 2Q2010 down from 45.9% a year earlier;

n In line with its regional expansion strategy, EFG Hermes commenced operations in two new regional markets during 2Q2010. The full spectrum of Investment Banking operations was started as a greenfield in Syria while the Group acquired a brokerage license in Jordan;

n Although total values executed by EFG Hermes halved to USD10.6 billion in 2Q2010 down from 21.9 billion in 2Q09, EFG Hermes remained the #1 Brokerage House in the region topping several of the region's most active capital markets and growing market share in others. Growing retail brokerage operations has been instrumental in ensuring the Group's continued dominance in the region;

n The Research Department continued to increase the stocks and economies under coverage and support the Investment Bank's operations as a whole with the stocks covered increasing to 109 stocks up from a coverage of 96 stocks at the end of 2009;

n Total assets under management within the Group decreased to USD5.07 billion, of which USD4.14 billion are in listed equities and money market funds and the remainder in private equity. Minimal incentive fees were booked during 1Q2010 (c.EGP5 million);

n Several new funds, mainly on the Asset Management side, are slated for launch during 2H2010 while both the InfraEgypt Fund and Syria Private Equity Fund are expected to close before yearend;

n In spite of challenging market conditions the Investment Banking Team closed several transactions during 2Q2010 totaling close to USD1 billion; these included the first IPO out of Egypt since April 2008 and the OT rights issue;

n Since the end of 1Q2010, two brokerage houses have initiated coverage on the EFG Hermes stock, namely Goldman Sachs and HC Brokerage. This is in addition to Bank of America Merrill Lynch and HSBC who already cover the stock in research;

n EFG Hermes' shareholding structure remains dominated by institutional shareholders. The top 50 shareholders own c.71% and include 33 western institutions and fund managers. These 33 western institutions and fund managers own around 46% of EFG Hermes shares.

 

 

Performance

 

Total Revenue

Table 3: Breakdown of Total Revenue

Please refer to the attached pdf

 

Sums and percentages may not add up exactly due to rounding

* net of bank interest paid, bank charges, FX differences and intercompany revenue (expenses)

** represents realised & unrealised gains/loss on trade facilitation account, includes EGP716.6 mn of capital gain on sale of Bank Audi in 1Q2010

*** being share of profit of associate in 2Q2009 and 1H2009

Sources: EFG Hermes audited financial statements and management accounts

 

Investor sentiment over 2Q2010 dampened as volatility set into regional markets as global capital markets, in general, weakened on the back of the news from Greece followed by reports of possible shortfalls in the Spanish and Italian banking sectors and coupled with the continued weak recovery of the US economy. Although the EFG Hermes Sales Team continues to report interest in the region by foreign institutional buyers but as a result of the fragile recovery in both the US and European economies their investment strategies remain conservative and magnitude directed to investment in the MENA region continues to be modest.

Total net consolidated revenue for 2Q2010 decreased 9.8% over 2Q2009 to EGP346 million both as a result of volumes traded on regional markets decreasing by around 48% over the similar period coupled with the loss of the revenue as a result of the sale of the stake in Bank Audi that had booked EGP108.8 million in 2Q09. On semi-annual basis total net consolidated revenue in 1H2010 nearly doubled over 1H09 to EGP1.413 billion up from EGP711 million. Setting aside the capital gains resulting from the sale of the Bank Audi and the revenue booked from the investment during 1H09, the growth in net total revenue over 1H09 is 34.4% as a result of several Investment Banking transactions during 1H2010 and the increase in net interest income and Treasury operations.

Although fee and commission revenue decreased 10.6% over 2Q09 to EGP205 million as regional volumes traded halved over the year it remained the core contributor to net total revenue as Brokerage revenue decreased by only around 36% compared to around 50% declines in volumes traded on regional capital markets as a result of the implementation of the more profitable retail model in addition to both Investment Banking and Private Equity performance improving.

Capital markets and treasury operations continued to be a core contributor to revenues, reigning in 40.7% of the net total revenues in 2Q2010. Capital Market transactions and Treasury's cash management coupled with selective investing in fixed income products to book EGP141 million(1), nearly tripling over 2Q09 as the Central Bank of Egypt left the interest rates unchanged during the quarter citing falling headline inflation and rising concerns over European sovereign risk and hence the global economy as the main reasons.

It must be noted that with divestment of the stake in Bank Audi in January 2010, EFG Hermes will no longer equity consolidate a portion of the Bank's revenues. Since then, and until the resulting cash balances are fully deployed, the Treasury Department has successfully managed the funds and generated solid returns that have supported the Group's revenue stream during this interim period. It must be noted however that the revenue that used to be generated from Bank Audi using the equity method for the consolidation was an accounting treatment that did not contribute to the Group's cashflow, this is in contrast to the revenue currently being generated by the Treasury Division as a result of investing sales proceeds.

 

Market Performance

Table 4: Performance of Markets in the Arab Region during 1H2010

 

Please refer to the attached pdf

Sources: Regional markets and EFG Hermes

 

Fee and Commission Revenue

 

Although activity on the regional capital markets was disparate during 1Q2010 there was an upward trend in both volumes traded and valuations that continued into the first part of 2Q2010. This trend was then reversed and most regional markets, with the exception of Palestine, fell sharply over the quarter. In terms of market valuations, all major regional indices fell short of their averages during 1Q2010 decreasing on average around 11.3%. In terms of market volumes, the outlook in the markets where EFG Hermes operates was likewise disparate; volumes traded in the secondary market increased slightly in Egypt (+3.7%), the UAE markets declined around 30%, volumes on the Kuwaiti market declined close to 40% while volume on the Saudi market increased but with the market index declining. Total volumes traded on regional capital markets in 2Q2010 are less than half of what they were a year ago as investor sentiment remained weak and trading continued to be dominated by retail speculative transactions. On average, valuations on the regional capital markets remain nearly flat when compared to 2Q09 levels.

 

_____________ 1Includes mainly EGP58.1 million of net interest and bank charges, EGP41 million of unrealised capital loss on stocks and EGP6.6 million of unrealised capital gains on fixed income and FX gain of EGP113 million

 

The decline in regional capital market activity in general is what affected the Group's fee and commission revenue and caused the decline to EGP206 million down from EGP229 million in 2Q09 mainly as revenue from Brokerage operations dropped and the continued near-lack of incentive fees at the Asset Management level due to the markets' near flat performance. This was partially replaced by revenues booked by the Investment Banking Division as it closed several transactions over the quarter.

In spite of decline in fee and commission revenue during 2Q2010, EFG Hermes continued its dominance across the region. The Group's expansion into two new countries and the growth of the retail brokerage business has ensured that its positioning as the #1 broker is maintained. Sealing Investment Banking deals and building a strong backlog for execution over the remainder of the year in addition to launching new funds both on the Asset Management and Private Equity Funds.

Table 5: Contribution of the Different Divisions to Operating Revenue on a Quarterly Basis

 

Please refer to the attached pdf

 

Sums and percentages may not add up exactly due to rounding

Sources: EFG Hermes audited financial statements and management accounts

 

Table 6: Contribution of the Different Divisions to Operating Revenue on a Semi-annual Basis

 

Please refer to the attached pdf

 

Sums and percentages may not add up exactly due to rounding

Sources: EFG Hermes audited financial statements and management accounts

 

 

Brokerage operations remained the core contributor to fee and commission revenue but its contribution to the total declined both on a quarterly and semi-annual basis as a result of average the lower market executions as well as the increase in revenue generated by the other divisions. Brokerage operations' contribution declined to 49.2% of the total fee and commission revenue in 2Q2010 (46.7% in 1H2010) down from 64.4% a year earlier. Asset Management was the second contributor to fee and commission revenue booking 19% of the total in spite of collecting only minimal incentive fees during the quarter (EGP4.5 million) but the increase in assets under management that are invested in equities rather than money market funds and fixed income portfolios relative to both 2Q09 and 1Q2010 has allowed the Team to book slightly higher management fees. Private Equity and Investment Banking each booked around 16% of the fee and commission revenue during 2Q2010 up from 11% and 3.6% respectively in 2Q09.

Regional operations, although not as large as the previous few quarters reigned in 37.6%(2) of the Group's fee and commission revenue down from 45.9% in 2Q09 echoing the decline in regional capital market activity as well as the absence of deals closed by the regional Investment Banking Team.

_____________

 

Hereunder is an analysis of the company's main operational divisions:

Brokerage

 

Although operating in arduous market conditions, EFG Hermes remained the top brokerage house in the region; a fact that was further affirmed by the Group being named the Best Brokerage House in the Middle East at the Banker Middle East Industry Awards. The annual Banker Middle East Industry Awards are designed to recognize banks and financial institutions that are pioneers in finance and that have witnessed growth through turbulent times. More than 4,500 industry professionals cast ballots for the seven institutions nominated as finalists for Best Brokerage House.

In general market activity across regional capital markets was flat; with volumes increasing around 11% on the back of indices falling by a similar level over 1Q2010. On the other hand, volumes are c.50% lower than in 2Q09. Looking at the regional averages excluding the effect of the Saudi market, the largest of the regional capital markets but the least accessible to most investors, trading volumes during 2Q2010 are 15.7% lower than 1Q2010 and 53.8% lower than 2Q09 coupled with market valuations that are c.10% and 5.2% lower than 1Q2010 and 2Q 09 respectively. Given this back drop, coupled with EFG Hermes maintaining its market positioning as the #1 broker across the region, the total value of trades executed by the Group decreased to USD10.6 billion in 2Q2010; a 15.2% over 1Q2010 and a 51.6% decline over 2Q09. Consolidated Brokerage fees and commissions decreased around 36% over 2Q 09 to EGP 101 million reigning in 49.2% of total fee and commission revenue down from nearly 70% in 2Q09.

The retail related business segments, be it the pure online, call centre or retail through branches or VIP clients, is continuing to increase. Retail-related Brokerage fees and commission revenue constituted 56% of the total Brokerage fee and commission income in 2Q2010 up from 52% in 1Q2010. It is due to this increase in retail activity that has limited the decline in the total Brokerage fee and commission revenue to 15% over 1Q2010 levels compared to the 15.2% decline in executions over the quarter.

EFG Hermes continues to expand its retail operations and is implementing a plan to expand services through both its branch network and online platform. The main services being launched over the coming few months include selling the funds managed by EFG Hermes through the branch network.

Figure 7: Breakdown of Brokerage Commissions Booked by Various Business Categories during 2Q2010

 

Please refer to the attached pdf

 

Sources: EFG Hermes audited financial statements and management accounts

 

Egypt

Volumes traded on the secondary market on the EGX declined 42.1% over 2Q09 levels and are slightly up (+3.7%) over 1Q2010. Conversely, valuations on the other hand are 6.1% above 2Q09 levels and 11.3% lower than 1Q2010 level. As a result total executions declined to EGP26 billion, down 39.5% over 2Q09 pulling down EFG Hermes' market share (of the total market executions) to 25% down from 40% in 2Q09. However, it must be noted that of the total EGP103 billion executed during 2Q2010 on the EGX, EGP41.7 billion were over the counter and special transactions (that carry no fees), the bulk of which were not transacted by EFG Hermes. Total value executed on the secondary market totaled EGP61.4 billion of which EFG Hermes executed EGP25.2 billion giving the Group a 41.1% market share of the total secondary executions; a share higher than both 2Q09 and the 24% in 1Q2010, both quarters which did not have any sizeable special transactions(3). EFG Hermes remained the #1 brokerage house in Egypt executing in total over 60% more than the #2 broker during 2Q2010 (total executions include both secondary and OTC).

 

Figure 8: Progression of Volumes Executed and Share of Total Market Executions

Please refer to the attached pdf

 

Sources: EGX and EFG Hermes

 

Revenue from brokerage activity in Egypt decreased 25% over 2Q09 levels to EGP73 million(4) constituting 35.7% of the Group's consolidated fee and commission income for the year down from 42.9% in 2Q09 as the other business lines and geographies began to slowly recover.

 

UAE

Figure 9: Progression of Values Executed and Share of Total Market Executions

Please refer to the attached pdf

 

Sources: DFM, ADX and EFG Hermes

 

Both trading volumes and values continued to decline over the quarter, volumes traded declined 31.9% and 29% on the DFM and ADX respectively coupled with declines in indices of 20.7% and 13.6% respectively over the similar period due to continued frailness of any economic or market recovery as credit growth remains constraint, private consumption remains weaker than other GCC countries and the continued restructuring of corporates in the UAE. Having said that, EFG Hermes's share of total market execution over the quarter increased on both the DFM to 13.1% and to 19.6% on the ADX, maintaining the Group's position as the #1 brokerage house in the UAE. Around 10% of EFG Hermes' executions in the UAE are channeled through its online platform.

_____________ 3 For the fiscal year 2009 most of OTC and special transactions were executed by EFG Hermes (total of EGP 78 million) and one of its competitors (a total of EGP 140 billion) accordingly EFG Hermes’ share of total market executions for the full year is 40.8%

In May, during Dubai Financial Market's ten-year anniversary celebration EFG Hermes Brokerage in the UAE received an award for being one of the five most active brokers on the exchange since its inception. Being ranked among the top five for a ten year period, although the Group has only began to actively trade the market since 2007, attests to the Firm's dominance of the UAE brokerage scene over the past few years.

Given that both volumes traded and indices in the UAE declined around 70% and 15% respectively over 2Q09 levels, revenue booked by Brokerage operations there consequently declined, albeit at lower levels reflecting increased market shares. Revenues booked by the Brokerage operations in the UAE fell 54% to the equivalent of EGP10 million in 2Q2010, constituting 5% of total fee and commission revenue, down from EGP22 million in 2Q09. The trend is also echoed on the 1H2010 fees and commission that reached EGP22 million down from EGP32 million a year earlier.

Saudi Arabia

Figure 10: Progression of Volumes Executed and Share of Total Market Executions

Please refer to the attached pdf

 

Sources: TADAWUL and EFG Hermes

 

Volumes traded on the Saudi market increased nearly 40% on the back of weaker valuations as the Tadawul main index declined around 10.4% over the quarter. Although volumes traded remained 43.1% lower than 2Q2009, the market was once again the top market in terms of liquidity, with average daily trading volumes reaching close to USD1 billion by the end of 2Q2010. EFG Hermes executions on the Saudi market increased 59% to SAR3.1 billion, increasing its share of the total market executions to 1.2%. The total outstanding access products as at the end of the quarter totaled USD250 million.

Revenues consolidated from the Saudi brokerage activities in 1H2010 increased to the equivalent of EGP6 million in agency fees corresponding to 1.4% of the Group's consolidated fee and commission revenue for 1H2010. EGP1 million of Asset Management fees booked purely out of Saudi Arabia is booked within the regional Asset Management revenue.

 

Oman

Figure 11: Progression of Volumes Executed and Share of Total Market Executions

Please refer to the attached pdf

 

Sources: Oman Stock Exchange and EFG Hermes

 

EFG Hermes executions on the Omani Stock Exchange declined 11% over 1Q2010 levels to OMR72 million as the market volumes contracted c.11% and indices declined around 10% over the same period allowing the Group to maintain its share of market executions at around 21.5% with market ranking third.

Revenues consolidated from Vision Securities' activities recorded the equivalent of EGP2 million in agency fees corresponding to 1.2% of the Group's consolidated operating revenues during 2Q2010 down from EGP3 million in 1Q2010 and EGP4 million in 2Q2009.

 

Kuwait

Figure 12: Progression of Volumes Executed and Share of Total Market Executions

Please refer to the attached pdf

 

Sources: Kuwait Stock Exchange and EFG Hermes

 

 

 

Trading on the Kuwait Stock Exchange has been dismal during 2Q2010. Negative investor sentiment in anticipation of possible financial difficulties within major corporations coupled with the introduction of the new Capital Market regulations that came into effect at the end of March 2010 put a dampener on volumes traded (as the Team had previously anticipated). Volumes traded decreased over 38% over 1Q2010 levels and nearly 71% relative to 2Q2009 as the index shed 13.2% over 1Q2010 levels (19.02% over 2Q2009 levels). Over 2Q2010 the majority of trading on the KSE comprised of institutions and banks liquidating their portfolios and listed companies buying treasury shares, with most of the volume being executed through the banks' and institutions' affiliated brokerage arms. With this backdrop and given that the bulk of EFG Hermes IFA's clients are daily traders (whether high networth clients or Kuwaiti institutions) that chose to limit their trading during the quarter, values executed by the Group in Kuwait declined 52.1% to KWD773 million (USD2.67 billion) during 2Q2010 relegating the company to the overall second position for the quarter.

It must be noted that the new regulations have initially decreased the volume traded on the exchange, however, over the long term it is hoped that these regulations will increase activity and deepen the market as more transparency and corporate governance measures are introduced.

As was explained in 1Q2010, Nasdaq OMX has been chosen as the new trading system to be used on the KSE. The project is underway and the new system should be up and running by 2Q2011. EFG Hermes' in house system, BrokerMind, should be therefore immediately deployed giving us an edge over other brokerage firms in Kuwait given the successful interfacing of our system with that of NASDAQ OMX as tested in other countries.

Brokerage activity in Kuwait booked revenues equivalent of EGP11 million in 2Q2010 (down from EGP21 million in 1Q2010 and EGP33 million in 2Q09) corresponding to 5.6% of the Group's total fees and commissions.

Other Regional Markets

Trading markets where EFG Hermes has no physical presence for its clients remains a key advantage the Group has over its competitors. Total executions by the Group on these markets increased by 17.7% to USD1.128 billion up from USD958.1 million a year earlier. As at the end of 1Q2010 EFG Hermes' share of total market executions in the main markets that it trades but has no physical presence include Qatar (share of total market executions 14.5%), Bahrain (share of total market executions 13.6%), Jordan (share of total market executions 1.7%) and Morocco (share of total market executions 0.22%). It is worth mentioning that the Group's market share in Jordan is expected to increase given the recent acquisition of a brokerage license there.

Branch Network

Three new branches have come online in Egypt during 2Q2010. The target to reach a total of 15 branches by the yearend may be delayed as the EFSA has changed the definition of branches and accordingly the Team has put further expansion on hold until a clear legal opinion and definition is received.

 

Online Trading

EFG Hermes' online trading platform continued to support the Group's overall market executions, especially in Egypt. Total executions through the online platform remained in the vicinity of 1Q2010 execution of EGP2.1 billion in 2Q2010 despite the decrease in traded volumes on the market since 1Q2010. The main reason being that the bulk of executions through the online platform remain that of the retail sector whose trading dominated the Egyptian market during 2Q2010. The average commission charged remains substantially higher than that charged to the institutional clients.

 

Research 

 

Figure 13: Development of Active Research Coverage

Please refer to the attached pdf

 

Source: EFG Hermes

 

The Research Department continued to increase the stocks covered within the region and despite dropping active coverage on 6 stocks and 2 of the shipping companies in Qatar merging (hence are now effectively one stock) stocks under coverage increased to 109 stock up from 90 at yearend 2009 and 100 at the end of 1Q2010. Today EFG Hermes research covers 55% of the regions market capitalisiation and is on target to increase coverage to 150 stocks by the end of the year. In addition, as at the end of 2Q2010 the Group covers 11 economies from a macro-level and 8 countries in terms of regular strategy notes.

For the remainder of the year, in addition to focusing on client-driven research notes, the Team is aiming to extend coverage on the Levant markets in general as local presence in the Syrian, Jordanian and Lebanese (in terms of Brokerage) has been established.

 

 

Asset Management

 

Figure 14: Development of Listed Assets under Management (totals in EGP billion)

Please refer to the attached pdf

 

Source: EFG Hermes

 

EFG Hermes ended the quarter with USD4.14 billion of assets under management, a 12.8% increase over 2Q2009, and 8.8% lower than the level as at the end of 1Q2010. The bulk of the decline was due to market effect (USD215.6 million) as regional capital markets declined, on a weighted average basis, around 11%. Net cash outflows were mainly a result of USD196.2 million in withdrawals from the money market funds and fixed income portfolios that were only partially replaced by around USD117 million of net cash inflows into regional institutional portfolios, as well as USD10 million into Egyptian equity funds. Given that 70.3% of the AUMs are Egypt-centric and are denominated in EGP, part of the decline can be attributed to the appreciation of the EGP against the USD over the quarter (average USD1=EGP5.486 in 1Q2010 vs. USD1=EGP5.637 in 2Q2010).

The Division's client base remains diversified and has become more skewed towards longer term perspective clients including institutional clients, endowments, foundations and insurance companies.

The EFG Hermes MEDA Fund ended the quarter with an NAV of USD278 million with minimal new subscriptions and redemptions of USD20 million. On the performance side, the Fund declined 6.5% compared to a decline of 7.9% in the MSCI Arabian Markets Index over 2Q2010. The Group's second flagship fund, the MENA Opportunities Fund ended the quarter with an NAV of USD410 million. The Fund maintained its high exposure over the quarter to take advantage of market momentum and the underlying macroeconomic backdrop in the region. The Fund ended the quarter flat YTD.

 

The Group's other funds also fared well in terms of performance, the EFG Hermes Saudi Arabia Equity Fund's YTD performance is +3.9% compared to the Tadawul All Share Index which is down 0.5%. On another note, the EFG-Hermes Egypt Fund had a NAV of USD38 million as at the end of 2Q 2010 having received USD10.5 million of subscriptions with minimal redemptions. The Fund's performance was mostly in line with that of the Egyptian market declining 13.3% compared to a 13.9% decline in the Hermes Financial Index (HFI).

On the discretionary portfolio level, the Team closed several new mandates that resulted in inflows totaling USD121 million into this segment of which only USD2 million were fixed income portfolios. The net cash inflows into the equity discretionary portfolio segment in 2Q2010 was USD119.4 million with a USD26.3 million decline coming from market movement.Overall, assets in managed equity and fixed income portfolios stood at USD1.1 billion at the end of 2Q2010; up 3% from 1Q2010.

 

The Firm's position in the Egyptian mutual funds market was further solidified with the launch of its fifth Money Market Fund in Egypt with the Arab Investment Bank in May. With an initial target of USD9 million, the new fund closed the initial subscription period with USD21 million. The Team is working on a pipeline of several new mandates in Egypt with a number of leading banks.

 

Both on quarterly and semi-annual basis overall revenues from Asset Management increased slightly. Asset Management booked EGP39 million in 2Q2010 up from EGP38 million in 2Q09 constituting 19% of the Group's total fee and commission revenue.

 

Investment Banking

 

Adverse global market conditions trickled in and affected the performance of regional capital markets, increasing volatility and dampening investor appetite in general. This in turn hindered the closing of several transactions slated for completion during 2Q2010. The Team began the quarter with a relatively strong pipeline of equity offerings. The first of these deals completed at the beginning of the quarter and before volatility began to set into the market, was the successful execution of the USD800 million rights issue for Orascom Telecom. This deal is the largest of its kind in Egypt. Thereafter, the Division started pushing for the completion of another sizeable equity-related transactions that it had planned for 2Q2010, however, precariousness of the general global market conditions set into action by the Greek impasse affected the regional capital markets rendering the deal closing unfeasible.

Conversely, and given the uniqueness of the story of one of the equity related mandates, coupled with the positive pre-marketing feedback, the Team decided to launch the USD180 million Initial Public Offering for Juhayna, a dominant player in Egypt's fast growing dairy industry that has a strong export business. This was the first IPO to be completed in Egypt since May 2008. With this transaction, Juhayna has become the first player from the important food & beverage sector to list on EGX. The offering was met with unexpected success with the private placement oversubscribed 1.75 times, with most of that demand being driven by long-only Western institutions, and the retail portion being 6.8 times oversubscribed. The offering once again proved the strength of EFG Hermes' distribution capabilities and the ability of the Investment Banking Team to execute transactions in very difficult conditions.

Following the completion of the Juhayna IPO, when market volatility did not subside further dampening investor appetite and the Team decided to postpone the launch of the two equity offerings planned for 2Q2010.

Going into 3Q2010, the Team's focus has once again shifted from equity transactions to both M&A and debt deals. The Investment Banking Division in Egypt is currently in the final stages of launching a bond for one of the Group's corporate clients.

Although the Team continues to be involved in a number of large M&A transactions, focus during 3Q2010 will be to close a number of already in-process mid-sized M&A given the complexities involved in closing mega M&A transactions that render them longer term transactions. Two of those mid-sized M&A transactions have so far been completed in 3Q2010. The first of these transactions is SODIC's acquisition of a 50% stake in Palymera, which was in fact EFG Hermes' first transaction in the highly promising Syrian market. The second deal was the announcement of the sale of 100% of LinkdotNet. LinkdotNet is considered to be Egypt's largest ISP, which attracted the attention of a number of players including Egypt's top mobile operators. Eventually the owner, Orascom Telecom, chose to go into exclusive negotiations with the Egyptian Company for Mobile Services. The transaction is in the finalisation stage and is expected to close before the end of 3Q2010. Another transaction is the sale of Arabeya Online Brokerage, where EFG Hermes is mandated by the Company's two main shareholders for the sale of up to 90% of the Company. Bank Audi finally acquired AOLB for EGP267 million with final closing expected by the end of 3Q2010.

There are several other deals in process but the Team's ability to close them remains a function of the overall investor sentiment, its ability to bridge the disconnect in valuation between buyer and sellers as well as the fast approaching summer and Ramadan lull.

Revenues booked by the Investment Banking Division increased four-fold in 2Q2010 to EGP33 million up from EGP8 million in 2Q09 as the Team closed the aforementioned transactions during the quarter. In fact, revenue generated by the Team during 2Q2010 is double what the Team booked during 1H09.

 

Private Equity

 

Total funds under management with Private Equity currently stand at to USD925 million(5) down from USD931 million at the end of 1Q2010 as divestment of the CIIC portfolio continued.

2Q2010 saw the launch of two important initiatives at the Private Equity level. The first of the initiatives was the first closing of the InfraMed "mother" fund at Euro385 million with the final closing targeted for Euro 1 billion. The Egypt pocket (InfraMed Egypt), which EFG Hermes is to manage and receive management fees against, will receive at least 20% of the total mother fund and the EFG Hermes Team has already began to market the fund locally in Egypt and is expected to raise another USD150-200 million. The second initiative, which coincided with EFG Hermes' entry into the Syrian market, is the launch of the Syria Private Equity Fund. The Fund has received all the required approvals within Syria. Soft marketing the Fund is well underway and fund raising is to start after Ramadan with a 4Q2010 closing. Initial feedback from prospective investors is positive.

There was minimal investment by all of the Funds managed during 2Q2010 as several large opportunities, that require either extensive due diligence or legalities, remain under study.

Total revenue booked by Private Equity increased 30% over 2Q09 to EGP33 million constituting 15.9% of the Group's fee and commission revenue.

 

 

 

 

Regional Expansion

 

Expansion into the Levant was a prime target for EFG Hermes and to that effect the Group completed its footprint during 2Q2010.

Although the Group already has a physical presence in the Lebanon, the brokerage license was dormant. With the approval of Banque du Liban, the license was reactivated at the end of 2Q2010. Although the trading on the exchange remains small relative to other regional markets, having a seat on the Beirut Stock is important both to complete the regional footprint as well as support the operations in Syria until the Damascus Exchange picks up as the BSE could be a possible listing market for Syrian companies in the short term.

After opening its office in Damascus at the end of March 2010, the Syrian Commission on Financial Markets and Securities granted EFG Hermes Syria L.L.C. a license to undertake the advisory activities, the full range of corporate finance activities (excluding underwriting), research, securities brokerage and asset management during April. Shortly thereafter, EFG Hermes Private Equity launched the Syria Private Equity Fund and the Investment Banking Team closed its first deal in Syria acting as the sole buy-side advisor to SODIC on its acquisition of a 50% stake in Syria's Palmyra Real Estate Development Company ("Palmyra").

To complete the spectrum within the Levant, during June 2010 EFG Hermes acquired 100% of Tadawol for Securities and Financial Services, one of Jordan's local brokers for JD3.85 million (USD5.4 million) and has since assumed management control over the business. It is worth noting that Tadawol is a small brokerage company with a market share of less than 1% and hence, EFG Hermes has effectively acquired a seat on the Amman Stock Exchange. EFG Hermes has already began to staff the office and commenced the integration process.

 

Capital Markets and Treasury Operations

 

Capital Markets and Treasury Operations remains a key component of the Group's revenues, especially after the sale of the Bank Audi stake and the proceeds not being fully deployed yet. Treasury has been booking solid revenues replacing those that previously emanated from the Bank Audi investment. Having said that, revenues booked through the Capital Markets and Treasury operations are in cash form as opposed to accounting entries as a result of the consolidation of the investment in Bank Audi.

Total revenue from the Capital Markets and Treasury Operations increased to EGP141 million(6) in 2Q2010 up from EGP45.7 million(7) in 2Q09 (excluding EGP108.8 million consolidated from the Bank Audi stake owned during 2Q09) constituting 40.8% of total net revenue up from 11.9% in 2Q09.

EFG Hermes continued to be near debt-free with large cash balances remaining, net interest income generated by the Treasury Department increased to EGP58.1 million in 2Q2010 up from EGP30.1 million in 2Q09. The bulk relates to interest generated through cash and balance sheet management, investment in treasuries and money market funds. The increase is a direct result of the increase in cash balances due to the sale of the Group's stake in Bank Audi earlier in the year. Opportunities to invest the cash balances in fixed income products issued by regional corporations were scarce during 2Q2010 and hence the decline in realised capital gains on fixed income products from EGP19.4 million in 2Q09 to EGP7.3 million in 2Q2010. FX gains were a major source of revenue during the quarter as the EGP depreciated against the USD over the quarter. The average exchange rate over 1Q2010 was 1USD=EGP5.49 and increased to 1USD=EGP5.64 for 2Q2010. EFG Hermes holds around 50% of its cash balances in foreign currency as well as owning assets in the GCC whose currencies are pegged to the USD. Accordingly, net FX gains reached EGP113 million in 2Q2010 up from a loss of EGP7.3 million in 2Q09 as the exchange rate ended the quarter at 1USD=EGP5.7.

 Operating Expenses

 

Please note that in order for the comparison to depict the Group's true performance the one-off capital gain on the sale of Bank Audi for EGP716.6 million is removed from the total revenues for 1H2010 in the write up following the table.

 

Table 15: Breakdown of Operating Expenses

 

Please refer to the attached pdf

 

Sources: EFG Hermes audited financial statements and management accounts

 

 

 

Please refer to the attached pdf

 

Sources: EFG Hermes audited financial statements and management accounts

 

Operating expenses continued to increase over 2009 level predominantly as the Group began to hire more staff into the branches and into several vacant senior positions. Operating expenses, other than employee expenses, after the initial major cuts at the beginning of 2009 continued to decrease in 2010, albeit as the lower levels than the previous year as Management continued to enforce tighter control over the operating expenses. Total operating expenses increased 25.75% over 2Q09 levels to EGP200 million, the bulk of which were costs relating to the fee and commission business. Most components of operating expenses witnessed an increase over 2Q09 levels, with the largest increase, in absolute terms being the increase of employee expenses.

Given that the nature of the business hinges upon hiring and retaining the best human capital, employee expenses is the largest component of operating expenses reaching 66.9% of total operating expenses in 2Q2010 up from 59.9% in 2Q09 with the bulk employees and hence expenses emanating from the fee and commission revenue generating business lines. Fully loaded employee(8) expenses increased 46.4% over 2Q09 level to EGP135 million in 2Q2010. The main reason for the increase in employee expenses remains the increase in the portion relating to the new Management Incentive Scheme as the full effect of the Scheme's renewal began to take effect; both as a result of the increased number of participants on the scheme as well as the average cost per share at which the scheme is financed. The increase in the fixed portion of employee expenses reflects the increase in the work force by 23.5% over the similar period, some of whom were senior team members. In addition, salary cuts for the top 200 employees was still in effect during 2Q09 but was reversed in November 2009. It is worth mentioning that in spite of the full effect of the new and expanded Management Incentive Scheme filtering into the operating expenses in 2010 resulting in a growth of the operating expense by 26%, the net operating profit margin of the fee and commission revenue declined to only 24.3% in 1H2010 from 29.3% in 1H09.

On an absolute basis other operating expenses (that include occupancy expenses, office expenses, communication expenses (data and telecommunication), travel and marketing expenses, promotion and advertising expenses and consultant and service fees) have only slightly decreased by 2.8% to EGP65 million in 2Q2010 down from EGP67 million in 2Q09.

Travel expenses increased 75% to EGP8.1 million in 2Q2010 up from 1Q09 and constituting 2.3% and 4.1% of operating revenues and operating expenses respectively up from 1.21% and 2.9% respectively in 2Q09 as the business lines increased travel to pitch for business and launch funds across the Group's expanding geographical presence as well as visit it diversified client base. The Group established presence in two new regional markets over the quarter that required several trips from both front-office and back-office staff to launch the business.

With the expansion of EFG Hermes' footprint across the region and its ability to service and cater to the clients' need wherever they may be, a facilitation that sets EFG Hermes aside from other regional Investment Banking platforms, as well as having fully integrated data and trading platforms, communication expenses increased (be it data communication or telecommunication). Data Communication increased 27.1% over 2Q09 to reach EGP9.02 million (4.5% of total operating expenses and 2.6% of total operating revenue). A major part of the increase can be attributed to expanding the new CRM system to include more users across all business lines, although the full implementation of and the widespread use of the system is yet to come. Telecommunication expenses increase by around 20% over 2Q09 levels to EGP2.5 million, a relatively small increase in absolute terms.

_____________ 8 Includes fixed employee costs, any accrued bonuses and the cost of the Management Incentive Scheme

Overall promotional and advertising expenses increased 20.3% over 2Q 09 levels to EGP7 million, but has actually decreased to 3.5% of total operating expenses down from 3.7% in 2Q09. However, within the expense, events planning and production expense decreased by around EGP500,000 as EFG Hermes did not host the MENA Financials Day on the London Stock Exchange as it did during May 2009 and instead focused on hosting country specific days on the LSE, which are more rewarding; with the Saudi Second Capital Markets Day being hosted in June 2010, this year with bigger attendance on both the issuer and investor side. The third Egypt Capital Markets Day being schedule for November 2010. Conversely, other promotional and advertising expenses nearly doubled over 2Q09 levels to EGP3.4 million in 2Q2010 as the Group's retail activities increased requiring specialised promotional activities and advertising as well as several business lines prepared for the launch of new retail-centric products over the next couple of quarters.

Huge savings on consultant and service fees took place in 2Q2010 with the expense declining close to 50% over 2Q09 to EGP7.6 million although the Group has used advisors and legal counsel for the launch of several products and regional expansion but has managed to negotiate both reasonable rates and retainer fees with several of the consultants that it uses on a regular basis.

On a semi-annual basis, operating expenses followed the same trend as the quarterly comparison, increasing 32.3% to EGP405 million in 1H2010 up from EGP307 million in 1H09.

As a result of the 9.8% decline in net operating revenue and the associated 25.8% increase in net operating expenses in 2Q2010 over 2Q09, net operating profit decreased 34.8% to EGP146 million in 2Q2010 down from EGP224 million in 2Q09. Overall more volatile and smaller market volumes traded coupled with the full effect of the renewed Management Incentive scheme have directly caused the decline in net operating profits and associated margin; down to 42.1% in 2Q2010 down from 58.4% in 2Q09. It must be noted that there are several expenses, including some employee expenses, that are associated with the expansion into Syria and Jordan during 2Q2010 that are reported within the business lines while these new entities have not yet began to bear any meaningful fruit at the revenue level.

In absolute terms, on a semi-annual basis net operating profits more than doubled over 1H09 levels to EGP1.008 billion in 1H2010 up from EGP404 million in 1H09, mainly as a result of the sale of the Bank Audi stake in 1Q2010 that booked a total gain on the sale of EGP716.6 million. Accordingly, adjusting for the sale of the Bank Audi stake, net operating profit decreased 28% over 1H09 level to EGP291 million with a net profit margin of 41.8% down 56.9% in 1H09 (but up from 40.8% if 1H09 performance is adjusted for revenues consolidated from the investment in Bank Audi).

 

Other Expenses

 

Other expenses for 2Q2010 include the usual depreciation and contingent liability provisions. Depreciation for 2Q2010 stood at EGP10 million up slightly from 8.4 million in 2Q09.

It must be noted that on a semi-annual basis, impairment and changes in fair value of investment property reached EGP93.5 million in 1H2010 compared to around EGP3 million in 1H09. These provisions and markdowns were taken during 1Q2010 as a result of the careful and diligent study of the Group's real estate portfolio in light of the tremulous market conditions that prevailed in the European markets that Management had anticipated would adversely affect the real estate market in the Middle East. Management continues to believe that this is a prudent decision especially in light of continued frail market conditions across the globe.

 

Balance Sheet

 

With the continued volatility on both global and regional capital markets continuing into the year EFG Hermes' large cash balances and unlevered balance sheet remains an important asset as the revenues generated by the prudent management of the balance sheet and cash balances support the Group's overall income during the challenging market conditions.

Cash, cash equivalents and other investments (namely T/Bills, bank deposits and investment in money market funds and fixed income products) remain high at EGP6.6 billion(9) up from EGP2.4 billion at the end of 2009, the bulk of the increase emanating from the sale of the Bank Audi stake earlier in the year. Having said that given that the Investment Banking platform remains profitable and in the absence of any major acquisition, EFG Hermes has been able to preserve its cash balances.

Due to the lower trading volumes in regional markets as a whole the total receivables and payables resulting from operations resulted in a lower than usual level of net receivables from clients of EGP69.2 million incurred mainly due to the normal course of business concentrated within the Brokerage and Asset Management divisions. This is in comparison to a net payable of EGP148.2 million as at the end 2009. Such balances relate to the daily operations and have since been settled.

The decrease of the total, current and non-current, amounts relating to the EFG Hermes Employee Trust to EGP391.5 million at the end of 2Q2010 down from EGP412.2 million as at the end of 2009 reflects the portion due to the members that have already completed a vesting period.

The increase in net fixed assets to EGP462.7 million as at the end of 2Q2010 up from EGP180 million as at the end of 2009 and the associated decline in projects under construction from EGP311.9 million as at the end of 2009 to EGP96 million as at the end of June 2010 is as result of the near-full completion and operation of the Group's new headquarters at the Smart Village in Cairo. As at the end of June 2010, only EGP1.9 million worth of construction under progress in the Smart Village premises remain outstanding.

Available for sale investments increased to EGP989.8 million at the end of June 2010 up from EGP778 million as at the end of 2009 mainly as a result of the increase in the Group's non-current stake in SODIC.

_____________ 9EGP536 million of investment in money market funds and bonds is reported in the EGP678.3 million investments at fair value through the profit & loss

Investment in subsidiaries and associates decreased to EGP11.8 million as at the end of June 2010 down from EGP4.7 billion as at the end of 2009 as a result of the sale of the Group's stake in Bank Audi. It is worth noting that the decline in the investment in subsidiaries and associates was coupled with an increase in the cash and cash equivalent balances over the similar period as the divestment was cash based.

On the liability side, the Group continues to carry very little bank debt. The main outstanding debt as at the end of 2Q2010 is a total of EGP68.96 million long term debt to DEG and IFC, this is down from EGP91.3 million at the yearend 2009.

The marked increase in creditors and other credit balances from EGP317 million as at the yearend 2009 to EGP1.26 billion as at the end of June 2010 is the EGP 2/share interim dividend approved by EFG Hermes' general assembly on June 14, 2010 with payment due starting July 15, 2010.

 

 

Profitability 

 

Net profit after tax and minority interest increased 82.3% over 1H09 levels to EGP580.3 million in 1H2010. However, EGP382.7 million relate to the net capital gain on the sale of the Bank Audi stake (gross net of tax capital gain is EGP476.2 million, but Board of Directors, External Auditor and the General Assembly had approved EGP93.5 million of contingent provisions and markdown on the Group's fixed assets as explained above). Accordingly, setting aside the net capital gain from the sale of the stake in 1H2010 and EGP193.8 million relating to the revenues consolidated from the investment in Bank Audi during 1H09, net profit after tax and minority interest reached EGP197.6 million, up 61.1% from the EGP122.7 million booked during 1H09. Reflecting the turbulent conditions in the regional capital markets, of the bottom line only around 30% of the net profit after tax and minority interest relate to the fee and commission revenue compared to around 42% a year earlier. It is worth noting that the expenses carried by the fee and commission business includes costs relating to new regions and products that have not yet began to book revenue.

On a quarterly basis net profit after tax and minority interest increased to EGP96.7 million in 2Q2010, up 43% over 2Q09 net profit after tax and minority interest (adjusted for revenues consolidated from the investment in Bank Audi in 2Q09).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

_____________________________________________________________________________________________

In this earnings release EFG Hermes may make forward looking statements, including, for example, statements about management's expectations, strategic objectives, growth opportunities and business prospects. Such forward looking statements by their nature may involve a number of risks, uncertainties and assumptions that could cause actual results or events to differ materially from those expressed or implied by these statements. Examples may include financial market volatility; actions and initiatives taken by current and potential competitors; general economic conditions; and the effect of current, pending and future legislation, regulations and regulatory actions. Furthermore, forward looking statements contained in this document that reference past trends or activities should not be taken as a representation that such trends or activities will continue. EFG Hermes does not undertake any obligation to update or revise any forward looking statements.

Accordingly, readers are cautioned not to place undue reliance on forward looking statements, which speak only as of the date on which they are made.

This document is provided for informational purposes only. It does not constitute an offer to sell or a solicitation of an offer to buy any securities or interests described within it in any jurisdiction. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs.

EFG Hermes Holding SAE has its address at Building No. B129, Phase 3, Smart Village - km 28 Cairo Alexandria Desert Road, 6 October and has an issued capital of EGP 1,939,320,000.

المجموعة المالية هيرميس القابضة شركة مساهمة القرية الذكية مبنى 129ب، المرحلة الثالثة، السادس من أكتوبررأس المال المصدر: 1,939,320,000 جم

_____________________________________________________________________________________________

Stock Exchange & Symbol:

Cairo: HRHO.CA London: HRHOq.L Bloomberg: EFGH Reuters pages: EFGS .HRMS .EFGI .HFISMCAP .HFIDOM

_____________________________________________________________________________________________

EFG Hermes (Holding Main Office)

Building No. B129, Phase 3, Smart Village - km 28 Cairo Alexandria Desert Road, 6 October Egypt 12577

Tel +20 2 353 56 499

Fax +20 2 353 70 942

efg-hermes.com

 

 

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