Efg-hold.gdr S Regulatory News (EFGD)

22 Feb 2007 07:02

EFG-Hermes Holdings SAE22 February 2007 EFG-Hermes Investor Relations FY2006 Earnings Release - 22 February 2007 Summary The fiscal year ending 31st December 2006 was an eventful year for EFG-Hermes.Turmoil in both our home market as well as regional markets has affected boththe business generated across all lines of business as well as the Firm's shareprice. Nevertheless, EFG-Hermes' Management has managed to encapsulate theseevents and channel them to the Group's advantage, ending the year on a positivenote with a growth in business, the implementation of the regional expansion,diversification well on track and a stable share price; all attested to by thecontinued improvement in financial performance. 2006 proved to be atransformational year for the Group on the strategic, operational, performanceand market perception perspective levels. Fiscal Year 2006 in Review • Successful completion of two capital increases in excess of USD1 billion withthe institutionalisation of the shareholder base helping curb the volatility inshare price witnessed at the beginning of the year; • The valuable addition of a strategic stake of Banque Audi to the Group'sinvestment portfolio evening-out the cyclicality of revenues generated from thecore business; • Total revenues booked during 2006 reached EGP1.2 billion; a 48.5% growth on2005; • Operating revenues increased by 12.9% over 2005 level to reach EGP898.6million. However, adjusted for the incentive fees of EGP170.3 million and onlyEGP14.1 million in 2005 and 2006 respectively, the increase in operatingrevenues is a notable 41.4% attesting to the improvement and growth of corebusiness within the Group; • Net profit after tax and minority interest has increased over two fold from2005 levels to EGP701.9 million. Adjusted for the net revenues emanatingfrom the Banque Audi investment(1), the bottom line grew by an impressive 38.7%over the previous year; • Subject to the general assembly approval, EFG-Hermes Board of Directors isrecommending a dividend payout of EGP0.75/share; • Further entrenching market leadership on CASE with EFG-Hermes subsidiariesrecording a combined market share of around 21%; • In the UAE, EFG-Hermes brokerage's performance continued to improve and theranking advanced to the number 2 broker on the Dubai Financial Market in4Q06 up from the 17th at the beginning of the year; • The installation of the FIX connections to CASE, DFM and ADSM and the officiallaunch of the EFG-Hermes call centre and the on-line trading operations duringthe latter part of the year; • EFG-Hermes received its margin trading license in Egypt on February 7th 2007; • Investment Banking operations out of Egypt continued its domination of themarket, while Investment Banking activities out of the UAE concluded severallandmark transactions. Together both Teams raised USD3.1 billion worth of equityand sealed USD1.5 billion worth of M&A transactions; • Assets under management have increased nearly two-fold EGP11.4 billion overthe year in spite of the weaker market conditions across the region, mainly as aresult of fresh funds rather than market related growth; with the nascentregional asset management team raising close to USD220 million in aperiod of four months; • Private Equity has launched new funds, investing large portions of the raisedfunds throughout the year thus maintaining the size of funds under management ataround USD500 million despite several successful exits; • The receipt of a full fledged investment banking license in Saudi Arabia (forcustody, dealing, managing, arranging and advisory activities) and theestablishment of a fully owned Saudi subsidiary with the first trade to beexecuted during February 2007; • Completed the full-time training of 39 entry level employees in the secondin-house investment banking course; • Initiation of coverage by HSBC and Prime Securities with both institutionspublishing several flash notes over the year. EFG-Hermes aims to have more firmsinitiating coverage of the stock. Performance Operating Revenues Total operating revenues have increased to EGP898.6 million, a new record highfor the Group, in spite of the adverse market conditions prevalent in the regionduring the year under review. As a result of market conditions Asset Management incentive fees for the year2006 became virtually non-existent while the success fees on Private Equitydivestitures have been severely curtailed. Table 1: Contribution of the Different Divisions to Operating Revenues Paste the following link into your web browser to download Table 1.http://www.rns-pdf.londonstockexchange.com/rns/6689r_1-2007-2-22.pdf *2005 includes EGP170.3 mn of incentive fees versus EGP14.1 mn in 2006 Sources: EFG-Hermes management accounts and audited financial statements Operating revenues for the year 2006 recorded a 12.9% over 2005, with 26.6%being booked during 4Q06. Although a modest growth in absolute terms relative toprevious years, however, adjusted for the incentive fees of EGP170.3 million andonly EGP14.1 million in 2005 and 2006 respectively, the increase in operatingrevenues is remarkable at 41.4% over the full year operating revenues of 2005. On a consolidated basis, Brokerage activities, both local and the UAE, remainedat the forefront position; collectively booking 43.2% of total operating revenueat EGP389 million. Investment Banking followed as another main contributor tototal revenue with 40.5% as several major deals closed, including some that werenot in the transaction backlog. Although Private Equity revenues from fixed feeshave nearly doubled over 2005 levels, its contribution to total consolidatedrevenues continued to drop to 8.3% as a result of the lack of sizeable exitsduring the year. Figure 2: Breakdown of Revenue by Business Line on a Quarterly Basis Paste the following link into your web browser to download Figure 2.http://www.rns-pdf.londonstockexchange.com/rns/6689r_12-2007-2-22.pdf *Including Asset Management incentive fees as follows: 2Q05 EGP15 mn, 3Q05 EGP12mn, 4Q05 EGP155 mn,1Q06 EGP1 mn, 2Q06 EGP3 mn, 4Q06 EGP4.9 mn Sources: EFG-Hermes, audited financial statements and management reports On a comparative standalone basis, 4Q06 is the second best quarter of the year. Hereunder is an analysis of the company's main operational divisions: Brokerage Division Egypt Although Egypt is one of the very few Arab markets that ended the year on apositive note with the HFI, the market's main tracking index, up 7.8%, it wasthe third most volatile market as can be measured by the difference between theyear's high and low as follows: Table 3: Arab Markets Performance During FY2006 Paste the following link into your web browser to download Table 3.http://www.rns-pdf.londonstockexchange.com/rns/6689r_3-2007-2-22.pdf *High and low adjusted for the change in the index calculation Sources: Regional markets and EFG-Hermes By year-end the Egyptian market regained some of the momentum lost over the yearwith investor confidence returning to the market and trading volumes edging upagain. EFG-Hermes' Brokerage arms in the home market managed to leverage theirleadership position and strong franchise to further entrench the Group'sdominant market share boosting revenues from core operations by more than 37.7%to reach EGP339 million. Figure 4: EFG-Hermes Executions and Market Shares Paste the following link into your web browser to download Figure 4.http://www.rns-pdf.londonstockexchange.com/rns/6689r_4-2007-2-22.pdf Source: CASE and EFG-Hermes Total executions by the Egyptian brokerage subsidiaries has increased by 42.8%over the comparable period last year and recorded EGP108.5 billion and averagedaround 42% of total market executions over the year. In spite of the drop inmarket share during 3Q06, 4Q06 saw the firm back to its earlier first place asthe market share increased to 22.2%. Improved and expanded services offered toboth institutional and retail clients have helped to consolidated the Group'sdominant market positioning as well as maintain the average commission ratescharged. The introduction of the on-line trading call centre during the latter part ofthe year, although began to bear fruit, will only be fully felt by year-end 2007as the retail clients become better serviced without diverting focus from ourcore client base of high networth individuals and institutions. Today onlinetrading executes an average of EGP2.5 to 3 million in Egypt and around AED3million in the UAE, while the call centre in Egypt executed a daily average ofaround EGP5 million during December 2006. UAE Figure 5: Progression of Volumes Executed and Market Shares Paste the following link into your web browser to download Figure 5.http://www.rns-pdf.londonstockexchange.com/rns/6689r_5-2007-2-22.pdf Sources: DFM, ADSM and EFG-Hermes Brokerage operations in the UAE have continued to grow, with full year executionincreasing 29.6% to USD6.5 billion despite the fact that total market executionsdeclined 15.8% over 2005 to reach USD227 billion and the two major markets'indices declined in the range of 42-47%. By December 2006 EFG-Hermes had a 6.4%market share of the total UAE market and ended the last quarter as the number 2broker on the DFM (and the number 1 broker for December 2006). After having anaverage of 2% market share during 1Q06, the UAE brokerage operations ended theyear at an average of 5% of the total market. Market shares on the DFM(2) andADSM in 4Q06 recorded 5.2% and 2.7% respectively. The introduction of newservices including online trading, call centres and trading lounges haveincreased both the number of active accounts and the volume being executedthrough EFG-Hermes. The main driving force of the increased market share is thatEFG-Hermes began introducing foreign fund managers to the market. Furthermore, the whole idea of cross-selling has become a reality as clientswith the Egyptian subsidiary were introduced to the UAE and actually end upexecuting their trades through EFG-Hermes UAE. During the turbulent times onthese markets the value of the quality of research published by EFG wasfundamental to attracting a different class of investors to the market.Essentially, the UAE brokerage arm replicated the strategy followed byEFG-Hermes brokerage in Egypt during the late 1990s and early 2000s during themarket's downturn when it introduced foreigners on to the market carrying boththe market and EFG-Hermes through the tough times. For the full year 2006, brokerage operations in the UAE recorded revenuesequivalent to EGP50 million; 5.5% of the Group's consolidated revenues. It mustbe noted that the operating revenue of the UAE brokerage operations is more orless equivalent to the revenues generated during the previous year, as the primefocus during 2006 was to grow EFG-Hermes's market share, attract newsophisticated clients and build the core team that will launch the business intoanother level all together. Research EFG-Hermes' independent Research Division supports both brokerage and investmentbanking operations (relating to offerings) and over the year has been expandingcoverage to new stock as well as re-initiating coverage of others. As at yearend 2006 the Research Department had published 171 reports covering stocks,economies, strategy notes various dailies and monthlies with a total of 1,580pages; the highest to date. Country year books that include economic overview, strategy and updates on allthe stocks covered within the country have become an annual publication with2007 year book on UAE already published and that on Egypt due for publication bythe end of February. Initiation of coverage on of at least another 30 stocks andeconomies are imminent by year-end. Asset Management Figure 6: Development of Assets Under Management Paste the following link into your web browser to download Figure 6.http://www.rns-pdf.londonstockexchange.com/rns/6689r_6-2007-2-22.pdf Source: EFG-Hermes 2006 was a turning point for the Asset Management business within the Group; thelaunch of the regional team expanding the coverage area, the launch of newproducts including capital guaranteed funds and the increase of assets undermanagement in spite of weaker market conditions across the region. However, itwas a bad year on the performance level as market condition obliterated thepossibility of any sizeable incentive fees. Assets under management grew nearly two-fold over the previous year's levelsdespite the decline in the market related valuations. During the last quarter,assets under management grew 18.6% over 3Q06 levels. Of the total as at the endof 2006, 23.2% are under the management of the Regional Asset Management Teamand the remainder is under management of the Egypt Team. Of the total assetswith the Egypt team, EGP2.5 billion are in money market funds. As at the end of the 2006 the shifting of funds between the Egypt and theregional team was finalized. In the process, the major transfers included theMEDA fund transferred in May 2006 with a size of USD67.8 million (ended the yearwith at USD131.2 million) and as of the beginning of December the Telecom and AlTawfeek Telecom fund were transferred for a total of EGP323 million and endedthe year at a size of EGP436 million. Going forward, Asset Management is a key area of growth for the Group asregulations around the region change. In Egypt regulations are expected to allowfor white labeled funds by year-end 2007 while in Saudi Arabia the change ofregulations directing all commercial banks to hand over their funds toprofessional fund managers by June 2007 opens up a whole spectrum ofpossibilities. On the technical side, a state-of-the-art Asset Management front and back officeplatform, was acquired at the end of 2005 from ADVENT, and became operationalfor back office operations during mid-February 2006 servicing both the homemarket and regional operations, with a common back office out of Cairo for costreasons. Egypt In juxtaposition to 2005, 83.9% of the EGP55 million recorded revenue (around6.1% of consolidated Group revenues) pertained to fixed management fees. Despitethe 74% decline of total revenue to EGP54.6 million the Asset Management team inEgypt managed to increase the fixed income fees from the managed funds by 11%over 2005 levels to reach EGP41.6 million, in spite of transferring a total ofUSD143.6 million to the regional team and that EGP2.5 billion of the increase ofassets under management during 2006 were in the form of money market funds thattypically earn around 50% of the average fees charged equity funds. The decline in division's overall revenue is mainly linked to the decline inmarket performance which slashed incentive fees to EGP14.1 million in 2006 downfrom EGP170.3 million in 2005 in spite of the increase of the assets undermanagement. On an operational level, the Team's reputation for fund and discretionaryportfolio management has become further entrenched the Team was the first tointroduce capital guaranteed funds onto the market as well as scoring the first4 positions in fund performance for 2006: • Successful launched four new funds to the local market; two new money marketfunds, Egypt's first capital guaranteed fund (Al Watany Bank of Egypt, in August2006 with a current size EGP140 million) and the country's second Islamic fund(the first was launched by EFG-Hermes during 4Q05); • Newly launched Egyptian Saudi Finance Bank Islamic Fund managed to gain 14.8%in only six months by the year-end 2006; not only outperforming the performanceof other local mutual funds but also beating the CASE 30 as well as the HermesFinancial Index; • Local mutual funds managed by EFG-Hermes (Credit Agricole 2, CreditAgricole1, Bank of Alexandria and Banque du Caire) have ranked first, second,third and fourth among all local mutual funds in terms of performance; • Most EFG-Hermes mutual fund outperformed the CASE 30 and the HFI indices in ayear full of volatility and uncertainty on the market. UAE By the end of 2006, the Regional Asset Management Team out of Dubai wasoperating in full force. As at the end of the year assets under managementreached USD465 million, of which 46.6% was new money. Al Dannah GCC fund waslaunched for Al Bank Al Saudi Al Faransi and a fund for the Commercial Bank ofQatar, Al Waseela Fund, has been launched earlier this year. Several pitches toSaudi banks are currently in place to take advantage of the recent change inregulations. Contributing 1.8% to the Group's total revenues regional asset management bookedthe equivalent of EGP16.6 million in its 6 months of operations. The Divisionbroke even by year-end 2006 after only a few months of operations. The teambuilding process was a goal in itself; today there is a team of twelve on theground in Dubai, several of which have been headhunted from renowned investmentbanks including Merrill Lynch and JP Morgan. It must be noted that the Teamalready manages portfolios for several prominent Saudi individuals, althoughstill relatively small amounts, the Team expects the amounts to grow asEFG-Hermes has a physical presence in the Kingdom. Investment Banking EFG-Hermes' investment banking arms raised USD3.1 billion worth of equity forclients; not counting the USD323 million private placement of EFG-Hermes'capital increase in January 2006. Total M&A transactions sealed during the yeartotaled USD1.4 billion. Investment Banking operations out of Egypt and the UAEstarted 2007 on a strong note with a pipeline of in excess of USD20 billion. Egypt 2006 saw Investment Banking out of Egypt remaining as the core contributor tothe Group's operating revenues booking 37.2% of the Group's consolidated netrevenue. Total revenues booked have increased 80% over 2005 levels to reachEGP333.9 million; the increase is 32.8% even if the EGP92 million collected asfees for the EFG-Hermes capital increase are removed. Several prominent dealshave contributed to this revenue stream and include the EGP1 billion for SODIC,El Seweedy Cables and the Telecom Egypt/Vodafone transactions. Moreover, thediversity of industries typical to EFG-Hermes continued as well as the fact thatout of the 12 deals concluded during the year, 10 were deals for repeat clientsreflecting the clients' trust in the Team as well as their loyalty to the firm. UAE The Investment Banking Team out of the UAE closed several large deals includingthe largest floatation in the UAE, the IPO of EITC (du) for USD660.5 million onbehalf of the Dubai Government. Booking EGP29.7 million Investment Banking outof the UAE has contributed 3.3% to the Group's consolidated revenues. It isworth noting that the Team's competitors in the UAE are the internationalinvestment banks that are executing regional deals for clients in the UAE. Private Equity With the advent of 2007 the challenge of declining funds under management islurking again as the Jordan Telecom Fund and the Middle East Telecom Fund (for atotal of USD30 million) followed by Horus I in 2008 (USD54 million). On theupside, the expected success fees on exit are expected to support EHPE'sprofitability going forward. EHPE's extensive network in Egypt has served theFirm well as it provided attractive investment opportunities for the funds undermanagement and during the turbulent and competitive 2006 EHPE managed to closedeals in excess of USD115 million for its funds. On the other hand, 2006witnessed a slowdown in liquidating the CIIC portfolio as the Team chose notcompromise the value of the mature investments by rushing exists given thecurrent market conditions. In raising new funds, EHPE focused on the Team's corecompetence which is investing in Egypt. Accordingly, during 2006 EHPE initiated,structured and signed term sheets for three new funds due to be launched during2007 with combined sizes in the vicinity of USD350 million. As a total revenues at the EHPE level dropped to EGP74.8 million. However, itmust be noted that the consulting and management fees increased over 100% whilesuccess fees on exit declined by 57% over 2005 as adverse market conditionspostponed the exit of several investment. EHPE contributed 8.3% to consolidatedGroup revenues. Regional Expansion Expansion into Saudi Arabia is on track with the first trades scheduled for thelatter part of February 2006 as opposed to the initial expectations of December2006. It is worth noting that to date none of the financial services companiesthat received any form of licensing under the new Capital Markets Law havecommenced operations; even the firms that had received licenses for only onebusiness line before EFG-Hermes' received its full license. It must be notedthat the quality of research published by EFG-Hermes will be an even moreeffective marketing tool for the brokerage activities due to the recent downturnin the market. On the asset management side, several discretionary portfolioshave been added for Saudi clients and several pitches to commercial banks tomanage their funds are being pursued. On the investment banking side, the Teamhas 3 signed mandates originating in the Kingdom. Operating Expenses Total operating expenses have increased by 15.8% over 2005 levels to EGP314.7million despite the increase in revenues by 41.4% (adjusted for the incentivefees) over the same period. Employee expenses remain the single largest component of the operating expensesas human talent is the foundation of our business. Fully loaded(3) employeeexpenses grossed EGP188.4 million for the year, constituting 60% of the totaloperating expenses in 2006 down from 62% in 2005. Several new senior hires wereadded to the Team during 2006 and included the COO, Head of HR, Head of Trainingand Head of Business Risk. 75 people were added to the Management IncentiveScheme as a precautionary tactic to retain the Firm's core talent as they wereaggressively approached by as headhunters on behalf of regional andinternational investment banks setting up shop in the region. In general theemployee costs although decreased to 21% of revenues it remains within safeboundaries mainly as a result of the said Management Incentive Scheme. AsEFG-Hermes is proposing to pay dividends, as per the Egyptian Companies' LawEFG-Hermes Holding employees are entitled to profit sharing equivalent to 12months of their basic salaries. Accordingly, EGP9.5 million of the cash bonuses to the Holding Company employeeswill be paid below the bottom line as part of the profit distribution account.If adjusted for this, the more accurate level of fully loaded employee expenseswould reach EGP197.9 million, constituting 62.9% of operating expenses and 22%of operating revenues. It must be noted however, that across all the lines ofbusiness there still remains a hidden employee cost that relates to ourregionalisation plan where extra staff is hired and trained in order to beplaced within the various regional units. Going forward and as the ManagementIncentive Scheme expires in 2008 for most people, the cost employee costs willinvariably increase as a new scheme is launched or as the Firm matches packagesoffered by the international investment banks to professionals in the region. Consultant and services fees remains the second largest component of operatingexpenses. Standing at EGP24.2 million as at the year-end, a 34.3% decline overthe previous year, consultant and service expenses constitute nearly 7.7% oftotal operating expenses and relate to the lawyer, auditor and other consultantsused during both capital increases, acquiring the licenses in both Saudi Arabiaand Lebanon, establishing the subsidiaries but predominantly relate toInvestment Banking and Private Equity operations. Consultant and service feesare directly related to the expansion plan and activity during any one quarter. Promotional and advertising expenses increased over two-fold over 2005 to reachEGP19.6 million and 6.2% of total operating expense. The growth in this expenseis a necessity as the Firm focuses on retail products, including online tradingand call centre operations, that require extensive promotion. As EFG-Hermes wasnew to the UAE more than half the expenses were incurred by the Brokerage andAsset Management divisions there. Occupancy expenses and telecommunication expenses, each constitutingapproximately 4% of total operating expenses have increased substantially over2005 figures (72.9% and 94% respectively) as the operations in the UAE increaseand those in Saudi Arabia being set up, entailing increased communication costsmainly due to the introduction of the call centres and online trading thatrequired direct and secure communication lines between all three markets, aswell as the new offices at the DIFC Gate and renting temporary offices in bothRiyadh and Beirut. In comparison to 2005, 2006 witness the first expense to the EFG-HermesFoundation. Although the amount directed to the Foundation was only 10% of thepreviously announced budgeted figure, EFG-Hermes spent at least another EGP2million on charity work as the procedures to set up the Foundation werecumbersome. Currently the Foundation's main project is that tackling the problemof street children in conjunction with UNICEF. Several other causes are to belaunched during 1Q07, after the official launch of the Foundation. As a result of the above, net operating profit has increased 11.4% over the full2005 to reach EGP583.9 million, with margins slightly declining to 64.97% downfrom 65.9% in the full year 2005. However, if normalized for incentive feesbooked by Asset Management (EGP170.3 million in 2005 and EGP14.1 million in2005) net operating profit has increased 61.1% over the 2005 level and the netoperating margin actually improves to 64.4% in 2006 up from 56.5% in 2005. Banque Audi(4) The largest item of other income emanates from the portion consolidated from theBanque Audi investment. Table 7: Progression of the Consolidated Portion of Revenues Paste the following link into your web browser to download Table 7.http://www.rns-pdf.londonstockexchange.com/rns/6689r_7-2007-2-22.pdf *Based on average number of voting shares owned at the end of each quarter As can be seen from the above, Banque Audi's performance remains resilient inspite of the political situation in Lebanon mainly as a result of the diversityin its business model, both in geographic and business specific terms. During the 4Q06 the EGP appreciated against the USD (in the vicinity of 0.4%)creating an FX loss for EFG-Hermes Group, with the majority being booked at theHolding Company level due to the USD balances held. Going forward and to avoidlosses on currency fluctuations Management has undertaken hedging transactions. Other Expenses Traditionally other expenses included the financing cost as EFG-Hermes was a netborrow. As business grew financing costs turned positive as brokerage businessgrew and income is generated from the free float, the debt was paid down andmore recently interest income and quasi interest income is earned on the USD500million capital increase has filtered in. Over the year financing costs have began to increase as more debt was taken onduring 1Q06 to finance the Banque Audi deal (a total net interest expense ofEGP13 million) and the drawdown of the DEG and IFC loans began to take placetowards the end of 3Q06. Total interest paid on the recent DEG and IFC loanssince drawdown totaled EGP6.9 million. However, at the Holding Company levelprofits on money market operations and interest earned on the capital increasefunds have more than covered financing costs and bank expenses. It is worthnoting that the net return on the USD500 million from the Abraaj capitalincrease was above the money market rates recorded by the market for both thefunds held in US Dollars and Egyptian Pounds. As a result net income before taxes and minority interest increased 73.7% over2005 to EGP 823.7 million and recording a 28.1% increase if the income fromBanque Audi is removed. Balance Sheet The consolidated balance sheet has nearly quadrupled in size since December 2005but more importantly grown stronger and more solid. With the latest capitalincrease the consolidated shareholder's equity and minority interest reachingEGP7.4 billion compared to a current market capitalisation in the vicinity ofEGP15 billion. Net cash position rose to over EGP3.5 billion as the cash andcash equivalents increased; a net of close to EGP650 million generated mainlyfrom the investment bank's operations. Cash and cash balances are invested in acombination of time deposits and money market operations both in Egyptian Poundsas well as foreign currency both on and off shore. Brokerage operations as at the end of the year resulted in net payable amountsas a result of operations of EGP700 million incurred mainly due to the normalcourse of business as brokerage activities increase both locally and in the UAE. As 75 more key employees have been added to the Management Incentive Scheme thecurrent portion increased to EGP37.6 million up from EGP23.8 million in 2005. As at year-end 2006, EFG-Hermes KSA, although established, has not yet issuedits opening balance sheet, accordingly EGP68.8 million of the increase indebtors relate to the operations in the Kingdom. By the end of 1Q07 all theseamounts will have been settled and EFG-Hermes KSA financial statements will beconsolidated on that of the Holding Company. The paid-in capital of SAR120million of the Saudi subsidiary as well as the Banque Audi investment (bookvalue of EGP3.2 billion) remain the largest constituents of investment inassociates figure. Projects under construction of EGP16.6 million relates to the cost of land ofthe new premises at the Smart Village as well as the down payments drawn down bythe various consultants for the design phase of the project. On the liability side the remaining treasury shares were all in GDR form andcorrespond to 1,121,787 shares at an average cost of EGP17.7/share. It is worthnoting that during January 2007 1.12 million shares of the treasury shares weretransferred to the Employee Trust Fund as per the general assembly approvalduring March 2006 (disclosure to CASE and LSE on 11th January 2007). Although the Group is not in need for cash at the current time due to thecapital increase, drawdown on the DEG and IFC began at the end of 3Q06 tofinance the regional expansion as was originally planned. As at year-end 2006,the outstanding were USD20 million from the IFC and Euro15 million from DEG. Taxes The effective tax rate paid for the year 2005 was around the full rate of 20%.During the year 2006 there were several slight changes in the tax law executiveregulations that rendered the income from subsidiaries domiciled in the UAE andBanque Audi investment tax free. Accordingly, EFG-Hermes had a tax credit ofEGP15.98 million during 2006. As at year end 2006, the consolidated tax bill isEGP103.7 million corresponding to an effective tax rate of 14.5%. Profitability As a result, net income after tax and minority interest increased 100% over 2005level and recorded EGP701.9 million up from EGP350.1 million, with net profitafter tax and minority interest margin increasing to 57.2% up from 42.4% in2005. On a standalone basis profits for 4Q06 recorded EGP191.9 million ascompared to EGP151.3 million in 3Q06. Of the bottom line profitability, the majority relates to our core business; asthe bottom line if adjusted for the EGP216.3 million of revenue consolidatedfrom Banque Audi and approximately EGP13 million of cost for bridge financingthe acquisition until the capital increase came through the adjusted net profitafter tax and minority interest recorded EGP498.6 million (up 42.4% over 2005)with a net profit margin of 40.7%. Recommended Dividend Payout EFG-Hermes has not distributed dividends over the past few years as the Firm wastranscending a growth spurt due to the expansionary plans that required theretention of profits to fund the expanded business and footprint. Although thereremains several strategic growth plans yet to be implemented but with thecurrent liquidity available within the Group, the Board of Directors recommendsthe disbursement of EGP0.75/share in dividends. Such distribution is subject tothe approval of EFG-Hermes Holding Company's General Assembly approval. Total dividends to be distributed is EGP290.9 million, representing 41.4% ofconsolidated net profits after tax and minority interest and 58.3% of the netprofits produced by the investment banking operations excluding the net incomefrom Banque Audi. Challenges Going Forward Going into 2007 the major challenge facing the Group remains the Group's successitself. Market expectations are forever increasing. However, for Management thechallenges are mainly on the operational level. With the assets of the Group'sinvestment banking activity hinging on the professionals that drive the businessfurther complicated by the need to increase hiring as new markets are openedcreates a dilemma for retaining the our key business drivers, whether in thebusiness lines or support functions, as well as the introduction of the newhires into our culture while minimising possible clashes and/or overrides.Today, it is not only the regional investment banks that attempt to headhunt ourkey individuals but also the international banks that are setting up shop withinthe region who are paying exuberant packages as they realise the importance ofhaving local Arabic speaking professionals staffed for the regional offices. Todate EFG-Hermes' reputation, culture, the fact that it is local to its variousmarkets and more importantly the current management incentive scheme has helpedmaintain existing staff as well as lure new members to the EFG-Hermes Team. The business itself poses several challenges as Management endeavors toduplicate the success in the home market and the UAE as the investment bank'soperations are expanded into multiple markets. The genuine growth of assetsunder management, whether in Private Equity or with the Asset Management Teams;remains a challenge as several Private Equity firms and Asset Managers set up inthe region. With the success achieve being itself the Group's new base level of performance,Management still maintains is aspiration of transforming the Group into theregion's CitiGroup or HSBC as more markets including are added expanding theGroup's footprint from Morocco to Oman and the spectrum of services offeredincrease as the amalgamation of the region's financial powerhouse continues. ________________________________________________________________ In this earnings release EFG-Hermes may make forward looking statements,including, for example, statements about management's expectations, strategicobjectives, growth opportunities and business prospects. These forward-lookingstatements are not historical facts but instead represent only EFG-Hermes'belief regarding future events, many of which, by their nature are inherentlyuncertain and are beyond management's control and include among others,financial market volatility; actions and initiatives taken by current andpotential competitors; general economic conditions and the effect of current,pending and future legislation, regulations and regulatory actions. Accordingly,the readers are cautioned not to place undue reliance on forward-lookingstatements, which speak only as of the date on which they are made. EFG-Hermes (Main Office), 58 Tahrir Street, Dokki, Egypt 12311 Tel.: +20 2 338 3626 | Fax: +202 337 8038 | Website: www.efg-hermes.com Stock Exchange & Symbol: Cairo-HRHO.CA | London-HRHOq.L Bloomberg: EFGH | Reuters pages: EFGS .HRMS .EFGI .HFISMCAP .HFIDOM -------------------------- (1)Consolidated revenues from Banque Audi recorded the equivalent of EGP216.3 mnwhile the bridge financing of the acquistion cost the equivalent of EGP13 mn (2) Since the beginning of 2005, executions on DFM constituted between 80-84% oftotal UAE Market executions (3) Including salaries, cash bonuses and the cost of the employees trust for theyear (4) The share in the profits of associates recorded from Banque Audi is basedon the Bank's unaudited figures that have been approved by the Bank's Board ofDirectors during its meeting on 15th February 2007 Paste the following link into your web browser to download EFG-Hermes Financials FY2006 PDF document related to this announcement: http://www.rns-pdf.londonstockexchange.com/rns/6689r_-2007-2-22.pdf This information is provided by RNS The company news service from the London Stock Exchange