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Abu Dhabi, UAETuesday 25 September 2018

Exclusive: EFG Hermes to enter second sub-Saharan African country in 2018

Egyptian investment bank increasing focus on frontier markets

Karim Awad, CEO of EFG Hermes Holding, says the bank is targeting an increased presence in frontier markets. Jaime Puebla / The National
Karim Awad, CEO of EFG Hermes Holding, says the bank is targeting an increased presence in frontier markets. Jaime Puebla / The National

EFG Hermes, Egypt's biggest publicly traded investment bank, will expand into a sub-Saharan African country this year as part of a push to raise its frontier markets profile. The move follows its entry into Pakistan, Kenya and Bangladesh in the past two years.

"We're reinventing ourselves on a couple of fronts," Karim Awad, the firm's chief executive officer, told The National on the sidelines of a conference in Dubai on Monday. "We have moved out of the Middle East and North Africa to become more of a frontier bank. We started in Pakistan, opened up in Kenya and will open up in another sub-Saharan market this year. We can't disclose it at this point in time."

EFG, which has operations in six Middle Eastern countries, has endured difficult years following the Egypt’s 2011 revolution, with its business in the Arabian Gulf suffering following the collapse of oil prices in 2014.

The bank suffered a loss of 540 million Egyptian pounds in 2013 amid political chaos in Egypt that led to a foreign exchange crisis. Foreign investors meanwhile stayed away from the country and corporate activity dwindled, leading a drying-up of capital market activity. The bank's business has subsequently recovered however; it reported a profit of 1.4 bn pounds in 2016 in its most recently issued annual report, according to data from Bloomberg.

The bank has been expanding beyond the region into selected frontier markets in the past two years, often starting by covering listed companies that operate in frontier markets. EFG is looking to increase its headcount in its existing frontier market operations in addition to opening the new office in Africa.

Investment in frontier markets, where stock markets are in their nascent stages and register thin trading volumes, is a niche space that has garnered increased interest from international investors seeking better value stocks than developed market stocks.

The S&P 500, the benchmark measure of US equities, trades at a price-to-earnings ratio of 21.73, while the MSCI All World Country Index, a measure of developed world and emerging market stocks, trades at 18.98 times earnings, according to Bloomberg Data. Frontier markets trade at 16.33 times earnings.

While frontier markets span a broad geographic range, Mr Awad told The National the bank will be selective in its approach.

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"We're very careful about our expansion strategy, we are not going to plant our flag everywhere," he said. "We want to make an impact in every market that we are in. It's not just about presence in the market, it's about our positioning in those markets. So we want in every market that we operate in to have a good presence too."

Within the Middle East, Mr Awad said he is particularly upbeat on the growth prospects of Egypt and Saudi Arabia. EFG believes that Egypt’s central bank will further reduce interest rates this year, a move that would spur a rally in Egyptian stocks.

The central bank raised interest rates to as high 20 per cent in November 2016 to attract attract investment back into the Egyptian pound, after the country devalued its currency to unlock a $12 billion bailout package from the International Monetary Fund.

"We believe that interest rate cuts that our macro-economist is forecasting will definitely help rally the market,” said Mr Awad. “It will definitely alleviate the pain of high financing costs and will encourage more investments going forward."

EFG’s research arm last month raised its recommendation on stocks in Saudi Arabia to overweight, ahead of expectations that the shares in the kingdom will be included in the widely-trcaked emerging market indexes of index compilers MSCI and FTSE.

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