x Abu Dhabi, UAETuesday 25 July 2017

EFG-Hermes pays price for Egypt's revolution

EFG Hermes, Egypt's biggest investment bank, has revealed its group reports profits tumbled 81 per cent during the turmoil which engulfed the region last year, weeks after announcing it is in merger talks with Qatar's Qinvest.

EFG-Hermes blames the fall in revenue on political unrest in the region during the Arab Spring. Asmaa Waguih / Reuters
EFG-Hermes blames the fall in revenue on political unrest in the region during the Arab Spring. Asmaa Waguih / Reuters

The year of revolution in Egypt has taken its toll on the country's biggest investment bank as profits at EFG-Hermes tumbled 81 per cent.

The disappointing earnings sent the stock to its lowest in more than a month, closing 3.4 per cent down at 12.4 Egyptian pounds.

Full-year profit fell to 133 million pounds (Dh80.9m) from 700.4m pounds a year earlier. EFG-Hermes blamed the decline on lower revenues because of political unrest in the region during the Arab Spring.

Revenues for the year were down 33 per cent at 1.6 billion pounds, compared with 2.4bn pounds the year before.

Analysts said the losses did not reflect underlying problems at the company. "It is not a fundamental issue, it is just temporary," said Aybek Islamov, the director of emerging market banks equity research at HSBC.

"Last year was a very bad year," said Sebastien Henin, a portfolio manager for the Middle East and North Africa at The National Investor.

"But it's not just a case of a bad last year, it's been a bad four years in a row, which has killed investors' mood. A single good quarter [for Egypt] will not change that," he said. Egypt's stock market rebounded to be the second-best performer globally in the first quarter.

The bank's securities brokerage, investment banking and asset management arms all reported lower earnings as investors fled its core Arab market for havens amid the revolution and weak global demand for risk assets. "That produced a particularly challenging year," said Hassan Heikal, the chief executive at EFG-Hermes.

Heavy losses at the bank, which has offices in nine Arab countries, comes amid plans to merge with Qinvest, the largest investment bank in Qatar.

The lenders are discussing combining some of their operations to create an investment bank covering the Arab world, Africa, Turkey and south and South East Asia.

The proposed joint venture would include the banks' securities brokerages, asset management and investment banking operations. Total revenues from EFG-Hermes' investment banking platform were 668m pounds, a 65 per cent decline from 1.9bn the previous year. Even setting aside a one-off capital gain of 716.6m from the sale of Bank Audi in the second half of 2010, revenues declined 44 per cent last year. Fee and commission income fell 31 per cent to 587m.

"It is a difficult time for banks operating in investment activities," said Mr Islamov. "Income from primary activity in capital markets - initial public offerings - in Egypt is likely to be very subdued."

Revenue from capital markets and treasury operations fell 76 per cent excluding a one-off capital gain of 716.6m at the end of 2010. EFG-Hermes said reduced foreign-exchange gains and a fall in income from interest put pressure on the division's revenue.

Securities brokerage revenues fell 42 per cent as the unit reported a 50 per cent decline in transactions to US$19bn (Dh69.78bn) last year. EFG said this was broadly on par with the 45 per cent decline in average regional markets volume.

EFG-Hermes Private Equity, which is 18 per cent owned by the former president Hosni Mubarak's son Gamal, would not be part of a merger. The division made no exits last year, leaving revenue relatively unchanged after a 1 per cent decrease to 144m pounds. A number of investments are in the pipeline, and would be executed when market conditions improve, the bank said.

Egypt's stock market has staged a turnaround this year after suffering heavy losses during the turmoil of last year.

The country is part of the MSCI Emerging Markets Index, which opens it up to a greater portion of foreign investors, a factor that has contributed towards higher foreign fund flows to the market this year, analysts said.

Egypt's main EGX30 index is up 33 per cent since January, gaining about $3.8bn in market capitalisation. However, it is still down by 30 per cent since the end of 2010, after the index contracted by $8.4bn last year as investors fled a revolution in which Mubarak senior was toppled.