x Abu Dhabi, UAEFriday 21 July 2017

EFG-Hermes reaps benefits of shrewdness

The bank got out of proprietary trading earlier than most banks and maintained a diversified revenue stream from its brokerage, asset management and private equity units.

EFG-Hermes shuns leverage, holds no toxic assets and boasts a huge cash position - and it claims to be an investment bank? Joking aside, the Egyptian firm offers good value for even timid investors, according to HC Brokerage, which is based in Cairo. HC initiated coverage of EFG-Hermes yesterday with a "buy" rating and a price target of 38.5 Egyptian pounds, representing a more than 35 per cent upside from where it closed yesterday. The stock rose 0.6 per cent to 27.70 Egyptian pounds yesterday.

EFG-Hermes, founded in 1984 as the first Egyptian investment bank, now has a market capitalisation of 10.6 billion Egyptian pounds and has a dual listing on the Cairo and London stock exchanges. Unlike many of its peers, it has managed its balance sheet conservatively in recent years. It got out of proprietary trading earlier than most banks and maintained a diversified revenue stream from its brokerage, asset management and private equity units.

"This structure has saved EFG Hermes from experiencing huge write-offs and overstretched balance sheets like other prominent investment banks," said Germaine Benyamin, an analyst at HC. The investment bank also pocketed a nice profit on its sale of a 28 per cent stake in Bank Audi. "It was a very good deal," said Mr Benyamin. Today the bank is cash rich, with US$1bn on hand, most of that coming from the Bank Audi sale.

That capital could work as a buffer in turbulent times but the interest income also provides EFG Hermes with a sustainable stream of revenue. The cash could also assist EFG Hermes with an immediate source of funding for acquisitions, although it will probably aim for smaller targets this time around rather than ones the size of Bank Audi. "An acquisition the size of Bank Audi would be more complicated and introduces execution risk," Mr Benyamin said.

Many analysts expect the fourth quarter to show signs of recovery for the region, with capital markets among the first sectors to rebound. halsayegh@thenational.ae