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EFG Hermes reports 3Q 2011 earnings

EFG Hermes remains profitable amid challenging market conditions; the Firm sharply reduces Group operating expenses while maintaining flexibility.
EFG - Hermes | 17.11.2011

EFG Hermes*, the leading investment bank in the Arab world, released today its consolidated financial results for the third quarter of 2011, reporting net earnings of EGP 31.5 million on total operating revenues of EGP 395.7 million.

Total consolidated operating revenues declined 20% year-on-year and 15% quarter-on-quarter on the back of lower market volumes in Securities Brokerage, a decline in Asset Management's management fees, a decline in advisory fees generated from Investment Banking, and the disappearance of private equity incentive fees in the quarter. Crédit Libanais revenue, which accounts for 62% of total group revenue, remained stable.

"Amid challenging market conditions, prudence was the order of the day in the third quarter and remains so as we head into the end of the year," said Hassan Heikal, Chief Executive Officer of EFG Hermes. "We are pleased to have sharply reduced expenses at the Investment Bank while still leaving all five of the Investment Bank's divisions the flexibility they need to respond to the inevitable market upswing, whenever that may occur."

EFG Hermes was ranked twenty-fourth overall on the Europe, Middle East and Africa M&A tables at the 1H2011 mark and extended its achievement by closing its advisory on the USD 452 million sale of Olympic Group to Sweden's Electrolux, a transaction that will provide additional business as the Division continues to build a robust pipeline of mandates for execution when market conditions improve across the region.

"The business will continue to face headwinds as a result of regional challenges and turbulence in the global financial system alike," noted EFG Hermes Chief Executive Officer Yasser El Mallawany. "This underscores the fundamental wisdom of catalysing our transformation into a commercial bank last year by acquiring a controlling stake in Crédit Libanais."

Regional operations accounted for 74% of total Group revenues in 3Q2011, a sharp rise from 5% in 2005 when the Firm's regionalisation drive began.

At the Commercial Bank, Crédit Libanais reported net income of USD 16.7 million in 3Q2011, a rise of 4.1% quarter-on-quarter. The Bank recorded continued solid loan growth of 3.2% quarter-on-quarter (and 21.8% year-on-year), with the standout performer being the corporate loan book, which grew nearly 21% in the first nine months of this year.

"The systematic reduction in the cost of deposits, the re-deployment of excess cash generated by maturing securities, strong loan growth, continued success in NPL collection and effective containment of general expenses helped offset the loss of net interest income from maturing high-coupon fixed-income securities as well as the market-to-market loss in the group's trading portfolios," noted Commercial Banking Chief Executive Officer Takis Arapoglou.

Revenues in 3Q2011 split as 62% from the Commercial Bank, 35% fee and commission income from the Investment Bank, and 3% revenue from capital markets and treasury operations.

Highlights of EFG Hermes' performance in 3Q2011, including both the Investment Banking and Commercial Banking platforms, follow. Full financials and Management's detailed analysis of the factors underpinning the Firm's performance in the quarter just ended are now available for download on www.efghermes.com.

3Q2011 Performance Highlights

Group Performance:
- Total consolidated operating revenues in 3Q2011 totalled EGP 396 million, a 20% decline from the same period last year.
- Total revenue in 3Q2011 split as 62% from the Commercial Bank (EGP 246 million), 35% fee and commission income from the Investment Bank (EGP 138 million), and 3% revenue from capital markets and treasury operations (EGP 12 million, divided as EGP 9 million from net interest income and EGP 3 million from returns on investments).
- Consolidated net income for 3Q2011 stood at EGP 31.5 million, down 64% from the same period a year ago.
- Sharp cost cutting measures across all lines of business saw the Investment Bank's operating expenses fall 22% year-on-year in 3Q2011 and 14% quarter-on-quarter. Cost savings were realised through select headcount reduction and voluntary pay cuts by some senior staff.
- As of the end of September, EFG Hermes' shareholder base included 11,831 investors; the top 20 investors together account for 78.4% of the total shareholder base.

Investment Banking Platform:
- Total revenues from the Investment Banking platform declined 38% year-on-year in 3Q2011 to EGP 150 million (including EGP 12 million from treasury and capital market operations).
- Fee and commission income from the Investment Bank was down 26% year-on-year in 3Q2011 to EGP 138 million, reflecting lower revenues generated by all four fee-earning lines of business. Weak market sentiment and perceptions of risk translated into weak volumes, low valuations and redemptions across the firm's regional footprint. Notably, the 35% decline in Brokerage revenues beat a 47% decline in aggregate regional market volumes.
- Revenue from the Investment Banking Division fell 31% year-on-year to EGP 27 million on the back of lower advisory fees, Private Equity revenue contracted 20% in 3Q2011 to EGP 31 million due to the disappearance of incentive fees, while Asset Management revenue eased 5% as management fees declined.
- Securities Brokerage maintained its number one position in terms of executions in both the Egyptian and Dubai markets during the traditionally quiet summer season, which this year was marked by both Ramadan and El-Eid holidays. Regional volumes dropped an average of 39% quarter-on-quarter in 3Q2011, while Brokerage executions declined 31% in the same period to USD 3.9 billion, reflecting an improvement in the Division's market share.
- In addition to ranking number one in Egypt and Dubai, EFG Hermes was number three in Abu Dhabi, third in Oman (up from fourth in 2Q11), second in Kuwait (unchanged from the previous quarter) and sixth in Jordan.
- EFG Hermes Asset Management saw AUM decline 12% over the course of the quarter to USD 3.2 billion on the back of redemptions (7 percentage points of the decline) and market effect (5 percentage points). Egypt fixed income funds, namely local money market funds, represented 76% of total redemptions in 3Q2011. Regional equity funds represented another 14% of redemptions, reflecting the increase in risk aversion by regional clients as concerns over a deteriorating global economic outlook led investors to sell out of equities.
- Investment Banking completed its USD 452 million advisory on the Olympic Group's sale to Electrolux in 3Q2011, and continues to build a substantial pipeline of mandates for execution when market conditions improve.
- Private Equity AUMs were unchanged at USD 1.1 billion at the end of 3Q2011. The Division made no exits in the period while agreeing to two new infrastructure investments that will reach financial close in 1Q2012 and 2Q2012.
- The Research Division added one company to its list of equities under active coverage, bringing the total to 135 companies at the end of the quarter (Egypt 32, UAE 24, KSA 38, Kuwait 7, Oman 18, Qatar 8, Lebanon 4, Morocco 3 and Jordan 1). EFG Hermes currently covers 55% of the region's market capitalisation.

Commercial Banking:
- The Commercial Bank recorded net income of USD 16.7 million in 3Q2011, an increase of 4.1% quarter-on-quarter.
- Total loans reached USD 1.93 billion, an increase of 3.2% quarter-on-quarter and 21.8% year-on-year, while total deposits came in at USD 6.2 billion, an increase of 3.1% from the previous quarter and 12.1% year-on-year.
- Net interest income reached USD 28.3 million, a decline of 9.3% from the pervious quarter and 12.7% from 3Q2010.
- Fee and commission income topped USD 9.1 million, an increase of 46.6% from the previous quarter and a rise of 0.6% year-on-year.
- Credit loss expense showed a gain of USD 2.6 million, a 116% increase from the second quarter of this year.
- Net operating income reached USD 41.9 million, a 1.7% increase quarter-on-quarter and a 7.5% decline from 3Q2010.
- Net income stood at USD 16.7 million, an increase of 4.1% from the previous quarter and a decline of 18.4% year-on-year.
- Loans/deposits ratio reached 31.1%, unchanged quarter-on-quarter and a 2.5% rise year-on-year.