FY2009 Earnings Release 4Mar2010 2 - EFG-Hermes · FY2009 Earnings Release 04 March 2010 ... cutting plan filtered in. The cost savings came from both the employee expenses as well

INVESTOR RELATIONS FY2009 Earnings Release

04 March 2010

Performance at a Glance

Table 1: Performance at a Glance

Units 4Q09 3Q09 2Q09 1Q09 2008 2009

Total Executions USD million 24,735 11,979 21,946 9,384 118,434 68,044

Assets Under Management USD billion 5.306 5.354 5.011 4.82 5.235 5.306

in Asset Management USD billion 4.345 4.325 3.982 3.67 4.085 4.345

in Private Equity USD billion 0.961 1.029 1.029 1.15 1.15 0.961

Research Coverage 96 88 87 84 76 96

Investment Bank. Transactions USD billion 2.82 0.29 1.6* 0.034 1.582 3.148

Number of Employees 990 858 851 870 931 990

Fee & Commission Revenue EGP million 221 179 220 152 1,620 772

Total Net Revenue** EGP million 364 346 382 327 2,155 1,419

Net Operating Profit*** EGP million (33) 26 62 8 732 63 Net Profit After Tax & Minority Interest EGP million 85 151 176 140 934 552

* Pattel-Zain merger that was reversed, not included in total **including FX gain (loss), net interest income, realised & unrealised gains on fixed income products *** based on fee & commission revenue Sources: EFG-Hermes audited financial statements and management accounts

2009 in Review

EFG Hermes has emerged in 2009 as the only true regional Investment Bank in MENA region, even though the Group continued to experience deteriorating market conditions in 2009 which impacted the assets under management, trading volumes, the ability to close Investment Banking deals and raise new Private Equity funds;

Total net consolidated revenues declined 33.8% during 2009 to EGP1.43 billion down from EGP2.16 billion1 a year earlier and were predominantly booked through the operations of the Investment Bank;

Total fee and commission income was the main component of the Group’s revenues that was affected. Challenging market conditions over the year, including the decline in volumes traded across the region by an average of 40%, the capital markets totally shutting down but slowly recovering over the last few months of the year and the near absence of incentive fees, have been reflected in the decline of fee and commission revenue of 52.3% over 2008 (25.7% if adjusted for incentive fees) to EGP772 million;

1 of which EGP218.1 mn were incentive fees

Investor Relations Contacts

Dina Al-Sonbaty Managing Director Corporate Affairs & Investor Relations Email: [email protected] Tel: +20 2 333 18 202

Mohamed Arafa CFO Email: [email protected] Tel: +20 2 333 21 120

Tamer Zafer Managing Director Financial Corporate & Regulatory Reporting Email: [email protected] Tel: +20 2 333 18 153

EFG-Hermes (Main Office) 58 Tahrir Street Dokki Egypt 12311 Tel: +20 2 333 83 626 Fax: +20 2 333 78 038

Stock Exchange & Symbol

Cairo: HRHO.CA London: HRHOq.L Bloomberg: EFGH Reuters pages: EFGS .HRMS .EFGI .HFISMCAP HFIDOM

EFG-HERMES INVERSTOR RELATIONS FY2009 Earnings Release 4 March 2010 2

Total operating expenses declined 20.1% from 2008 to EGP709 million as the effects of the cost cutting plan filtered in. The cost savings came from both the employee expenses as well as the other operating expenses; a combined decline of around EGP180 million;

Net operating profit, reflecting the Group’s core agency business, recorded EGP63 million in 2009 down from EGP733 million in 2008 (of which EGP218.1 million were incentive fees). EFG Hermes’ net operating margin continued to come under pressure during 2009 declining to 8.2% down from 45.2% in 2008 (36.7% if adjusted for the realised incentive fees). EFG Hermes Management believes that at least EGP40 million of the total operating expenses are related to non-fee and commission business. Accordingly, the more accurate net operating profit and margin for 2009 are EGP103 million and 13.3% respectively;

Net profit after tax and minority interest in 2009 declined 40.9% to EGP551.8 million. It must be noted however, that during 2008 EGP218.1 million of incentive fees were booked and if these were set aside, the decline in net profit after tax and minority interest would only be 22.9%;

The Board of Directors is recommending, pending shareholders’ general assembly approvals, the distribution of EGP3/share: EGP1/share is to be distributed after the ordinary general assembly’s ratification of the audited financial statements for the fiscal year 2009 and EGP2/share are to be distributed as a special dividend due after an ordinary general assembly is held to ratify the 1Q2010 figures as the capital gains resulting from the sale of the stake in Bank Audi are recorded in 1Q2010;

Regional operations (non-Egypt related operations) accounted for 47.8% of the total fee and commission income in 2009 up from 42.1% a year earlier;

Although EFG Hermes lost some market share in some markets where it operates it regained share in others. The Brokerage arms in Egypt and the UAE (on the DFM and ADSM) continued to maintain their number one positions. The Kuwaiti operations oscillated between the #1 and #2 position most of the year while the Omani operation ended the year in the third position. Growing retail brokerage operations have ensured that the Group maintained its regional dominance during the period when its institutionally-biased market shares became threatened;

As a result of the retail strategy that EFG Hermes embarked upon over the last couple of years, the Group has become the largest retail broker in the region with approximately 50% of the brokerage business being contributed by retail, VIP, online and call centre clients;

The Research Department continued to increase the stocks and economies under coverage and support the Investment Bank’s operations as a whole with the stocks covered increasing to 96 stocks up from a coverage of 76 stocks in 2008;

Total assets under management within the Group increased to USD5.3 billion, of which USD4.4 billion are in listed equities and money market funds and the remainder in private equity. Given the market performance, no incentive fees were booked during 2009 compared to a total of EGP218.1 million booked during the pre-crisis period in 2008;

EFG Hermes Private Equity was chosen as the manager of the Egypt pocket of the InfraMed infrastructure fund spearheaded by Caisse des Dépôts (France) and Cassa depositi e prestiti (Italy). In addition, towards the latter part of the year, the Team began work on several initiatives, that should be ready for launch by the end of 1H 2010, including specialised funds and a fund dedicated to Syrian investments;


2009 was a difficult year for the Investment Banking Team. Despite the difficulty of raising equity during most of the year and the disconnect between buyers’ and sellers’ expectations making it difficult to close mandated M&A transactions, the Team increased its activity in both the advisory and debt capital market transactions. Two large transactions that were started in 2009 and concluded in 2010 include SODIC’s rights issue and Mobinil’s bond issue. The pipeline into 2010 remains solid and varied in both type of deals and country of origin;

EFG Hermes’ shareholding structure remains dominated by institutional shareholders. The top 50 shareholders own 73.2% and include 33 western institutions and fund managers.

Material Events after the Close of the FY2009

After lengthy discussions with Bank Audi regarding a combination of the two businesses, it became evident, after the events of 2008, that an amalgamation in the near future would be difficult.

With one investment, without control, representing over 50% of EFG Hermes’ adjusted book value; it became clear that a divestiture should be considered. Management was able to create a liquidity event at a premium of around 15% to the then ongoing share price, and finalise the sale for a total deal size of approximately USD913 million.

From a financial point of view, the transaction leads to an unconsolidated capital gain of USD260 million. On a consolidated basis, as EFG Hermes accrues its share of Bank Audi’s profits less the dividend received on the balance sheet (equity method of consolidation) the consolidated capital gain before tax is in the vicinity of EGP500 million based on Bank Audi’s published unaudited financial statements.

EFG Hermes believes that a number of opportunities exist that could make strategic sense in the foreseeable future. With the Group’s strong liquidity, Management believes that the Firm is very well positioned to take advantage of these opportunities.

Looking Ahead

Having begun 2010 on a strong note, closing two large Investment Banking deals, maintaining leadership on the Brokerage front across the region and the balance sheet even stronger with the addition of c.USD1 billion of cash, EFG Hermes Management has carefully investigated the direction and path to be followed to further grow the Group’s revenue stream.

Growing the Investment Bank platform remains key as it represents the group’s core activities and primary competence of its Team. Within the business lines, expanding the retail brokerage, whether in Egypt or regionally, remains an important target; the addition of new branches and the expansion of the services provided online are the starting points. Selective and totally collateralised margin lending to clients in the high interest rate environment is being expanded. The Group will also continue to provide seed capital to all the new funds launched by either the Private Equity or the Asset Management Divisions. On the geographic expansion, initially expanding into the Levant and Libya are a priority given that these markets are in EFG Hermes’ focus region as well as the numerous business opportunities present in these markets given their nascent status. Other regions of


focus for the Group’s geographic expansion of the Investment Bank platform, in no particular order, include Pakistan to the east, Morocco to the west and south to Sub-Saharan Africa (ex-South Africa).

The Group’s strategy to transform the platform into a universal bank remains key in spite of the recent sale of the stake in Bank Audi. EFG Hermes will continuously seek to acquire control of a commercial bank, and in fact, there are several prospects that Management is exploring. Obviously, at least in the beginning, the size of the target is likely to be smaller than Bank Audi.

Management is also looking into expanding the scope of the Asset Management business and its platform both organically and through acquisitions. Needless to say, that any acquisition needs to be accretive to EFG Hermes’ shareholders as well as provide the Group with an expanded client base or product range that are either unattainable through an organic expansion, or would be a long rather than a medium term goal. In continuation to recent successful transactions, Management now has an increased appetite for selective underwriting and syndication deals that would utilise the Group’s balance sheet. Merchant Banking activities is another area that is of interest. Although, Merchant Banking would be undertaken in an opportunistic manner, and under strict guidelines, so as not to interfere or conflict with EFG Hermes’ core business, such transactions are expected to be a rewarding use of the Group’s available cash balances.

Regional Capital Markets During 2009

2009 was not a very eventful year. MENA capital markets continued to be oversold as indiscriminate selling, that marked the second half of 2008 showed no signs of reversing. MENA markets witnessed severe losses with not a single market registering full recovery on both volumes traded (down 40% on average for the region from 2008) and valuations. In general MENA markets have underperformed both emerging and the US markets in 2009; the MSCI Arabia gained 17.3% over the year compared to 23.5% for the S&P 500 and 74.5% for the MSCI EM.

Negative investor sentiment across the globe continued; beginning to weaken only during 2Q09 as governments initiated aggressive countercyclical stimulus packages which helped ease the effects of the global financial crisis. As investor sentiment recovered, both fixed income and equities markets began to recover. The positive performance was apparent in the region’s best performing markets for the year, namely Egypt (up 34.7%) and Saudi Arabia (up 27.5%) while other markets like Qatar ended the year with minimal gains of 1.1% despite the country’s sound macroeconomic backdrop.

During the first half of 2009, MENA markets in general exhibited acute weakness as a result of weak oil prices, sluggish credit markets and negative investor sentiment that translated into the investors following defensive strategies. As oil prices began to recover, and the aggressive stimulus packages began to trickle across global economies, a strong recovery on regional markets began only to be faced in the summer by consecutive shocks as major debt defaults by prominent groups surfaced followed closely by the uncertainty relating to the Dubai government-related entities. For the second half of the year, MENA capital markets posted mixed performance. As concerns relating to more systemic regional defaults were laid to rest, markets resumed recoveries. Another wave of indiscriminate selling hit the regional capital markets towards the end of November as Dubai World announced the debt standstill. Volatility across the region began to subside as it became apparent that the Dubai debt situation was contained and markets began to slightly recover in December, with most markets either flat or marginally down, with the exception of Egypt where market valuations increased over 7% during the month. Overall, MENA capital markets lagged the global rally which


started after the all-time lows March 2009. However, going into 2010 recovery of MENA markets will be disparate as investors differentiate further between the regional markets and decisions become more skewed towards fundamentals. Having said that, the MENA region in general is set for sustained growth as oil prices recover and increased spending on infrastructure will trigger growth in some GCC countries, while growth in countries such as Egypt will hinge on government reforms and favourable demographics.

Amidst this unprecedented market turmoil, making 2009 arguably the most challenging year EFG Hermes has witnessed in years, the Firm managed to maintain its market positioning, continue to be the counter-party of choice for western institutions, build a solid backbone to expand retail brokerage, build a pipeline of Investment Banking transactions from across the region, introduced coverage model into the modus operandi and more importantly delivered profitability, albeit at lower levels than in the previous couple of years. The Group’s solid and debt-free balance sheet has been a key advantage compared to its peer group. The deliberate and focused reduction of expenses whether by introducing new policies, headcount reductions and acceptance of salary cuts (for most of the year) by the top 200 employees has allowed Management to deliver on its promise of delivering cost savings in the vicinity of EGP180 million over the year.

Table 2: Performance of Markets in the Arab Region during 4Q2009

Activity During Quarter (difference beginning &

ending indices)

Indices 4Q09 Vs.

4Q08

Volumes 4Q09

Vs.4Q08

Volumes 4Q09

Vs.3Q09

Indices 2009 Vs.

2008

Volumes 2009

Vs.2008 4Q08 4Q09

Egypt -32.29% -8.99% 34.70% 95.44% 20.69% 34.70% -23.38% Dubai -60.36% -17.68% 10.22% 27.94% 23.41% 10.22% -43.14% Abu Dhabi -39.60% -12.18% 14.79% -14.28% -2.51% 14.79% -69.99% Saudi Arabia -35.60% -3.17% 27.46% -25.15% 1.90% 27.46% -36.06% Bahrain -26.74% -6.19% -19.17% -74.47% 33.03% -19.17% -73.30% Jordan -32.29% -5.75% -8.15% -16.75% 7.73% -8.15% -50.82% Kuwait -39.38% -10.39% -9.99% -49.86% -42.09% -9.99% -40.27% Lebanon -31.71% 6.50% 32.36% 10.51% -7.60% 32.36% -44.21% Morocco -12.85% -2.99% -4.04% -44.23% 134.81% -4.04% -32.25% Oman -35.94% -3.10% 17.05% 54.57% -17.48% 17.05% -32.94% Qatar -26.07% -6.14% 1.06% -45.45% -1.71% 1.06% -47.50% Total Weighted Average -35.73% -6.85% 12.65% -21.37% 1.64% 12.65% -40.18%

Average of Egypt & GCC -37.66% -7.39% 15.63% -20.21% -1.66% 15.63% -40.00%

Sources: Regional markets and EFG-Hermes


Performance Total Revenue

Table 3: Breakdown of Total Revenue

Total Revenue (EGP mn) FY2009 FY2008 Change

2009 Vs. 2008

Total Fee & Commission Revenue 772 54.1% 1,620 75.2% -52.3%

Treasury Operations* 195 13.7% 113 5.2% 72.6%

Net Principal Account & Gain on Investment 6 0.4% (84) -3.9% -106.7%

Total Revenue From the Investment Bank 973 68.2% 1,649 76.5% -41.0%

Banque Audi 436 30.6% 328 15.2% 33.1% Sundry Revenues 18 1.2% 179 8.3% -90.1%

Total Revenue 1,426 100% 2,155 100% -33.8%

Sums and percentages may not add up exactly due to rounding * including FX gains (EGP1.2 million), net interest expense (EGP74.6 million), realised & unrealised gains on fixed income (EGP107 million in 2009) Sources: EFG-Hermes audited financial statements and management accounts

Total net consolidated revenue declined 33.8% over 2008 reflecting the financial crisis that hit global and regional financial markets that set in during 4Q08. It must be noted however, that 65% of the total revenues in 2008 were booked during the first half of the year before the financial crisis. In addition, if the incentive fees2 booked during 2008 were removed the decline in net consolidated revenues in 2009 is only 25.7% compared to declines in trading volumes across regional markets by an average of 40%.

Although not as dominant as in 2008, revenue from the Investment Bank remained the key contributor to net consolidated revenue accounting for 68.2% of the total net consolidated revenue compared to 76.5% a year earlier. With the total shutdown in equity markets over most of the year, the weak trading volumes, the general decline in indices for most of the year affecting the value of assets under management, coupled with net cash outflows particularly during the first half of 2009, fee and commission revenue decreased 52.3% over 2008 to reach EGP772 million in 2009. It must be noted however, that the volatile market conditions made it impossible to close any capital market deals during most of the year and it obliterated the possibility of booking any meaningful incentive fees within Asset Management compared to total incentive fees of EGP218.1 million booked in 2008 (booked during the first half of the year). With the Prop. account closed down in 2008, Treasury had regained the upper hand in the Group’s cash management and with selective investing in fixed income products to counter the declining interest rate environment, managed to book EGP195 million3, nearly doubling revenues over 2008 and constituting 13.7% of total net revenue. The

2 Total incentive fees booked in 2008 were EGP218.1 mn compared to EGP11.9 mn in 2009 3 Mainly includes EGP74.6 mn of net interest and bank charges, EGP107 mn of realised and unrealised capital gains on fixed income and FX gain of EGP1.2 mn


EGP195 million includes revenue from net credit interest (EGP74.6 million) and treasury operations including capital gains on fixed income (total of EGP107 million). Revenue consolidated from Bank Audi increased 33.1% over 2008 to EGP436 million reflecting the Bank’s solid growth over the year. Its contribution to EFG Hermes’ total revenue increased to 30.6% during 2009 as a result of the challenging market conditions facing investment banks in general that restricted the general fee pot.

Operating Revenues Activity on capital markets, where EFG Hermes operates, has been dismal compared to the growth in these economies during the year. Pessimism, negative investor sentiment and the increased retail and speculative trading in the absence of meaningful foreign and institutional activity exacerbated market volatility and decreased its depth. Although markets began to slightly recover during the latter part of the year, 4Q09 saw both valuations and volumes traded decrease 7.4% and 2% respectively over 3Q 09 levels. Overall, volumes traded in 2009 were down 40% over 2008 albeit valuations were 15.6% higher than 2008 supported by valuations on speculative stocks, which EFG Hermes does not recommend to its clients nor actively trades. With this backdrop EFG Hermes managed to fair well with the Investment Bank achieving profitability during the difficult 2009. 4Q09 total operating revenues increased 6.5 fold over 4Q08 operating revenues to EGP221 million, but it must be noted that 4Q08 included a loss of EGP123 million loss on the Prop. Account and hence revenue from the agency business actually increased 41.3%. On a full year basis, total operating revenue declined by 49% over 2008 to EGP778 million, the decline decreasing to 41.8% if the incentive fees booked are removed.

In spite of the above, EFG Hermes managed to maintain it positioning as the largest and premier Investment Bank operating in the region by sustaining its #1 position across the brokerage firms in spite of its core clients’ low level of activities, the largest asset manager beginning to secure net cash inflows and sealing several investment banking deals in difficult market conditions.


Table 4: Contribution of the Different Divisions to Operating Revenue on a Quarterly Basis

Division Revenues (EGP mn) 4Q09 3Q09 2Q09 1Q09 4Q08

Change 4Q09 Vs.

4Q08

Brokerage: Egypt 68 30.7% 64 35.7% 84 38.3% 55 36.4% 49 30.9% 40.6% Brokerage: UAE 20 8.9% 15 8.6% 21 9.7% 9 6.0% 15 9.3% 35.1% Brokerage: KSA 4 1.7% 2 1.1% 5 2.3% 4 2.6% 3 1.9% 26.3% Brokerage: Oman 3 1.6% 4 2.5% 4 1.8% 3 2.0% 5 3.2% -31.1% Brokerage: Kuwait 14 6.4% 17 9.8% 32 14.7% 14 9.3% 16 10.0% -8.9% Asset Management: Egypt 19 8.7% 12 6.8% 15 6.8% 9 6.0% 6 3.8% 221.1%

Asset Management: Regional 28 12.4% 27 15.2% 24 10.9% 26 17.2% 40 25.5% -31.2%

Private Equity 48 21.7% 27 15.1% 25 11.3% 24 15.9% 24 15.3% 100.5% Investment Banking: Egypt 23 10.2% 9 5.3% 2 0.9% 6 4.0% - - -

Investment Banking:UAE (5) -2.3% 0 0.0% 7 3.2% 1 0.7% 0 0.2% -

Total Fee & Commission Revenue 222 100% 179 100% 220 100% 151 100% 157 100% 41.3%

Prop. Account & Gain (or loss) on Investments * (1) -0.6% 6 3.2% 4 1.8% (3) -2.0% (123) - -

Total 221 - 185 - 224 - 148 - 34 - 547.4%

Sums and percentages may not add up exactly due to rounding * excluding Treasury Operations Sources: EFG-Hermes audited financial statements and management accounts

Table 5: Contribution of the Different Divisions to Operating Revenue on an Annual Basis

Division Revenues (EGP mn) FY2008 FY2009 Change

2009 Vs. 2008

Brokerage: Egypt 545 33.7% 271 35.2% -50% Brokerage: UAE 150 9.2% 65 8.5% -56% Brokerage: KSA 35 2.2% 15 1.9% -57% Brokerage: Oman 21 1.3% 15 1.9% -30% Brokerage: Kuwait 40 2.5% 78 10.1% 95%

Total Brokerage 791 48.8% 445 57.6% -44% Asset Management: Egypt 89 5.5% 55 7.2% -38% Asset Management: Regional 403 24.9% 105 13.6% -74%

Total Asset Management 492 30.4% 160 20.7% -67% Private Equity 105 6.5% 124 16.1% 18% Investment Banking: Egypt 200 12.3% 40 5.2% -80% Investment Banking:UAE 32 2.0% 3 0.4% -91%

Total Investment Banking 232 14.3% 43 5.6% -81%

Total Fee & Commission Revenue 1,620 100% 772 100% -52% Prop. Account & Gain(or loss) on Investments* (85) -5.5% 6 0.7% -107%

Total 1,535 - 778 - -49%

Sums and percentages may not add up exactly due to rounding * excludes Treasury Operations; no Principal Account during 2009 Sources: EFG-Hermes audited financial statements and management accounts


Brokerage operations remained the core contributor to the business in 2009 booking 57.6% of the total fee and commission revenue up from 48.8% in 2008, in the absence of sizeable incentive fees on the Asset Management side and the huge drop in Investment Banking transactions. Nevertheless, Asset Management remains the second largest contributor to fee income, booking 20.7% of the total. Assets under management increased to USD4.35 billion as at the end of 2009, up slightly from USD4.2 billion a year earlier, but with an increase in the lower fee earning money market funds constituting a large portion of the AuMs for the first half of 2009. The contribution of Private Equity to the total fee and commission income increased to 16.1% of the total up from 6.5% a year earlier as the Team managed to exit several investments during the latter part of the year and hence booked success fees. Contribution of the Investment Banking Division in the total operating revenues echoed the total shut down of capital markets during 2009 that made it difficult to close any equity offerings or meaningful M&A transactions during the year.

In line with the Group’s regionalisation and geographic expansion strategy the Investment Bank’s revenues emanating from outside Egypt totaled 47.8% in 2009 up from 42.1% a year earlier and expected to further increase as the Group’s operations further expand across the region.

Hereunder is an analysis of the company’s main operational divisions:

Brokerage Decreased market activity across all regional markets was reflected by the fall in Brokerage revenue to a total of EGP445 million in 2009 down from EGP791 million in 2008. Nevertheless, Brokerage remained the key contributor to fee and commission revenues reigning in 57.6% of total fee and commission revenue for the year up from 48.8% in 2008. The expansion into retail brokerage activity through the growth in online and call centre activities as well as the branch network, currently being built up in Egypt have ensured that although the Firm lost some market share in some markets it remained the #1 broker in its core markets as well as the largest broker operating in the Middle East and North Africa.


Figure 6: Development of Brokerage Commissions Booked by Various Business Categories in Egypt and the UAE

Source: EFG-Hermes audited financial statements and management accounts

During 2009 the Brokerage Division expanded its activity in the access product market into regional markets where foreigners and/or regulators require synthetic access to the market, the success of this service hinging on the fact that EFG Hermes is a local participant in all of the markets where it has physical presence. Currently, the Team has two products in circulation, the ABWAB and the SHAMAL products. As at December 31, 2009 the total outstanding on both access products was USD350.4 million.

In addition to hosting the annual One-on-One conference during March in Sharm El Sheikh, Brokerage hosted several others in an attempt to keep its core client base connected to the region and fully informed, even at times when trading and investor sentiment were not conducive to any meaningful activity. Some of the conferences hosted during 2009 were the First MENA Financial Institutions Day on the LSE, the Second Egypt Capital Markets Day on the LSE, the First Saudi Capital Markets Day on the LSE and the First MENA Day in New York in October. As usual, all of the events were very well attended and has ensured that the Group has maintained its contacts, leadership position and rapport with both investors attending as well as the issuing companies presenting.

Egypt EGX is the regional capital market that recovered most during 2009, given the more transparent and stronger market control that had institutional clients returning, if only shyly to begin with, to trade the market. Valuations on EGX increased 34.7% during 2009 over yearend 2008 levels on the back of lower volumes, 23.4% lower than 2008. In contrast EFG Hermes’ executions only decreased to EGP172 billion, a 19.2% decrease over 2008. Accordingly, the Group managed to maintain its share of total market executions at 44% for the full year remaining the #1 broker on the Egyptian Exchange.

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UAE Figure 8: Progression of Volumes Executed and Share of Total Market Executions

Sources: DFM, ADX and EFG-Hermes

Trading on both UAE markets was volatile during most of 2009; during the first half because of general investor sentiment as well as the absence of any meaningful institutional trading on both the DFM and ADX, followed by a short reversal during 3Q09 that was dampened by Dubai World’s announcement of the debt standstill and the ensuing uncertainty. Although year-on-year valuations remained above levels witnessed at the end of 2008, volumes traded on the DFM and ADX decreased by 43.1% and 70% respectively due to retail trading falling drastically and foreign clients totally withdrawing from the market. In spite of EFG Hermes’s main client base being absent from the market for most of the year, the Group managed to maintain its #1 broker positioning. Total executions during 2009 decreased 64.6% from 2008 levels to USD7.8 billion.

Although not as large as the operations in Cairo, online trading in the UAE has continued to pick up over the year with an average commission well above that charged for the normal brokerage activities. Total turnover generated by online in the UAE increased nearly 65% over 2008 levels.

In line with the general decrease in capital market activity over the year across all regional markets, revenues from Brokerage operations out of the UAE have decreased 56% over 2008 and reached the equivalent of EGP65 million constituting 8.5% of the Group’s total consolidated operating revenues.

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25%

30%

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

EFG-Hermes Excutions in UAEMarket Share in DFMMarket Share in ADX

UUUUUUUUUUUUUUUU(USD mn)


Saudi Arabia Figure 9: Progression of Volumes Executed and Share of Total Market Executions

Sources: TADAWUL and EFG-Hermes

EFG Hermes lost market share on the Saudi Exchange during 2009, ending the year with an average of 1% of total market executions and in second position between the brokerage firms that are not related to commercial banks. The main reason being the Group’s belief that the Brokerage business in the Kingdom is a commodity business and hence the real value out of the presence in Saudi would be from the other business lines including Asset Management and Investment Banking, both of which the Firm has been growing with results expected to trickle down as investor sentiment slowly comes back. The Brokerage business would then inevitably grow as a result. Accordingly, the Firm was not willing to either commit its balance sheet to extend margin lending in volatile and speculative markets nor did it resort to providing huge discounts on its commission rates to gain business that during, stellar market conditions, may not remain.

However, as markets begin to stabilise and institutional interest returns, the access products which the Group has launched are bound to attribute to an increase in EFG Hermes’ share of market executions. Total outstanding on EFG Hermes’ market access products began to pick up as the year progressed and the outstanding as at the end of the year reached USD350 million.

Revenues consolidated from the Saudi brokerage activities recorded the equivalent of EGP15 million in agency fees corresponding to 1.9% of the Group’s consolidated fee and commission income during 2009.

61

1,117

4,904 5,810

9,285 8,478

3,652 2,872 3,212

1,347

2,632

0.01%0.22%

0.89%

1.40%

1.60%

2.42%

1.12%0.96%

0.70%

0.55%

1.08%

0.0%

0.5%

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2.5%

3.0%

0

1,000

2,000

3,000

4,000

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6,000

7,000

8,000

9,000

10,000

2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

Executed by EFG-Hermes Market Share(SAR mn)


Oman Figure 10: Progression of Volumes Executed and Share of Total Market Executions

Sources: Oman Stock Exchange and EFG-Hermes

EFG Hermes executions on the Muscat Securities Market declined 37.5% from 2008 levels to OMR408.4 million echoing the declines in volumes traded on the exchange. The Group’s share of total market executions averaged 18% over the year. It must be noted that, although a relatively small market, Oman remains an important market in the greater EFG Hermes footprint.

Revenues consolidated from Vision Securities’ activities recorded the equivalent of EGP15 million in agency fees corresponding to 1.9% of the Group’s consolidated operating revenues during 2009.

Kuwait Figure 11: Progression of Volumes Executed and Share of Total Market Executions

Sources: Kuwait Stock Exchange and EFG-Hermes

156 204

212

81 67

135108 98

16.9%

14.4%

29.9%

24.3%

19.2%17.5% 17.2%

18.8%

0%

5%

10%

15%

20%

25%

30%

35%

0

50

100

150

200

250

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

Executed by EFG-Hermes Market Share(OMR mn)

3,102

2,807

1,897

1,472

976

2,832

1,496

1,160

26.32%

26.21%

26.85%23.54%

29.10%

30.17%27.34%

36.04%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

500

1,000

1,500

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2,500

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1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

Executed by EFG-Hermes Market Share(KWD mn)


2009 was a good year for EFG Hermes in Kuwait. The Group managed to increase its market penetration, fully integrate the acquisition of IFA and set a solid stage for the cross-selling of the Group’s other products, predominantly on the Asset Management front, can be launched in 2010.

EFG Hermes executions on the Kuwaiti Exchange decreased to KWD6.5 billion, a 30.3% drop compared to a 42.1% declines in the volumes traded and 10% in market valuations over the year. As a result, EFG Hermes market share continued to increase over the year reaching 36.04% in 4Q09 and 30.2% for the full year. For the last five months of 2009, EFG Hermes IFA had the lead position on the market; a position that hopefully will continue into 2010.

The Kuwaiti subsidiary managed to book the equivalent of EGP78 million in revenue during 2009 corresponding to 10.1% of the Group’s total operating revenues.

Other Regional Markets Trading markets where EFG Hermes has no physical presence for its clients remains a key advantage the Group has over its competitors. The services rendered by the desk dedicated to trading these markets have been expanded whether in terms of countries traded, adding a few African markets on request of some of the clients or in terms of settlement processes or very limited and selective margin lending facilities. The main markets traded during the year were Qatar, Jordan, Bahrain and Morocco. It must be noted that volumes traded on these markets had declined drastically over 2008 levels with volumes in Qatar, where EFG Hermes does most of the business, declining 47.5% over 2008, Bahrain declining 73.3%, and Jordan 50.8%. Although EFG Hermes has no seats on these exchanges it has a calculable and increasing market share on these markets. Market shares in 2009 were 10% in Qatar, 4.5% in Bahrain, 3% in Jordan and 0.5% in Morocco.

Branch Network Expanding into retail brokerage by having a branch network, across Egypt to begin with, began as an idea during 2H 08, with the pilot branch being launched at the Gezira Club in Zamalek in October 2008. The original plan rested on having 3 branches and aimed at breaking even by the end of 2009. Having said that, as at the end of 2009 EFG Hermes had 8 branches in addition to the Hurgada branch that is being staffed to commence operations and 3 others have been contracted and will open soon. Of the operating branches, the average to turn a profit was a four-month period given that most branches are rentals and the average investment cost per branch is quite low.

The Team handling the branch network aims at having 15 operating branches by the end of 2010 in Egypt before moving into other markets where EFG Hermes has physical presence.


Research

Figure 12: Development of Active Research Coverage

Source: EFG-Hermes

EFG Hermes’ research products continued to differentiate the Firm from its competitors especially during the volatile market conditions that regional and international capital markets that were characteristic of 2009. During 2009 the Research Team published 529 reports up from 343 reports in 2008. As at the end of 2009 total stocks under active coverage reached 96 stocks representing more than 50% of the region’s market capitalisation (up from 76 as at the end of 2008), with the majority of initiations targeting regional rather than Egyptian stocks. In addition, the Team provides coverage of all countries with stock markets in the GCC, the Levant and North Africa from a macro standpoint and 8 countries from a strategy perspective. Due to market conditions the Team focused on more frequent shorter notes that review outlook both in terms of strategy and valuation in light of market changes. Furthermore, in early 2009 the Team launched the MENA Focus List, a joint product with Sales, which highlights the top investment targets across the MENA region and the list is periodically reviewed. During 2009 the MENA Focus List had average returns in excess of 45% compared to around 17% for the MSCI Arabia to which it is benchmarked.

For the third year in a row, the Research Department maintained its overall # 1 ranking in the Euromoney Middle East Research poll.

During 2009, the Team has taken several initiatives to improve the commerciality of the Group’s product offering and attend to the clients’ changing needs. These included simplifying the equity rating system by moving to a single three-tier, 12-month rating system instead of the ST/LT rating system.

13 1325 19 22 27 291 5

1716

2120 19

611

6 1116 22

2

7

5

4

6

13

26

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009

Egypt UAE KSA Others

22

6053

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96

76


Asset Management

Figure 13: Development of Listed Assets under Management (totals in EGP billion)

Source: EFG-Hermes

Assets under management began to increase in 2009, albeit at rates lower than those seen during the first half of 2008. Total AUMs stood at USD4.4 billion at the end of 2009 up from USD4.2 billion a year earlier. Declines in late 2008 and early 2009 were predominantly due to market effect as a result of global market contagion post-Lehman. EFG-Hermes Asset Management had relatively modest outflows – unlike other regional managers – due to its diverse, primarily institutional investor base.

Money market and fixed income mandates comprised a larger percentage of overall AUMs increasing from 42% to 51% over the year due to decreasing risk appetite among regional and international investors. Consequently, offshore equity mandates contributed a decreasing portion of overall AUM’s at 22% down from 29% in 2008. Assets under management for institutional and HNWI discretionary mandates, however, remained stable comprising approximately 21% of total AUMs.

While the geographic base remained Egypt-centric with 69% of total AUM’s coming from the country, 65.4% of total booked revenues came from regionally-focused mandates. This fee composition is largely a result of the prevalence of money market mandates in the Egyptian market, while regional mandates largely remain equity-focused.

The Firm’s flagship funds, the EFG Hermes MEDA Fund and the Middle East and North Africa Opportunities Fund, ended the year with USD306 million and USD426 million, respectively. The EFG-Hermes MEDA Fund also posted a positive return of 8.7% over 2009, and outperformed the MSCI Arabian Markets Index by 1.4% in the last quarter of the year. The EFG-Hermes Saudi Arabia Equity Fund achieved annual performance of more than 22%, the EFG Hermes Middle East and Africa Telecom Fund gained 10%, and the EFG Hermes Egypt Fund achieved approximately 13% for the year.

0

5

10

15

20

25

30

35

40

45

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

Egypt Equity Funds Money Market Funds

Offshore Equity Funds Portfolios

14.3

(EGP bn)

21.6

28.6

34.6

23.020.7

22.4 24.4 24.4

41.441.435.4


EFG-Hermes Asset Management also secured several new mandates in the second half of 2009 which will largely launch by mid-2010. These mandates include a capital-guaranteed fund and a money market fund which are both in the final stages of regulatory approval. Asset Management also received the mandate for the launch of the first Egypt-dedicated fixed income fund which is currently in the approval stages as well.

In 2009, HSBC awarded EFG-Hermes another mandate to launch a capital-protected fund with a minimum size of USD50 million. In addition to this positive development, Asset Management saw net fund inflows of more than USD20 million into discretionary portfolio accounts in Q409. These positive flows predominantly came from regional clients, and best-in-breed investors including pensions, foundations and insurance companies. The total AUM’s from this investor type totaled nearly USD1.2 billion at the end of 2009 up 7% from the end of 2008.

EFG-Hermes Asset Management also worked to develop and integrate its client base in 2009. Primarily, the Business Development team worked diligently with EFG Hermes’ IT Division to integrate the new Client Relationship Management (CRM) software in an effort to more effectively streamline client communication and servicing going forward.

Asset Management revenues decreased by 67% over 2008 levelsto EGP 160 million as a result of challenging market conditions. Nevertheless, the stability of the department’s money market and fixed income funds helped support fee revenue in 2009. Despite market volatility and weak investor sentiment this past year, Asset Management contributed nearly 20.7% of the Group’s consolidated net operating revenues for 2009.

Investment Banking

2009 was an unusually difficult year for Investment Banking with EFG Hermes’ two main lines of business being hit hard. Although the Team carried a strong pipeline of equity offerings, both private placements and Initial Public Offerings, into the year, the feeble performance of the equity markets and the unprecedented negative investor sentiment rendered execution impossible. With equity raising traditionally being the main revenue driver, the overall division’s revenue generation ability was compromised.

On the M&A side, the valuation gap between buyers and sellers persisted throughout most of the year and in many cases too wide to bridge. Furthermore, several deals were agreed to but were not finalised due to either financing difficulties or regulatory approvals. On regulatory difficulties, the Team worked extensively on two large, high profile regional transactions that officially closed and were then reversed due to unforeseen reasons beyond the Team’s control: the first of the deals was Etisalat's winning bid for Iran's third mobile license and the second was Palestine Telecom US$1.6 billion merger with Zain Jordan. The potential fee loss on the two transactions (in addition to a third undisclosed one where the Team had generated a final binding offer that was declined by the seller on basis of valuation) was c.EGP 24 million.

However, the Team was successful in closing the year with the largest and only major M&A transaction to take place on the Egyptian market this year, acting as the Sole Buy Side Advisor to Actis on their USD243 million acquisition of 9.3% stake in Commercial International Egypt. The deal cemented EFG Hermes’ position as the leading FIG franchise in both Egypt and the region and showed Investment Banking Team’s ability to maintain its independence and remain as the advisor of choice for most private equity houses.


Realising the lack of volume on the M&A market, during the second half of the year the Team started expanding its activity to products that are outside its traditional scope. EFG Hermes acted as Sole Advisor to Orascom Development Holding on the issuance of the first ever Egyptian Depositary Receipt program for a total size of USD1.8 billion. Debt Advisory is another area that the Team began to tackle. The first transaction, completed during 4Q09, was for the Egyptian Nitrogen Products Company’s USD1.1 billion project finance facility where EFG Hermes acted as the Financial Advisor. The deal was also the largest debt syndication in Egypt in 2009 and involved coordinating work between 19 banking institutions. The Team also utilised the Group’s strong balance sheet by fully underwriting Orascom Telecom’s USD50 million commercial note. During 4Q09 EFG Hermes began acting as the Sole Advisor to Orascom Telecom for the defense of its stake in Mobinil, a stake that is currently worth c.USD4.45 billion.

On the newly introduced facets of the business the Team ended 2009 with several mandates that are in very advanced stages of execution. These include EFG Hermes’ first ever fully underwritten bond issue; where EFG Hermes is the Sole Financial Advisor and Underwriter for the Egyptian Company for Mobile Services (Mobinil) EGP 1.5 billion fixed rate note issuance. EFG Hermes Investment Banking successfully managed this pioneering transaction on the Egyptian debt market and successfully syndicated the entire issue to non banking financial institutions (the first time this has ever been done in the Egyptian market) thereby eliminating the need to take any part of the bond on EFG Hermes’ balance sheet. The transaction, which closed at the end of January 2010, has received a lot of very positive reviews and has potentially generated a lucrative business flow going forward.

On the equity side, the Team is starting to see a glimmer of hope. During 4Q 09 the Team successfully launched the underwritten USD100 million rights issue for the Sixth of October Development and Investment Company (SODIC) (closed in 1Q2010) as well as launched the USD800 million rights issue for Orascom Telecom; a transaction on closing will be the largest rights issue in Egyptian history. EFG Hermes has also been mandated on two new IPO transactions, and if market conditions continue to stabilise would close before June.

The strong and varied pipeline and mandates that the Team currently has make it somewhat optimistic about the coming year. The Team continues to pursue an aggressive pitching strategy that has expanded into new markets including Syria and Libya (from which mandates have already been sourced) in addition to the traditional markets in Egypt and the GCC. Needless to say that having the experienced coverage infrastructure and personnel in place makes the prospects of deal generation, especially from the GCC more focused, structured hence increasing the possibility of securing the mandates.

Revenues booked by the Investment Banking Division in 2009 recorded EGP43 million compared to EGP232 million during 2008, contributing 5.6% to the Group’s consolidated operating revenue.


Private Equity

2009 was a busy year for Private Equity. The Team had to provide extensive support to the core portfolio companies to help them minimise the negative repercussions of the global financial crisis. Furthermore, the fundraising conditions for Private Equity remained difficult in general given the market volatility and the uncertainty that dominated the investors’ outlook throughout the year. As at the end of the year total funds under management with Private Equity reached USD961 million4 down from USD1.15 billion the previous year as several redemptions from Horus II, Horus Agri and SNB took place over the year.

There were three main investments sold over the year (in the real estate, oil & gas and food sectors), all achieving returns in excess of the limited partners’ hurdle IRR. On the investment side, Horus III negotiated two main investments. The first was a 74% stake in Ridgewood Egypt, a medium size water desalination company specializing in providing water and other utilities to the tourism sector. The second investment, in which Horus Agri was also party to, was the acquisition of a 75% of the equity capital of Omnia Investment Group, a leading transporter, producer and processor of live cattle in Egypt. EHPE is currently actively involved in the process of restructuring and expanding OIG’s operations both locally and regionally.

With respect to the existing managed Funds, until yearend 2009 Horus III had drawn down USD460.1 m, representing 80% of committed capital with USD115 million left available for drawdown and has USD295.5 million invested. Horus II exited five investments during 2009 realising capital gains in excess of USD100 million. Accordingly, the Fund had another distribution during the year bringing up the total distributed to the limited partners to USD186.4 million representing c.1.2x the committed capital. Horus I is being wound down with procedures for the sale of the last two investments being finalised. The Fund will be closed and liquidated by 2Q2010.

In April 2009, EFG Hermes Private Equity signed a memorandum of understanding with Caisse des Dépôts (France), Cassa depositi e prestiti (Italy), and Caisse de Dépôt et de Gestion (Morocco) for the launch of the InfraMed Fund, an infrastructure fund set up to invest in the southern Mediterranean region. Subsequently, EIB also joined the sponsors group. EFG Hermes’ commitment to the fund is capped at EUR15 million and in addition to being a Sponsor, EFG Hermes will manage a minimum of 20% of the Fund which will be dedicated to Egypt. EFG Hermes will also establish an Egyptian local fund to co-invest alongside InfraMed in the Egyptian projects; target size of the fund expected to be in excess of USD80 million. The InfraMed initiative is targeting a first closing before the end of June 2010, a date which has now become a vital milestone for the Union of the Mediterranean. The Fund now has in excess of EUR350 million committed and is targeting commitments of EUR1 billion.

Consistent with its regional expansion, EFG-Hermes has also recently announced a Syria Private Equity Fund to capitalise on the process of restructuring and liberalisation this economy is undergoing, This initiative is expected to conclude during 2010.

Total revenue booked by Private Equity reached EGP124 million during 2009 up from EGP105 million during 2008 representing the management fees of existing funds under management and includes EGP23.8 million of success fees booked on the exits during the year.

4 total on which management fees are calculated


Operating Expenses

Table 14: Breakdown of Operating Expenses

(EGP mn) 2009 2008 2009 Vs. 2008

Total Operating Revenue* 772 1,620 -52.35% Total Operating Expenses 709 887 -20.09% Net Operating Profit 63 733 -91.42% Net Operating Margin 8.15% 45.22% Employee Expenses 456 552 -17.39% Number of Employees 990 931 6.34% Employee Expenses/ Total Oper. Revenue 59.06% 34.07% Employee Expenses/ Total Oper. Expenses 64.30% 62.20%

Other Operating Expenses 253 335 -24.54% Other Operating Expenses/ Total Oper. Revenue 32.79% 20.71% Other Operating Expenses/ Total Oper. Expenses 35.70% 37.80%

* fee and commission income Sources: EFG-Hermes audited financial statements and management accounts

EFG Hermes Management was swift in introducing cost cutting measures starting in the latter part of 2008 in order to rein in expenses and ensure that the Investment Bank platform was profitable throughout the entire year, a feat which was accomplished. The main reductions came from the following:

An average of 6% reduction in headcount during the first part of the year that translated into approximately a 10% saving in monthly payroll. Towards the end of 2009, and with the expansion of the branch network headcount actually increased (990 employees in 2009 compared to 931 at the end of 2008) but was predominantly junior hires with low fixed salaries;

The top 200 employees accepted pay cuts in the vicinity of 15 to 55% in the monthly salaries; a reduction that was reversed effective October 2009 as a result of competitive pressures due to the global investments banks returning to the region and headhunters targeting several of the Group’s key players;

Several relocations, back to Cairo, especially of back office staff from the higher cost base in the UAE;

Senior staff within the Brokerage Division forwent their monthly commissions for the first half of the year;

A new expense policy was introduced that minimized travel, marketing, promotion and third party expenses;

All donations were limited to the amounts approved by the shareholders’ general meeting to the EFG Hermes Foundation.

As a result of the above measures being stringently adhered to, fully loaded total operating expenses in 2009 decreased by nearly EGP180 million, a decline of 20.1% over 2008 levels.


Due to the nature of the Group’s core business and given that it hinges on human capital and the ability to hire and retain the very best, employee costs remain the largest component of operating expenses, constituting 64.3% of the total, up from 62.2% a year earlier. Fully loaded employee expenses decreased 17.4% to EGP456 million in 2009 down from EGP552 million in a year earlier. The main saving came as bonuses decreased 41% over the previous year due to the minimal accrual of annual bonuses to all employees and monthly bonuses paid to the Brokerage Team in 2009. It must be noted however that the fixed employee expenses have remained nearly flat at 2008 level for the full year in spite of adding several senior and junior hires to the Team during the year. The other component of employee expenses that increased was the Trust, as the first Management Deal expired at the end of 2008. Accordingly, the level of the Trust expense in 2009 partly reflects the renewal of the deal. It must be noted that although the decline in the share price during 3Q08 had allowed EFG-Hermes to partly build up an inventory of stock for the renewal of the Management Incentive Scheme at a lower average cost than was originally forecast at the beginning of the year, the average cost/share to the Trust is significantly higher than in the original scheme. The full impact of the new Management Incentive Scheme will be reflected in 2010.

With the challenging market conditions that prevailed during 2009, slashing trading volumes, nearly obliterating incentive fees and totally shutting down equity capital markets, fee and commission revenue declined by around 52.4%, fully loaded employee expenses shot up to 59.1% of total operating revenue up from 34.1% the previous year and reached 64.3% of total operating expenses in 2009 up from 62.2% in 2008.

Other operating expenses that include occupancy expenses, office expenses, communication expenses (data and telecommunication), travel and marketing expenses, promotion and advertising expenses and consultant and service fees, decreased over 2008 levels as the severe cost cutting measures were introduced starting 4Q08. Total other operating expenses decreased 25.5% over 2008 to reach EGP253 million, a saving of EGP82 million over the year. It must be noted, however, that the cumulative 2009 expenses include expenses of both the Kuwaiti and Omani subsidiaries that were acquired during 2008, while the 2008 expense levels included their contributions for only a few months.

As the Group’s footprint increased over the past year to include Kuwait, Oman, Lebanon and the branch network in Egypt and the modus operandi was re-geared at decreasing travel levels to a minimum, two constituents of the other operating costs increased over their 2008 levels, namely occupancy and data communication expenses. Occupancy expenses increased 38.1% over 2008 to EGP41.1 million as offices in Kuwait, Oman, Qatar, Lebanon and the branch network in Egypt came online representing 5.3% of total fee and commission revenue and 5.8% of total operating expenses up from 1.8% and 3.4% respectively in 2008. Communication expenses (both data and telecommunication) increased 11.2% over 2008 levels to EGP39.8 million as the Firm continued to ensure smooth connectivity between its increasing physical locations as well as its various disaster recovery sites, in addition to the increased use of audio and video conferencing facilities to replace travel whenever possible. All other expense items witnessed declines both on a quarterly basis and the full year comparative basis. The major absolute cost savings were in the promotional and advertising expenses that decreased by nearly EGP 30 million (a 57.4% decline) from 2008 levels, as the Group downsized all promotional and advertising costs to a minimum. The Group did not sponsor any major conferences, bar its own One-on-One conference and those where it is the sole host/initiator of the conference, reversing the trend of sponsoring major conferences and events in its key markets during 2008. Several cost curbing measures have also been introduced with respect to travel expenses starting at the beginning of the year that have restricted use to particular airlines and hotels with which the Group has corporate rates, as well as limiting entertainment and other expenses


have brought down travel expenses by 45.6% (3.5% of total operating expenses) in 2009 to EGP24.8 million from EGP45.6 million (5.1% of total operating expenses) in 2008.

Since the beginning of the financial crisis EFG Hermes Management promised to do all that was necessary to ensure that the Investment Bank (based on fee and commission income fully loaded with all expenses) remain profitable; a feat that has held true for 2009. As market conditions began only to deteriorate during 3Q08, fee and commission revenue for the full year 2009 declined by 52.4% to EGP772 million down from EGP1.62 billion in 2008 resulting in a net operating profit of EGP63 million in 2009 down from EGP733 million in 2008 (of which EGP218.1 million were incentive fees). EFG Hermes’s net operating margin continued to come under pressure during 2009 declining to 8.2% down from 45.2% in 2008 (36.7% if adjusted for the realised incentive fees). EFG Hermes Management believes that at least EGP40 million of the total operating expenses are related to non-fee and commission business. Accordingly, the more accurate net operating profit and margin for 2009 are EGP103 million and 13.3% respectively. It must be noted however, that remaining profitable at the level of the Investment Bank in dire market conditions and with the coming under pressure to keep the Team intact signifies EFG Hermes’ positioning as the regional leader in the industry as it was able to swiftly change its operating model to encompass changing market conditions while continuing to keep its core Team intact as well as hiring renowned professionals into key positions to be able to take advantage to the embryonic market improvements.

Other Revenues and Expenses

The major components of other revenue remain the consolidated portion of EFG Hermes’ 29.2% ownership stake in Bank Audi Saradar and the net income from treasury operations and balance sheet management.

Bank Audi: Bank Audi continued to solidify its positioning across the region and revenue consolidated at the EFG Hermes level grew 33.1% over 2008 levels to reach EGP436 million and constituting 30.6% of EFG Hermes’ total net revenue for the year up from 15.2% a year earlier.

As mentioned above, EFG Hermes sold its entire stake in Bank Audi in January 2010 at USD91/share for a total deal size of approximately USD913 million entailing an unconsolidated capital gain of US$ 260 million.

Treasury Operations: Treasury operations and cash management continued to be a strong source of revenue throughout the year and has supported the Group’s overall revenue during dire market conditions. During 2009, the net revenue generated by the Treasury Division was EGP195 million5 compared to EGP113 million in 2008 and constituted 13.7% of the Group’s total revenue up from a mere 5.2% in 2008. EFG Hermes remaining close to debt-free and the Treasury Department continued to resort to fixed income operations to counter the declining interest rate environment. It must be noted that the large increase in Treasury operations during 2009 are attributed to capital gains realised on fixed income products including but not limited to Egyptian Eurobonds and the limited corporate bond positions.

5 Includes net interest income (interest and quasi interest earned on the cash balances less interest paid to the banks ) of EGP74.6 mn, net realised & unrealised gains on fixed income products of EGP107 mn and net FX gains of EGP1.2 mn


Please note that during 2008, other revenues included a one-off item for EGP90 million being the revaluation of the Nile City premises.

Other expenses for the year ending December 31, 2009 include the usual depreciation and amortisation amounting to EGP38.7 million. A provision expense for a total of EGP53.5 million is included and covers potential deferred liabilities.

Balance Sheet

EFG Hermes’ balance sheet continued to be strong, liquid and unleveraged. High levels of cash, cash equivalents and other investments (namely T/Bills, bank deposits and investment in money market funds and fixed income products) reaching EGP2.43 billion6 down from EGP3.004 billion at the end of 2008. With the Investment Banking platform being profitable throughout 2009, the Group’s cash balances have been preserved in spite of the continued spending on the new premises at the Smart Village. Cash has been a cornerstone in generating revenues and supporting the Group through the recent downturn in the market and has been instrumental in providing comfort to EFG Hermes’ clients in terms of counterparty risk and stability. Although maintaining large cash balances is comforting, Management realises that with the recent addition of an extra USD0.9 billion to the cash pot, deployment will need to be more aggressive in order to preserve value for the shareholders. Recent opportunistic underwriting transactions including SODIC’s rights issue and Mobinil’s bond issuance are examples where the Group’s cash had earned higher returns while maintaining Management risk criteria until longer term uses have been targeted, carefully investigated and finally approved by the Board of Directors.

Changes on the available for sale investments, from EGP704.7 million as at the end of 2008 up to EGP781.1 million as at the end of 2009, is due mainly to the change in the market valuations that have caused the value of the Group’s stake in SODIC to increase to a total of EGP329 million up from EGP175.7 million as at the end of 2008.

Total receivables and payables resulting from operations resulted in net payables to clients of EGP148.2 million incurred mainly due to the normal course of business concentrated within the Brokerage and Asset Management divisions. This is in comparison to a net payable of EGP344.1 million as at the end 2008. Such balances relate to the daily operations and have since been settled.

EFG Hermes’ investment in Bank Audi, which is equity consolidated, increased from EGP3.99 billion as at the yearend 2008 to EGP4.73 billion as at the end of 2009 as a result of the Bank’s improving performance and the increase in the Group’s stake to 29.16% at the end of 2009 up from 27.45% as at the end of 2008.

The increase in property, plant and equipment since the end of 2008 to EGP491.9 million relates to the continued work on EFG Hermes’ new headquarters in Egypt.

6 EGP803.4 mn of investment in money market funds and bond is reported in the EGP975.1 mn investments at fair value through the profit & loss figure


On the liability side, the Group continues to carry very little bank debt. The main outstanding debt as at the end of 2009 is a total of EGP91.3 million long term debt to DEG and IFC, this is down from EGP129.1 million at the yearend 2008.

During August 2009 the Capital Market Authority finally approved the retirement of 5.15 million shares (as approved by the Firm’s extraordinary general assembly on 7th April 2009) and accordingly as at the end of 2009 the issued and paid-in capital have been decreased to EGP1.914 billion divided into 382,714,545 shares with a par value of EGP5/share. The value of the treasury shares on the balance sheet as at the end of 2008 was EGP239.4 million.

Taxes

The effective tax rate for the year 2009 decreased substantially to 3.2%, down from 9.3% in 2008 as revenues emanating outside Egypt and from non-taxable entities have increased. The effective tax rate remains well below the 20% tax rate set for Egyptian companies given that the Firm continues to administer tax management at the level of the Group as a whole, as well as optimising balance sheet management revenues.

Profitability

EFG Hermes faired well in 2009 in spite of the financial meltdown that started during the latter part of 2008 and spilled into 2009. Albeit at lower levels than the previous years, the Group overall remained quite profitable relative to other regional and international investment banking platforms. Net profit after tax and minority interest in 2009 was EGP551.8 million; a 40.9% decline over the 2008 level reflecting the 33.8% decline in total net revenue and the increasing pressure on EFG Hermes towards the latter part of the year that have dictated that the salary cuts for the top 200 employees be reversed and that bonuses (although on average at levels substantially lower than 2008) are paid. It must be noted however, that during 2008 EGP218.1 million of incentive fees were booked and if these were set aside, the decline in net profit after tax and minority interest would only be 22.9%. Fee and commission revenue constituted 54.1% of total net revenue in 2009 and only 11.4% of the bottom line compared to 75.2% and 78.5% (71.9% if incentive fees are removed) respectively in 2008 due to the collapse in regional capital markets over the first half of the year that made it impossible to close any Investment Banking deals, eradicated any incentive fees, decreased volumes and values traded across all markets and increased overall volatility. As a result, the bulk of the bottom line relates to the Bank Audi investment as well as the Treasury operations, both of which have ensured healthier returns to the Group as a whole, even though revenues booked by the Investment Bank have covered the fully loaded costs for the Group as a whole including the provision for some bonuses for the year.


Recommended Dividend Payout

The Board of Directors is recommending the distribution of EGP3/share based on the following timeline:

EGP1/share is to be distributed after the ordinary general assembly’s ratification of the audited financial statements for the fiscal year 2009;

EGP2/share are to be distributed as a special dividend due after an ordinary general assembly is held to ratify the 1Q2010 figures as the capital gains resulting from the sale of the stake in Bank Audi are recorded in 1Q2010.

Please note that EFG Hermes’ statutes currently do not allow for the distribution of interim dividends. Accordingly, an extraordinary general assembly meeting is to be called for on the same day as the ordinary general assembly called to ratify the yearend 2009 audited financial statements in order to seek shareholders’ approval to change the statutes to allow for interim dividend distribution.

The proposed dividend of EGP1/share corresponds to a total dividend bill of EGP382.7 million; 69.4% of net profit after tax and minority interest and equivalent to the combined cash dividend payout and share buyback and cancelation for 2008.

The proposed special dividend of EGP2/share (a total of EGP765.4 million) that is being recommended in light of the recent sale of EFG Hermes’ stake in Bank Audi corresponds to approximately 16% of the total sales proceeds and 50% of the unconsolidated capital gain on the sale.


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In this earnings release EFG-Hermes may make forward looking statements, including, for example, statements about management’s expectations, strategic objectives, growth opportunities and business prospects. Such forward looking statements by their nature may involve a number of risks, uncertainties and assumptions that could cause actual results or events to differ materially from those expressed or implied by these statements. Examples may include financial market volatility; actions and initiatives taken by current and potential competitors; general economic conditions; and the effect of current, pending and future legislation, regulations and regulatory actions. Furthermore, forward looking statements contained in this document that reference past trends or activities should not be taken as a representation that such trends or activities will continue. EFG-Hermes does not undertake any obligation to update or revise any forward looking statements.

Accordingly, readers are cautioned not to place undue reliance on forward looking statements, which speak only as of the date on which they are made.

This document is provided for informational purposes only. It does not constitute an offer to sell or a solicitation of an offer to buy any securities or interests described within it in any jurisdiction. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs.

EFG-Hermes Holding SAE has its address at 58 El Tahrir Street, Dokki, Giza and has an issued capital of EGP 1,939,320,000.

جم 1,939,320,000: الجيزة رأس المال المصدر -الدقى - لتحريرشارع ا 58المجموعة المالية هيرميس القابضة شرآة مساهمة

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Stock Exchange & Symbol:

Cairo: HRHO.CA London: HRHOq.L Bloomberg: EFGH Reuters pages: EFGS .HRMS .EFGI .HFISMCAP .HFIDOM

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EFG-Hermes (Holding Main Office)

58 Tahrir Street Dokki Egypt 12311 Tel +20 2 333 83 626 Fax +202 333 78 038 efg-hermes.com

Documents

FY2009 Earnings Release 4Mar2010 2 - EFG-Hermes · FY2009 Earnings Release 04 March 2010 ... cutting plan filtered in. The cost savings came from both the employee expenses as well