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EFG Hermes: Management webinar key takeaways

  • 4Q20 to come in strong for the advisory business, leasing, Valu and satisfactory for MF

  • Provisions booked in 9M20 was 3x higher than 2019, so we should see a decline in booked provisions in 2021

  • AIB acquisition is expected to improve margins, group ROE and finalize it by end of 1Q21 or early 2Q21

Al Ahly Pharos Securities Brokerage
21 January 2021

General Highlights

  • Part of the large cash base will be utilized in the AIB acquisition, while the remaining part will be used in merchant banking activities (like bridge loans and ST financing), treasury management and operational needs. However, the company will always maintain large cash base because some transactions require the company to be in a solid financial position to be a participant (for example during ARAMCO IPO).  

  • AIB acquisition is expected to improve margins, group ROE by complimenting other lending businesses. Management aims to finalize it by end of 1Q21 or early 2Q21.

  • Management believes that 2020 has fared well relative to their expectations, where group revenues grew by 6% y/y in 9M20 while bottom line decline (19% y/y) was predominantly driven by hefty booked provisions on the NBFIs side which would allow the company to be in a much better position starting 2021.

  • Provisions booked in 9M20 was 3x higher than 2019 boosted by the adoption of IFRS9 which led them to take higher provisions as well as unstable economic conditions. So far nothing warrants continued high provisioning in 2021. So we should see a decline in booked provisions compared to 2020 high levels, and reversals are not off the table, depending on the economic wellbeing of Egypt.

  • 4Q20 to come in strong for the advisory business, leasing, Valu and satisfactory for MF.

  • 3Q20 revenues were boosted by strong PE contribution while sell side revenues were weak. Valu grew more than 4x, Tanmeyah recovered in 3Q20 while leasing was flat. Treasury and capital markets were boosted in 3Q20 by unrealized gains from the adoption of IFRS9.

Investment Bank Platform Update

  • IB platform will increase focus on growing DCM where there’s a lot of pent-up demand, beside ECM and normal M&A activity.  

  • Brokerage volumes were affected in 9M20 by weaker executions and structured products across MENA markets.

  • IB managed to close 12 transactions in 9M20 despite weak capital market activity with an expected strong 4Q20 mainly on the debt side (TMG and EFG Hermes securitization, debt arrangement for OCI, and Sukuk issuance for CIRA and Marakez). 

  • 2021 has a strong pipeline of M&As and IPOs (subject to market conditions).  However, management has seen healthy flow for DCM business and expects it to be a trigger for the IB next year having seen a lot of pent-up demand for DCM products like arranging debt from banks, sukuks, securitization,  and commercial paper.

  • PE was boosted in 9M20 by Vortex Solar exit, bringing in incentive fees of EGP349 million in 3Q20. Going into 2021, exits are unlikely to happen since the healthcare and education investments are still in the investment phase. Management is currently trying to raise a new permanent fund and working on another Voretx investment and another one in the infrastructure sector in 2021.

  • AM witnessed improvement in 2020 especially local AuM , while regional remained flat. Inflows locally and regionally should improve with improve global conditions and alleviated pandemic concerns. 

NBFIs Update

  • Management had a prudent provisioning strategy for the NBFIs business segment in 2020, with EGP185 million in booked provisions for 9M20 which caused NBFIs bottom line to decline by 74% y/y%.

  • Primary focus on asset quality rather than growth during 9M20 has brought down delayed payments as the PAR 30  (percentage of the gross loan portfolios that is overdue by more than 30 days) declined from 8% to 7%, versus 3% in 2019.

  • Provisions to come in lower in 2021, and reversals are not off the table, subject to market conditions.

  • Leasing and factoring merged in one company called Corpsolutions which offers investment banking clients LT lease and ST factoring financing solutions. The company ranked #6 in the leasing market with a market share of 6% over 9M20. Management expects the business to grow at double-digit in 2021. Clients' repayments have resumed normally after the 6 months moratorium ended, with nothing alarming on asset quality. Closed 3Q20 with 1.4-1.5% of portfolio covered by provisions, higher than what is required by the FRA, thanks to the ECL model under the IFRS9. Margins were stable since cuts are entirely pass through which now makes it more attractive for customers.

  • Microfinance focus in 2021 is to resume growth after the company has successfully controlled the quality of the portfolio by focusing on collection rather than growing. The portfolio has been hovering around the EGP3 billion mark for the most part of the year. PAR30 (percentage of the gross loan portfolios that is overdue by more than 30 days) is now in a decline trend after we’ve seen a spike in May - June to 8%, now it is roughly 7%. However, NPL ratio is in the range of 5% and are 200% covered. As of Sep20, provisions built for Tanmeyah stood at 9.5% of total portfolio. Margins benefited from rate cuts given that it is not pass-through to clients and the portfolio is of a fixed pricing. The pricing environment remains to be stable, with no pressure in terms of pricing coming from market participants. EFG is happy to insure its microfinance portfolio if the cost of insurance proves to be less than the cost of provisioning.

  • Valu has been doing very well in 9M20 with high double-digit growth rates. Management believes the business to improve further in 2021 with many new tie-ups, products and promotions.  Quality of the portfolio has been stable with no changes in 2020. As of 3Q20, NPL ratio recorded 1.5% and 3.5% of portfolio was covered by provisions.  

New Ventures: 1) Factoring is still very small but growth in 2021 to be supported by synergies and cross selling opportunities with EFG leasing. 2) Online payment platform “PayTabs”, 3) the 37.5% stake in Insurance company “Tokio Marine” in 2Q20, and 4) the establishment of a mortgage finance company “Bedaya” in partnership with GB Capital and Talaat Moustafa in 3Q20, altogether will not have a meaningful contribution in FY20. They should be considered as start-ups that feed into the completion of the NBFIs platform capitalizing on synergies and enhancing cross selling capabilities across the group.