Research Department EFG Hermes Initiation of Coverage 3 August 2010

Option value with limited downside risk Buy

 Unique business model with Audi’s divestment strengthening Target Price (EGP) 38.5 excess capital and contributing to 38% of TP and core operations Market Price (EGP) 27.7 driving 48%; pricing the business at a P/E of 9.9x (2012e) Upside 39.0%

 A great option value on improving market conditions with 39% upside; downside limited to 15% if a potential recovery takes longer Listed On EGX Bloomberg HRHO EY  We initiate coverage on EFG Hermes with a Buy rating at a SotP of RIC HRHO.CA EGP38.5/share, offering a 39% upside

An aggressive regional expansion strategy in the GCC and Levant and a Market Cap. (EGP mn) 10,627.9 diversified product offering insure a sustainable revenue stream and position EFG Market Cap. (USD mn) 1,864.5 Hermes as the largest investment bank platform in the region. EFG Hermes booked c12% of total regional executions while managing 9% of regional funds by FY09. Number of Shares (mn) 382.7 A conservatively managed balance sheet, zero leverage, no exposure to toxic Avg. Daily Turnover (EGP mn) 43.2 assets, a well-timed exit from prop trading, and a relatively low regulatory risk Avg. Daily Turnover (USD mn) 7.6 environment saved EFG Hermes from experiencing huge write offs and overstretched balance sheets like other prominent investment . Shareholder Structure Bank Audi divestment offers great financial and strategic flexibility, Financial Group 18.5% strengthening EFG’s excess capital by more than USD1 billion. Re-rating MENA Abu Dhabi Inv. Authority 9.0% banks (trading at a 26% discount to our fair value) would facilitate EFG Hermes’s EFG Hermes Employee Trust 8.0% redeployment strategy, most likely with a positive effect on earnings. A universal Gazelle Incorporation 7.9% banking model hedges against fluctuations from investment banking activities and Sch. Salomon Smith Barney 6.0% Public 50.6% leads to cross-selling opportunities. However, we believe the company would be looking for smaller targets this time around, whereas an acquisition of a target the Price Performance Chart size of Bank Audi would be more complicated and introduces execution risk. 43 EFG (LHS) 8,0 A large option value with limited downside perfectly positioning EFG to CASE (RHS) 38 7,5 capture a capital market recovery even faster than commercial banks given the 33 7,0 shorter cycle for capital market rebounds. Every 1% increase in market performance 28 would translate to an EPS growth of 2%. Even if the company fails to capitalize on 6,5 23 its expansion plans, the risk is limited because of interest on excess cash, 6,0 18 cushioning any operational drop. We calculated a downside risk of only 15% (based 13 5,5 on trough earnings scenario at a P/E of 15x) in the case of a prolonged recovery, Stock Performance (EGP) while on historical peak earnings (P/E of 10x) the upside is 39%. The stock offers 8 5,0 an attractive risk/reward profile despite poor earnings in the next few quarters.

Key Catalysts: With an excess capital position, the company could be an attractive takeover target for a large investment bank keen on accessing a large regional market share. An acquisition announcement would also unlock value given the current attractive valuations. Even in the case of additional dividend distributions, offering high yield, it would still be a win-win scenario.

We initiate coverage with a Buy and SotP of EGP38.5/share, implying a 39% upside. Cash represents a significant 38%, which we believe supported the stock and helped it outperform the EGX YTD by 16%. The investment banking (IB) segment is trading at a significant 55% discount to our FV. We believe the market is Germaine Benyamin factoring in a slower rebound in regional markets and overlooking potential on the IB side. Adjusting for the special dividend distribution, we believe the current level  +971 4 293 5382 represents a good entry point.  [email protected]

KPIs (EGP mn) FY09a FY10f FY11f FY12f FY13f FY14f Fee & Com. Income 772 985 1,291 1,635 2,037 2,415 Janany Vamadeva

Total Income 1,470 2,109 1,900 2,278 2,714 3,138  +971 4 293 5384 Dividend Yield 3.6% 10.8% 3.3% 3.9% 5.2% 7.3% P/E (x) 19.3 13.2 12.2 9.0 6.8 5.5  [email protected] P/B (x) 1.2 1.1 1.1 1.1 0.9 0.8 ROAE 6.6% 8.8% 9.2% 12.3% 14.7% 16.1% * Disclaimer: See page 31 Egypt – Financial Services 1

Financial Statements

EGP mn FY05a FY06a FY07a FY08a FY09a FY10e FY11e FY12e FY13e FY14e Income Statement Fee Income 795.8 898.6 1,719.6 1,620.1 772.0 985.5 1,291.4 1,635.4 2,036.9 2,415.5 Income from Bank Audi - 216.3 287.5 327.6 436.0 - - - - - Interest Income 13.2 72.0 246.3 187.1 118.4 242.6 430.1 455.0 490.4 525.9 Gains on Prop. Inv. - - 10.1 92.2 0.5 0.5 0.6 0.8 0.9 1.1 Forex income 0.9 (10.9) (33.8) (9.9) 1.2 1.3 1.3 1.4 1.5 1.5 Investment Income 14.3 36.3 341.2 (69.5) 112.6 108.2 141.3 148.0 146.5 153.8 Dividend Income 5.6 1.8 18.6 22.9 12.2 13.6 16.2 17.4 17.3 18.1 Other income 1.6 1.5 1.6 86.5 17.3 757.5 19.0 20.0 21.0 22.0 Non-fee-based Inc. 35.5 317.0 871.6 636.9 698.2 1,123.7 608.6 642.5 677.5 722.5 Total Income 831.2 1,215.6 2,591.2 2,257.1 1,470.2 2,109.2 1,900.1 2,277.9 2,714.4 3,137.9 Finance Expenses 23.0 45.7 38.1 64.5 43.8 41.1 36.5 29.0 10.7 - Gen. Admin. Costs 271.7 314.7 799.1 887.5 709.2 836.8 861.9 905.0 950.3 997.8 Depreciation 9.9 14.1 18.4 25.6 34.2 39.9 41.1 42.4 43.6 45.0 Provisions 27.4 14.8 109.4 42.3 53.5 38.2 45.8 55.0 66.0 79.1 Other Costs 24.9 2.5 12.2 142.6 12.0 53.9 10.8 11.0 11.2 11.4 Total Expenses 356.9 391.8 977.2 1,162.5 852.6 1,009.9 996.2 1,042.3 1,081.8 1,133.3 Operating Income 474.3 823.8 1,613.9 1,094.5 617.7 1,099.3 903.9 1,235.6 1,632.6 2,004.6 Taxes 95.0 103.5 210.8 101.419.6 285.8 27.1 37.1 49.0 60.1 Net Profit Before MI 379.4 720.3 1,403.1 993.1 598.1 813.5 876.8 1,198.5 1,583.6 1,944.5 Minority Interest 29.3 18.3 111.9 59.6 46.2 8.1 8.8 12.0 15.8 19.4 Attributable Profit 350.1 701.9 1,291.2 933.5 551.8 805.4 868.0 1,186.5 1,567.8 1,925.0

Balance Sheet Assets Cash and Cash Equiv. 976.6 3,805.1 3,445.6 2,410.6 1,611.7 6,525.3 6,604.2 7,338.6 7,751.4 8,185.1 Investments 142.6 140.4 2,808.1 1,395.3 1,756.2 1,851.4 2,187.0 2,041.2 2,143.2 2,250.4 Associates 15.3 3,358.1 3,748.9 4,030.0 4,738.0 17.4 60.7 19.1 20.1 21.1 Prop. Inv., Proj. Const. 140.0 105.2 88.2 178.2 178.2 187.1 196.4 206.3 216.6 227.4 Intangible Assets 69.4 64.7 63.5 699.5 701.0 701.0 701.0 701.0 701.0 701.0 Other Assets 1,036.8 1,732.4 2,823.6 1,329.2 1,543.2 1,782.4 1,878.6 1,913.6 2,009.3 2,109.7 Net Fixed Assets 29.0 51.9 160.9 376.1 491.9 506.7 521.9 537.5 553.6 570.2 Total Assets 2,409.5 9,257.7 13,138.8 10,418.7 11,020.3 11,571.3 12,149.9 12,757.4 13,395.2 14,065.0

Liabilities Accounts Rec. 1,166.6 1,346.9 2,627.0 957.9 779.9 545.9 1,243.6 867.9 201.6 75.2 Creditors and Other Bal. 244.3 261.9 633.5 507.0 318.9 478.3 526.1 578.7 636.6 416.7 Borrowings 59.5 227.3 189.9 128.8 91.3 91.3 91.3 53.6 - - Other liabilities 0.9 0.9 82.3 486.0 697.2 662.2 728.5 801.3 881.4 440.7 Provisions 54.0 67.2 169.2 153.2 190.9 229.0 274.8 329.8 395.7 474.9 Total Liabilities 1,525.3 1,904.2 3,702.0 2,232.9 2,078.2 2,006.8 2,864.3 2,631.3 2,115.3 1,407.5 Shareholder Equity 884.2 7,353.5 9,436.8 8,185.7 8,942.1 9,564.5 9,285.5 10,126.1 11,279.9 12,657.5

Financial Ratios Return on Avg. Assets 21.1% 12.0% 11.5% 7.9% 5.1% 7.1% 7.3% 9.5% 12.0% 14.0% Return on Avg. Equity 52.2% 17.2% 15.5% 10.8% 6.6% 8.8% 9.2% 12.3% 14.7% 16.1% Net Operating Margin 60.4% 69.0% 53.5% 45.2% 8.1% 15.1% 33.3% 44.7% 53.3% 58.7% Net Profit Margin 45.4% 59.0% 54.1% 43.2% 41.2% 40.0% 48.1% 54.5% 60.2% 63.9% EPS 0.9 1.8 3.4 2.41.4 2.1 2.3 3.1 4.1 5.0 DPS - 0.75 1.00 0.501.00 3.00 0.91 1.09 1.43 2.01

Fee Income Breakdown Brokerage 40.1% 41.2% 33.7% 48.8%57.6% 47.9% 42.9% 43.8% 42.4% 38.8% Asset Management 28.9% 7.7% 29.7% 30.4% 20.7% 16.9% 19.1% 18.4% 17.9% 18.2% Investment Banking 5.6% 11.1% 10.3% 6.5% 16.1% 13.8% 14.2% 15.2% 17.0% 18.0% Private Equity 25.3% 39.2% 26.2% 14.3% 5.6% 21.3% 23.8% 22.6% 22.7% 24.9%

Egypt Financial Services 2

Investment Case

 A unique, fully diversified investment banking business model distinguishes EFG Hermes from peer players

 Excess cash offers a buffer in turbulent times while supporting organic and inorganic growth opportunities

 Substantial long-term value with 39% upside potential at historical peak earnings while limited 15% downside risk on FY10 (trough) earnings

Unique business platform setting EFG Hermes apart

At a time when investors are skeptical on financial services firms and numerous players are going bust, struggling with their funding resources, becoming undercapitalized with overstretched balance sheets, and suffering from substantial write-downs on toxic assets with some still in need of additional provisions, we believe EFG Hermes’s unique profile has distinguished it among both regional and global players on key strengths:

(i) Regional diversification in both GCC and Levant has cushioned it from market falls as the Levant and North African markets provide a hedge against oil-driven market performances. The company also has a diversified, well-established client base with retail expertise catering to the GCC while other markets remain a play on the institutional front. (ii) A first-mover advantage and strong expertise in regional markets safeguarded EFG Hermes against competition from foreign players that joined later (particularly on the retail front), positioning it as the top player in regional markets. (iii) The company has a large product diversification, providing brokerage, asset management, private equity, and investment banking services. This creates cross-selling opportunities as the company continuously explores new avenues like debt capital markets and potential merchant banking activities. (iv) A strong cash position (cUSD1 billion, 57% of assets) without significant challenges of the liquidity squeeze that other banks may face given the enhanced liquidity requirements proposed by the Basel Committee. (v) Very low gearing (leverage ratio of 1.2x), which removes the need to deleverage unlike most investment banks that are still well over 20x leveraged. (vi) Excessive cash balance provides a sustainable source of interest income (25% of total income on average) and an immediate source of funding for attractive acquisition options. (vii) We do not expect tougher regulations and higher taxes on financial service providers like in the UK, US, and some European countries, which provides higher earnings visibility for the region. (viii) A conservative balance sheet management strategy with no investments in toxic assets saves the company from huge impairment charges seen elsewhere. The company has also exited prop trading in 2008. (ix) Chart 1: EFG Hermes—a prominent regional player Chart 1: EFG Hermes—a prominent regional player

EFG Hermes’s Business Platform

Investment Banking Operations Cash Holdings

Brokerage Cash balance  Market leader in regional markets  Extremely liquid, zero leverage  Retail penetration offers potential BS, providing immediate liquidity  Geographical diversification to Immediate source of funding for  Cash balance yields a sustainable new markets i.e. Libya organic growth and acquisitions source of interest income  Better margins  A significant part of the share Asset Management price is supported by cash and  Significant (9%) market share of reflected in the stock regional funds outperforming regional markets  New product launch; selective merchant banking  Regional expansion: Huge Cash deployed on potential from KSA commercial bank  Management fee offers relatively sustainable revenue stream Private Equity  Diversifies the business platform Offers cross-selling opportunities for EFG products Universal Banking Model and not directly driven by market  Banks currently offer attractive performance to some extent valuations  Under-penetrated region  Potential value accretive  Corporate restructuring provides acquisition acts as a positive more PE opportunities sentiment for the stock Investment Banking  Commercial banking provides  Debt capital market offers better sustainable revenue stream prospects  Consolidation phase post the financial crisis likely to increase investment banking activities (mainly M&A)

Egypt Financial Services 3

Chart 2

Brokerage: The biggest contributor to revenue EFG’s estimated stake in regional activity (FY09E)

900 12% 800 10% 700 Investment banking 600 8% 27% 500 Brokerage-Egypt 6% 31% Brokerage- 400 Regional 300 4% Private 14% 200 equity 2% 14% 100 Asset Asset 0 0% Management- Management- Regional Egypt Brokerage Total IBD AM PE 8% 6% Total Region revenue (USD Bil) EFG's stake of regional activities Source: EFG Hermes, HC Research

Aggressive regional expansion strategy

Since the market boom in 2004, management embarked on an aggressive expansion plan, adding ten new markets to date ( being the latest), effectively increasing total executions by ten times over the span of five years. These new additions and market share gains have compensated for drops in trading activity across the board.

 Strong expertise in Egypt (oldest regional market) provided a platform for going regional with centralized operations based in Egypt helping cost savings. Egypt remains a key market, delivering 52% of fee income.  GCC markets were the first hot targets on abundant petrodollar liquidity. The company set up ground operations in the UAE, , , and (mostly through local partnerships), and trading through third parties in markets where it has no physical presence catering to institutional clients.  Expanding into the Levant and (high growth economies) hedges against volatility in oil-driven markets.  Strong franchise helped achieve executions worth a hefty USD12.5 billion in 1Q10, an impressive 12% market share of total regional executions and an estimated 13% of total regional brokerage revenue.  The company is capitalizing on a retail-driven region (c75% of total executions), with an aggressive plan to further penetrate the segment, which currently books 52% of EFG Hermes’s trading activity versus a minimal contribution a couple of years back. Further enhancing its online trading platform and extending selective margin trading should secure additional retail exposure.

Table 1: Our Take on EFG Hermes’s Aggressive Regional Expansion Strategy

% of Brokerage Brokerage Mkt. Targeted Country Rationale Drawbacks Rev. 2009 Share 2009 Client Retail Central location, home to most of the Local competition capping market share Egypt 35% 44% and headcount. High margins and lucrative gains, political instability. Inst. commissions. High commissions, retail driven, decent Kuwait 10% 30% Retail Changing regulatory environment. margins. Highly fragmented market. Can easily Prolonged Dubai World negotiations UAE 8% 12% Retail increase market share with the closure of overhang on the market. Low margins. various small players. No taxes. No physical presence. Splitting commissions. Banks are now allowed to * <6% 10% Inst. Fastest growing economy in the region. carry brokerage activities, which would pressure commissions. Huge potential for AM with KSA home to Commercial banks dominate brokerage Inst., 48% of regional FUM. ETF was recently KSA 2% 1% while commissions are the lowest. Low HNWI launched in KSA, which might increase margins. foreign interest in the market. Inst, Oman 2% 18% Few players, high commissions. Small market. HNWI Hedge against oil-correlated markets. Jordan <6% 2% Inst. Highly fragmented market. Potential for increasing market share. Government efforts to liberalize the Market still at an infancy stage. New Syria * - Inst. economy offer potential for M&As while regulations might be around the corner. few listed stocks offer IPO potential. *Markets with no physical presence

Source: Company reports, HC Brokerage

Egypt Financial Services 4

Strong earnings outlook post 2010 as market recovery trickles down to all investment banking activities and supported by cash

Capital market cycles are usually the fastest to recover, offering higher investment potential versus sluggish rates on deposits and longer real estate cycles for prices to adjust. As such, we believe EFG Hermes is perfectly positioned to capture recovery across regional markets.

 Earnings are expected to grow at a CAGR of 28% versus a CAGR of 19% for other financials under our coverage. This is supported by new market additions and further retail penetration that would also expand margins. Treasury operations offer a buffer in turbulent times and interest income further supports earnings.  A pickup is anticipated by 4Q10 with 2Q10e earnings expected to come under pressure on slower market activity while summer and Ramadan are likely to hinder a rebound in 3Q10.  Brokerage will be the first to rebound, growing at a 16% CAGR, followed by a trickle down to other lines of business.  Asset management (AM) follows collecting performance fees, capturing any upsides in the market in the absence of a high watermark and growing at a CAGR of 22% to 18% of revenue in 2012.  The company has a strong investment banking outlook with lucrative opportunities on debt underwriting given corporate restructuring and capital-raising in the debt markets growing at a CAGR of 69% to 25% of revenue in 2012 from 6% in 2009.

Chart 3: Brokerage will remain the key revenue generator while market rebound should increase share of the other segments

Revenue contribution of EFG Hermes’s business segments Interest income to total income

3,000 Fee income/Total income% Fee income 600 23% 25% 2,500 (EGPmn) 17% 436 20% 500 18% 2,000 20% 347 177 601 1,500 105 248 400 232 462 451 15% 183 370 440 12% 492 365 1,000 308 300 EGP mn 136 103 511 301 10% 41 124 210 8% 8% 364 43 247 10% 186 160 167 500 939 200 6% 212 72 791 717 863 580 472 553 295 389 444 0 5% 100 2% 2005 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e Brokerage Asset management IBD Private Equity 0 0% 2005 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e

Source: Company reports, HC Research

Earnings resilience even under a prolonged recovery scenario means EFG Hermes is still well positioned to weather the storm

Given that EFG Hermes’s business is highly sensitive to market swings, we visited a number of scenarios assuming both a best-case scenario where a market rebound would be stronger and sooner than expected and a worst-case scenario where recovery is more prolonged with lower activity in 2010. For our base case scenario, we expect a full earnings recovery to pre-crisis levels by 2013, with brokerage being the first to reflect a rebound followed by performance fees for asset management. As brokerage is the main revenue generator, we tested earning resilience for various scenarios including a +/-10% change in executions across the board, a +/-100 bps change in regional market share, and a +/-2 bps change in commissions for FY10. We believe EFG Hermes’s cash- holding that earns risk free rates has provided a cushion against market volatility, reflecting earnings’ resilience to market swings.

Table 2: EFG Hermes’s sensitivity to market volatility; cushioned by cash holdings

Variable on aggregate Assumptions FY10 Total Revenue % to base Net Income % to base case Margins % level for the region (EGP bn) (EGP mn) case (EGP mn) Best Case Scenario 10% higher executions 391.1 2157.0 2.3% 840.4 4.3% 19.0% 100 bps higher market share 13.0% 2122.5 0.6% 814.8 1.2% 16.0% 2 bps higher commissions 15.3 2180.2 3.4% 857.4 6.5% 21.0% Base case Scenario Current execution levels 355.53 2109.2 805.4 15.1% Current Market Share 12.0% Current commissions 13.3 Worst Case Scenario 10% lower executions 319.9 2062.1 -2.2% 771.0 -4.3% 10.9% 100 bps lower market share 11.0% 2069.5 -1.8% 776.6 -3.6% 11.6% 2 bps lower commissions 11.3 2038.7 -3.3% 753.0 -6.5% 8.5%

Source: HC Research

Egypt Financial Services 5

Great option value in an upward cycle, while a limited downside in case of a prolonged slowdown

EFG looks attractive, trading at a peak earnings P/E (FY07) of 4.6x compared to 6.6x for global peers, reflecting a discount of 30% to its implied P/E. We calculate a valuation of EGP38.7 based on historical peak earnings at a P/E of 10x for the business, which gives a huge option value when markets start to rebound, with a 39% upside potential. We also calculate a blue-sky valuation of EGP43.0 on expected peak earnings at a P/E (FY14F) of 10x, reflecting a huge upside of 55%. Even in the case of a prolonged recovery with no upside potential for earnings from its current level, the downside will only be 15% based on a 2010 a P/E of 15x.

Table 3: Investment banking division on multiples

2007 2008 2009 2010 2011 2012 At Current Market Price P/E 4.6 5.2 75.7 29.8 7.9 4.6 P/BV 0.9 1.4 1.1 1.0 1.0 0.9 At our Target Price P/E 20.7 11.1 162.4 63.9 16.9 9.9 P/BV 4.0 3.0 2.3 2.2 2.2 1.8 Value Component Valuing IB at Trough Earnings (P/E 15x) Valuing IB at Peak Earnings (P/E 10x) Inv. Banking Platform 4.3 18.6 Net Cash and Cash Equivalents 14.7 14.7 SODIC 1.1 1.8 Other Investments 3.6 3.6 SotP 23.7 38.7 Potential/(Downside) (MP: EGP27.8) (14.7%) 39.4%

Source: HC Research

While the downside is limited, we believe the upside potential is boundless in case markets perform better than expected. We studied the implication of market movement on 2011 fee income with a 10% higher-than-expected market performance, increasing revenue by at least 14%, while earnings would be 20% higher.

Table 4: EFG Hermes’s sensitivity to market volatility; huge upside in case of a faster recovery

EGP mn Base Case Markets 10% Higher than Expected Deviation to Base Case Market Movement Implication Brokerage 553.4 607.6 10% 1:1 AM 247.2 310.0 25% 1:2.5 IB 308.0 364.0 18% 1:2 PE 182.9 190.8 4% 1:0.4 Total Revenue 1,291.5 1472.4 14% 1:1.5 NI 868 1041.4 20% 1:2

Source: HC Research

Egypt Financial Services 6

Valuation and Risks

 Initiate coverage on EFG Hermes with a Buy rating on SotP of EGP38.5/share (39% upside)

 Investment banking platform is trading at a P/E of 4.6x (FY12E) compared to a P/E of 9.6x for the industry

 Cash and cash equivalents represent 38% of EFG Hermes’s value, offering a buffer in the downturn and supporting the stock

We initiate coverage on EFG Hermes with a Buy recommendation based on a SotP of EGP38.5/share, offering a 39% upside potential. We value the investment banking operations on a standalone basis, stripping out cash and other investments, and valuing only core operations with the associated costs and the related equity portion. For investment banking, we used a residual income model to arrive at our TP of EGP18.36/share, with our cost of equity at 14.0% (risk-free rate of 8.25% and a risk premium of 5.5%) and our long-term growth rate at 3%. At our target price we value the operations at a P/E of 9.9x for FY12, which is in line with industry averages of 9.6x. As such, core investment banking operations represent 48% of EFG Hermes’s value.

Table 5: Workings of the residual income valuation for IB operations

EGP million FY10f FY11f FY12f FY13f FY14f Terminal Year Net Income 110.0 416.6 708.5 1,054.0 1,375.2 1,411.7 Cost of Equity 435.8 451.2 456.0 531.8 644.7 760.2 Excess Equity Return (325.8) (34.6) 252.5 522.2 730.5 651.6 TV of Excess Equity Return - - 5,923.4 PV (308.5) (28.7) 184.0 333.8 409.5 3,320.8 ROE 3.4% 12.8% 18.7% 22.9% 25.3% 25.0% Equity Invested 3,112.8 PV of Equity Excess Return 590.1 PV of TV 3,320.8 Value of Equity 7,023.7 No. of Shares 382,714,545 Value/Share 18.36

Source: HC Research

Cash and other investments supporting the stock against market turbulence

With no targets yet announced for the deployment of cash proceeds from the Bank Audi deal, we added net cash and cash equivalents at BV to our valuation, which adds a significant EGP14.69/share to our SotP valuation. We believe this supports the stock even under a worst-case scenario where a market recovery is not materializing. Although management is likely to opt for another cash distribution to shareholders, we still favor a universal banking model where commercial banking activity would provide a sustainable source of income, protect against volatility from capital markets, and give EFG Hermes cross-selling opportunities for its products. However, this is provided that the acquisition takes place in a timely manner to capitalize on the current low valuations across the board and that it be value accretive for EFG Hermes.

We also valued EFG Hermes’s 15.5% stake in SODIC using our real estate team’s TP of EGP125/share arrived at through DCF and residual land methods. To be conservative, the SODIC TP does not include future projects in the DCF, instead we apply a 50% discount to the land bank. Considering the smaller size of SODIC’s land bank and hence potentially faster value generation, the target price implies a lower 3% discount to its 2010e NAV of EGP129/share. Accordingly, SODIC is adding EGP1.8/share to EFG Hermes’s valuation. For other investments, we valued EFG Hermes’s holdings at BV, adding EGP3.6/share.

Chart 4: Valuation: Cash and investments together act as a cushion against investment banking operations volatility

Cash and investments booking 52% of value EFG Hermes’s SotP valuation

Other investments % of EFG 9% Component Methodology TP (EGP) Sodic Hermes value 5% EFG' Investment Inv. Banking Platform DCF 18.35 48% banking Net Cash and Cash Eq. BV 14.69 38% plateform SODIC DCF and Residual Land 1.80 5% 48% Net cash and Other Investments BV 3.60 9% cash equivilants SotP 38.45 100% 38%

Source: HC Research

Egypt Financial Services 7

Markets significantly discounting investment banking value

We believe the market is largely discounting investment banking operations (market-related), with the activity trading at EGP8.6/share, a 55% discount to our DCF investment banking TP. We admit that the current uncertainty and reduced risk appetite by investors remains an overhang on the stock. However, we feel the market is ignoring the benefit of regional diversification, which stands out when it comes to EFG Hermes. The company compares favorably with almost all investment banks in the region with its diversified geographical and product portfolio. New market additions (recently-announced Syria and Jordan) are likely to lift EFG Hermes’s earnings. In the MENA region, countries outside the GCC have fared better in investment banking and IPO activities YTD. As such, venturing into the Levant supported by a cash-rich balance sheet provides the broker with better investment banking operations. We believe the market is not taking this aspect into valuations.

Chart 5:

The market is significantly discounting EFG Hermes’s investment banking value

45 EGP

40 9.8 38.5 HC Valuation 35 Market Valuation 3.6 0.6 30 1.2 25 14.7

20

15 8.6 10

5

0 Market related Cash Sodic Other Excess value of Better market HC TP operations investments Sodic at HC TP expectations by HC

Source: HC Research

Chart 6: EFG Hermes has been outperforming the EGX YTD, but moving in tandem with banking stocks

EFG Hermes moving in tandem with banking stocks EFG Hermes outperforming EGX YTD

155 120 145 115 135 110 125

115 105

105 100

95 95 85 90 75 85 65

55 80 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Egypt Kuwait MSIGCCL EFG HRHO AUDI DFIBANK Index ADBF Index SASEBNK Index SECTBANK Index COMI

Source: Bloomberg, DataStream, HC Research

Egypt Financial Services 8

FY10e PB vs. ROE FY10e PE vs. EPS growth FY10e/11e 30 45% 40% 25 COMI DFM 35% 20 Motilal 30% AUB JPM 15 GS AUB Hong Yuan Riyad OSK 25% WOORI Riyad Duff & Phelps 10 Evolution Jefferies GS Daewoo 20% COMI Evolution OSK JPMEFG Guoyuan Jefferies 5 15% Guoyuan ROE(%) Hong Yuan 0 Shuaa 10% NBK EPS growth % (FY11e/FY10e) growth EPS EFG -5 0.00 1.00 2.00 3.00 4.00 5% Woori 0% -10 Global Daewoo 0 5 10 15 20 -15 FY10e PE PB (x)

Chart 7: Stock market performance YTD

25%

20%

15%

10%

5%

0%

-5%

-10%

Source: Bloomberg, DataStream, HC Research

Egypt Financial Services 9

Table 6: EFG Hermes versus other global players

Mkt Cap FY10e PE FY11e PE FY12e PE PB Ratio (x) ROE (%) (USD mn) Ratio (x) Ratio (x) Ratio (x) Australia Macquarie 12,201 12.3 8.4 7.4 1.2 10.6 Brazil Bradespar 7,147 13.0 n/a n/a 2.5 19.1 Canada Dundeewealth Inc 1864 19.8 17.5 n/a 1.8 4.9 Canaccord Financial Inc 716 12.4 9.0 8.2 1.3 9.9 China Northeast Securities 2252 16.3 n/a n/a 4.7 34.4 Sinolink Securities 1986 26.3 26.8 23.5 4.9 21.7 Egypt Pioneers Holding 298 21.7 n/a n/a 0.6 4.1 France Boursorama 873 9.3 13.0 12.6 1.1 8.1 Viel Et Compagnie 246 4.7 n/a n/a 0.9 17.2 Germany 39,954 5.7 6.3 6.1 0.8 14.8 Dab Bank AG 388 12.5 11.1 9.3 1.6 13.5 Hong Kong Get Nice Holdings Ltd 226 12.4 n/a n/a 0.5 -0.7 India Jm Financial Ltd 584 17.9 n/a n/a 1.5 8.4 Indiabulls Securities Ltd 138 10.4 n/a n/a 2.8 25.7 Indonesia Reliance Securities Tbk 41 7.1 n/a n/a 1.8 27.4 Nusantara Inti Corp 1 2.8 n/a n/a 0.1 1.7 Italy 7,286 17.0 9.2 7.9 1.0 n/a Japan Nomura 19,943 121.5 n/a n/a 0.9 n/a Matsui Securities 1601 17.4 n/a n/a 1.8 10.7 Kabu.com Securities 918 0.3 17.4 n/a 0.0 8.9 JS Global Capital Ltd 23 9.7 n/a n/a 0.6 6.3 Switzerland 50,075 8.6 7.5 7.5 1.4 19.3 UBS 57439 12.83 8.25 8.3 0.75 22.39 Thailand Kim Eng Securities 199 8.0 12.7 n/a 1.6 16.4 SICCO Securities Pcl 18 16.3 n/a n/a 0.7 2.4 Barclays 56914 10.1 7.6 6.9 1.34 n/a 6,121 11.3 8.2 7.0 1.2 11.5 Arden Partners Plc 34 23.5 n/a n/a 2.1 11.4 Evolution Group 311 12.0 10.1 7.6 1.5 5.2 Numis Securities 223 n/a n/a n/a 1.3 -7.5 Cenkos Securities 134 19.3 8.1 n/a 2.9 14.3 Charles Stanley 138 13.0 7.5 6.4 1.2 9.4 Collins Stewart 280 13.2 8.3 7.7 0.7 5.4 USA Greenhill & Co Inc 1856 32.1 19.2 15.7 8.3 33.1 79,378 9.9 7.9 n/a 1.2 21.8 Bank of America 137,852 14.4 8.5 n/a 0.6 n/a 37,565 14.0 8.0 n/a 0.9 n/a JP Morgan 158,471 11.7 8.5 7.3 0.9 6.4 Charles Schwab 18,165 25.0 16.1 11.2 3.2 17.2 3,925 17.3 11.9 9.9 7.2 n/a Options Xpress Holdings 866 16.5 13.5 10.8 2.7 21.0 Average (Mkt weighted) 17.4 12.1 9.6 1.8 EFG Hermes 2,045 13.1 12.1 8.9 1.1 8.8

Source: Bloomberg

Egypt Financial Services 10

Key Catalysts

Announcement of an acquisition target

With sufficient cash available, EFG Hermes will continue with its small add-ons like its latest acquisition of a Jordanian brokerage firm. Given the current attractive valuation for MENA banks, EFG Hermes would be able to unlock value by acquiring an undervalued bank, which we believe would be EPS accretive.

A faster rebound in capital markets

Given its strong regional and product diversification, EFG Hermes is well positioned to capture a faster–than-expected rebound in capital markets with a huge upside potential. Every 1% upward movement in the markets would translate to a 2% increase in EPS. However, in a downward cycle, EFG Hermes is highly unlikely to outperform.

A potential takeover target

With huge excess capital and a considerable market share in regional markets, EFG Hermes would be a hot pick for bigger investment banks with regional expansion plans. The company is also trading at attractive levels with no takeover premium factored in. A large bulge bracket firm would be able to capitalize on their size, offering a huge scope particularly in investment banking. The stock has historically rallied on such rumors, including one about a potential merger with CIB—Egypt’s biggest private bank. We ruled this out due to a conflict of interest given that CIB has its own investment banking arm: CI Capital.

Egypt Financial Services 11

Key Risks

Prolonged slowdown in regional markets

With EFG Hermes being mainly a play on regional markets, a prolonged slowdown in local markets would severely impact operations. Even though interest income makes up about 25% of revenue, an average 60% of revenue is fee-based from investment banking activities, making it highly vulnerable to capital market performance. As Egypt remains its main revenue generator, an underperformance in the Egyptian market would significantly impact operations. However, we believe the downside is limited to 15% on a 2010 P/E of 15x, which we believe is the toughest for EFG Hermes (a worst-case scenario). Key risks Competition within local markets

As the company remains a market leader in most of its markets, we believe this risk is confined to some extent. We feel commissions could come under pressure for markets like Egypt where a consolidation of some entities is likely given the large number of brokers. In Qatar, the central bank’s decision to allow banks to reenter brokerage operations is likely to pressure commissions.

Execution risk

With no target identified yet and capital markets showing a glimpse of a rebound, management could miss attractive opportunities at lower valuations with cash earning low money market rates. Part of the cash can be deployed in organic growth, expanding the investment banking platform. However, we believe the universal banking model is still better for EFG Hermes, offering it a sustainable source of income.

Dubai Group selling further stake

Currently, Dubai Group is the biggest single shareholder of EFG Hermes with a stake of 18.5%. We believe the group’s immediate need of cash may lead it to offload part of its holding in investments including EFG Hermes. This would likely have a negative effect on the stock. As illustrated in the graph below, the market reacted negatively to DFG’s stake sale last year. If the group opts for divestment, it would be a distressed sale to get immediate liquidity rather than waiting for the right time to divest, which would pressure the stock. However, we believe once the overhang is lifted it would be a great entry point for the stock and could act as a positive catalyst.

Chart 8: Dubai Group selling a further stake would pressure EFG Hermes

EFG Hermes stock price sensitive to change in structure

38 Share Price (EGP)

Share price dropped 7% to news that Dubai 36 Group is selling part of its stake in EFG

34

32

30

28

26

24 0-Jan-00 17-Sep-09 8-Oct-09 26-Oct-09 11-Nov-09 1-Dec-09 17-Dec-09 4-Jan-10 21-Jan-10 9-Feb-10 25-Feb-10 15-Mar-10 31-Mar-10 20-Apr-10 9-May-10 25-May-10 10-Jun-10

Source: Bloomberg, HC Research

Egypt Financial Services 12

Regional Capital Market Outlook

 We expect regional markets to recover soon on strong surpluses and government support with 2010 being a transitional year

 Lucrative regional investment banking fee pot with Saudi Arabia booking the lion’s share

 MENA market outlook: Positive on GCC (48% of EFG Hermes’s revenue), Neutral on Egypt (52% of revenue)

Regional markets hammered on global turmoil

Fears of a double dip recession, a Eurozone crisis, and lower oil prices have all cast a shadow on capital markets and pressured risk appetite across the globe. All GCC economies were hammered despite the strong macro picture, less leverage from both the corporate and banking sides, strong government support with huge surpluses, strong domestic demand, and infrastructure spending. Dubai has been the worst performer, suffering persistent underperformance on Dubai World’s restructuring plans, which are still an overhang on the market even though their outcome was better than expected. The last couple of weeks have proved that GCC markets managed to break the link to the global equity market performance. However, some markets like Egypt were adversely affected by the Euro crisis as the Eurozone is its biggest trading partner and tourist exporter.

Chart 9: Regional Markets have shown mixed correlation to other EMEA

Dubai is the worst hit among regional markets; significantly underperforming the MSCI EMEA

210 Index Level

190

170

150

130

110

90

70

50

30

MSCI EMEA Egypt DFMGI ADX Saudi Arabia Qatar Kuwait Oman Bahrain Morocco Jordan

GCC markets moving in tandem with oil prices ...... and in line with the real estate index

270 400 MSIGCCL DFM RE Index 220 ADX RE Index 300 TADAWUL RE Index 170 KUWAIT RE Index 200 120

100 70

20 0

MSIGCCL DXY Currency USCRWTIC Index Source: Bloomberg, HC Research

Egypt Financial Services 13

GCC remains a lucrative region for generating investment banking revenue

Despite the market downturn during the year, the region still managed to deliver a decent flow of investment banking fees of at least USD1.8 billion based on our estimates from brokerage, investment banking, and asset management. Brokerage booked the bulk of the figure, delivering an estimated USD765 million in fees in FY09. However, this was 39% lower than in FY08—in line with expectations. Saudi Arabia has been by far the most active regional market, with executions worth USD337 billion and the highest turnover ratio of 106%. It also booked most of the regional brokerage fee pot at c47% according to our estimates, which makes it a targeted market for all brokerage firms. However, the Saudi market remains tough, dominated mainly by commercial banks.

Chart 10: Regional markets: Lucrative investment banking revenue generators with Saudi Arabia on top

Regional turnover FY09 (in USD bn) Market capitalization to GDP (FY09)

467% 120% 1,400 Mkt. cap (USD Mkt. cap to 500% bn) GDP % 450% 300 1,200 T.O 100% 400% 250 Turnover ratio 1,000 350% 80% 234% 300% 200 800 215% 250% 60% 600 161% 150 132% 145% 143% 200% 40% 400 82% 92% 94% 150% 100 78% 54% 100% 200 50 20% 50% 0 0% - 0%

Estimated regional brokerage fee pot FY09 Estimated total regional investment banking revenue by activity

Brokerage tops regional IB fee pot (FY09) Oman 3% PE Kuwait 17% Qatar 11% 7% KSA Brokerage AM 47% 41% 15% UAE 14%

Total IBD Egypt 27% 18%

Source: Bloomberg, HC Research

Chart 11: Regional valuations look attractive at current levels compared to elsewhere

PE PB

37.8 40.0 4.0 3.4 35.0 3.5 3.2 29.3 2.9 30.0 2.7 3.0 2.5 25.0 2.2 2.5 2.0 18.118.318.5 1.8 1.9 1.9 20.0 16.817.1 1.8 15.015.115.115.7 2.0 1.5 1.6 1.6 1.6 13.413.513.513.714.2 1.3 1.4 15.0 11.7 1.2 9.9 10.410.511.2 1.5 1.0 1.1 10.0 1.0 0.7 5.0 0.5 0.0 0.0 ADX ADX DFM DFM India India Saudi Qatar Egypt Saudi Qatar Egypt Oman Oman Jordan Kuwait Mexico Jordan Kuwait Mexico Bahrain Bahrain Pakistan Morocco Malaysia Pakistan Morocco Malaysia Lebanon Germany Germany FTSE 100 FTSE FTSE 100 FTSE Indonesia Singapore Indonesia Singapore Dow Jones Dow Jones Hong Kong Hong Hong Kong Hong

Source: Bloomberg, Zawya Dow Jones, HC Research

Egypt Financial Services 14

Capital markets to lead recovery

With the cycle for capital markets being much faster than real estate, we expect an influx of inflows to equities once a glimpse of a rebound is on the horizon. With equities providing higher returns given the lower rates offered by banks on deposits and real estate prices taking longer to adjust, we would expect an earlier recovery in capital markets, particularly for GCC economies due to an anticipated increase in oil prices. However, we expect volumes to go back to normal only by 2013.

Strategy team take on MENA market outlook: Positive on GCC (48% of EFG Hermes’s revenue), Neutral on Egypt (52% of revenue)

We highlighted in our strategy note It’s All About the Macro published on 28 March that we anticipate an asset allocation shift by investors to dollar-denominated assets and governments with the financial ability to support their domestic economies for an extended period of time. Consequently, HC’s strategy team downgraded their outlook on the Egyptian equity market to Neutral from Overweight and placed a positive outlook on GCC markets. Since our change in view, the Egyptian equity market, as measured by the EGX30, has declined approximately 6% while the EGP has depreciated relative to the USD by 3.5% (as of 1 August), leading to a 9.5% loss of capital for USD-based investors.

Global macro events in 2Q10 have supported our macro assessment of the MENA region. In reviewing the outlook for the region and key macro factors, we maintain our Neutral outlook for the MENA region while favoring GCC to Egypt.

Low political risk in GCC: The resignation of the Japanese and Australian Prime Minister, UK elections resulting in a hung parliament, tension on the Korean peninsula, and the slow political action in the Eurozone have resulted in a huge swing of sentiment towards the USD as a safe haven (although this has reversed to some extent) and a decline in risk appetite towards equities. Political elections in Egypt scheduled in 2010 and 2011 could add further risk aversion by investors, whereas GCC markets are not exposed to this uncertainty.

Deficit spending helps GCC: Government ability to successfully continue their expansionary fiscal policies to support economic growth has been questioned by investors. The fallout of the Greek crisis to other European countries and the need by governments to curb spending and raise taxes will place increased pressure on the consumer to lead the economic recovery. In GCC markets, oil prices remain well above budgeted levels for 2010 and thus we do not see a risk in spending cuts. Therefore, the outlook for the GCC is relatively stronger than for other regions.

Table 7: GCC budgeted oil prices for 2010 are way below the current levels

Country Budgeted Oil Price (USD) Current Oil Price (USD) Deviation UAE 45* 79 76% Saudi Arabia 45* 79 76% Kuwait 43 79 84% Qatar 50–55 79 50% Oman 50 79 58% Bahrain 45* 79 76%

Source: Bloomberg, Prices are in USD/barrel. UAE, KSA, and Bahrain budgeted oil price not available but assumed to be cUSD45/barrel

Not affected by banking reform: The imposition of a tax on banks (Financial Stability Contribution of 7-15bp on liabilities) in and the US and the implementation of tighter regulations on banking activities by Basel (capital, leverage, liquidity) and other regulators (mainly affecting global investment banks such as prop trading and hedge fund investments) will likely impact the profitability and size of the Western banking sector. We remain bullish on the strength of the banking sector in the region, with banks immune to the malaise of toxic assets and their knock-on effects on balance sheets. While UAE banks should see NPLs rise on the back of the Dubai World saga, banks are very well capitalized to absorb any losses.

Global economic recovery: The speed of the economic recovery is expected to be hampered by the fallout of European debt contagion, which has already seen a number of sovereign and corporate credit ratings cut. This has spilled over to banks’ willingness and ability to lend and caused a decline in the expectation of growth over the next quarter. The Egyptian economy is very closely correlated with the developed world, exporting 70% of its goods to Europe and the US and receiving c50% of its remittances and FDI from there. Any slowdown in economic recovery in these key markets will have a knock-on effect on the domestic economy and equity market. GCC markets, with their high dependency on oil, will be negatively impacted by any concerns of a slowdown in the speed of recovery of the developed world with some near-term impact to sentiment of the energy- related equity markets.

Egypt Financial Services 15

Capital Markets Related Operations Outlook

 EFG Hermes’s regional platform is perfectly positioned to capture a rebound in capital markets

 Brokerage arm to remain EFG Hermes’s backbone while retail and margin trading are key growth drivers

 Diversified product offering on the asset management side and debt underwriting on the investment banking side to support earnings and hedge against market volatility

EFG Hermes is expected to significantly outperform peers once market recovery is around the corner

Given its scale of operations, EFG Hermes is well positioned to capitalize on the fact that capital market cycles are the fastest to recover, offering higher investment potential given the sluggish rates on deposits and the longer real estate cycles that would take some time for prices to adjust. Hence, we believe the company will be the first to recover among peers, with earnings growing at a CAGR of 28% versus a CAGR of 19% for other local financials under our coverage supported by new market additions and further retail penetrations that would also expand margins.

We expect brokerage to be the first to reflect a rebound followed by a trickle down to other lines of business as asset management starts delivering performance fees and capturing any upsides in the market in the absence of a high watermark.

We are also bullish on the investment banking outlook, with lucrative opportunities for EFG Hermes on the debt underwriting side given corporate restructurings and capital raising in debt markets. Equity offerings are also slowly starting to pick up, particularly in Egypt, as we saw EFG Hermes handling Juhayna’s IPO. It was also reported that EFG Hermes would take real estate company Amer Group public by the end of the year. Although the scale of IPO offerings is likely to be muted due to the global economic environment, the new equity offerings signal a strong pipeline, improving sentiment, and earnings surprises on the upside for the investment banking segment. Debt capital markets also offer substantial room for improvement given the level of intermediation provided by capital markets as companies still rely on direct bank lending. In the US, only 25% of lending is provided by direct bank lending versus 50% in Japan and 75% in Europe.

With a liquid balance sheet (cash booked a historical 25% of EFG Hermes’s balance sheet on average and a higher 57% after the Bank Audi divestment) treasury operations have always been a buffer for EFG Hermes in the downturn. Earnings would also be supported by interest income on cash proceeds even in the absence of a defined target. However, we have identified possible targets that look currently attractive and would fit into EFG Hermes’s selection criteria (see page 28).

Table 8 : EFG Hermes’s strong earnings outlook

2009 2010 2011 2012 2013 2014 CAGR % Brokerage 444.0 472.3 553.4 716.7 862.9 939.4 16.2% % of Total Fee Income 57.6% 47.9% 42.9% 43.8% 42.4% 38.9% AM 160.0 166.8 247.2 301.1 364.7 439.9 22.4% % of Total Fee Income 20.8% 16.9% 19.1% 18.4% 17.9% 18.2% Investment Banking 43.0 210.0 308.0 369.6 462.0 600.6 69.4% % of Total Fee Income 5.6% 21.3% 23.8% 22.6% 22.7% 24.9% PE 124.0 136.4 182.9 248.0 347.3 435.5 28.6% % of Total Fee Income 16.1% 13.8% 14.2% 15.2% 17.0% 18.0% Total Fee Income 771.0 985.5 1,291.4 1,635.4 2,036.9 2,415.5 25.7% Interest Income 118.4 242.6 430.1 455.0 490.4 525.9 34.7% Total Revenue 1,470.2 2,109.2 1,900.1 2,277.9 2,714.4 3,137.9 16.4% Operating Margins 8.1% 15.1% 33.3% 44.7% 53.3% 58.7% Net Income 551.8 805.4 868.0 1,186.5 1,567.8 1,925.0 28.4% Source: HC Research

A tough 2Q10 yet there is potential for a rebound by 4Q10

Despite a slight improvement in sentiment during 1Q10 where volumes started to gain traction, the Eurozone crisis hit hard during 2Q10 resulting in almost flat volumes in 1H10 compared to 1H09. With summer and Ramadan further slowing down activities during 3Q10, we are not expecting a rebound before 4Q10, making 2010 another tough year for EFG Hermes.

Trading activity is significantly down YTD compared to the corresponding period last year. The Dubai market has fared the worst in terms of volume, declining a sharp 91%, followed by Abu Dhabi at 24%. Given the prolonged timeframe in reaching a final settlement on the Dubai World restructuring proposal and more government-related entities going through restructuring or extension of maturity in commercial terms, we believe Dubai’s leverage issue will weigh on volumes this year until there is absolute

Egypt Financial Services 16

clarity on the macro points, which would provide a catalyst to the ADX as well. With huge government spending programs in Saudi Arabia, Qatar, and Kuwait we believe trading volume should improve in these oil-dependent countries.

However, given that Ramadan will fall in August and September this year, we do not expect any marked improvement until the last quarter of the year or early next year. We remain cautious on the growth outlook of the Egyptian economy and hence its stock market performance due to the emergence of sovereign debt issues and budget cuts in Europe. The Levant is resilient with Morocco, Syria, and Lebanon showing stellar performance in terms of value and volume, although low in absolute terms. EFG Hermes benefits from its regional presence whereby declines in some of the markets are to some extent offset by the rest. Moreover, its recent expansion into the Levant provides more upside potential.

Table 9 : Regional comparison of turnover, volume, and index level

Turnover (USD mn) Avg. Daily Turnover (USD mn) Volume (mn) Index Performance 2Q10 QoQ % YoY % 2Q10 QoQ % YoY % 2Q10 QoQ % YoY % 2Q close QoQ % YoY % Abu Dhabi 1,981 -29% -72% 30 -30% -72% 3,793 -20% -75% 2,514 -14% -4% Bahrain 69 -42% -60% 1 -43% -60% 128 -53% -59% 1,396 -10% -12% Lebanon 251 -73% -6% 4 -74% -12% 28 -62% 80% 1,509 33% 42% Syria 35 113% n/a 1 55% 575% 1 126% n/a 1,416 n/a n/a Dubai 5,369 -32% -67% 83 -33% -67% 10,099 -33% -76% 1,462 -21% -18% Egypt 11,759 1% -32% 187 0% -32% 7,850 32% -31% 6,033 -11% 6% Kuwait 9,737 -38% -71% 150 -43% -71% 14,262 -53% -71% 6,543 -13% -19% Oman 862 -11% -57% 13 -12% -57% 905 3% -62% 6,058 -10% 8% Nas. Dubai 247 -48% 3% 4 -49% 3% 489 -55% -32% n/a n/a n/a Qatar 5,103 11% -48% 79 7% -48% 661 32% -50% 6,899 -8% 6% Saudi 70,845 40% -44% 1,090 40% -43% 11,371 33% -47% 6,094 -10% 9%

Source: Zawya Dow Jones, HC Research

Table 10 : 2Q10 another tough quarter for EFG Hermes

2Q10e 2Q09a YoY 1Q10a QoQ Brokerage 106 146 -27% 120 -12% AM 35 39 -10% 37 -5% PE 40 25 60% 38 5% Investment Banking 50 9 456% 72 -31% Total Fee Income 231 220 5% 267 -13% Interest Income 63 31 101% 53 18% Total Revenue 339 390 -13% 1,085* Operating Margins 10% 28% -64% 14% -29% Net Income 70 176 -60% 484 -85% *Includes capital gains of EGP752 million on Bank Audi divestment

Source: HC Research

Chart 12: Brokerage revenue to come under pressure in 2Q10 given lower activities

Egypt remains by far the biggest revenue generator Brokerage contribution by country 2Q10e

Country 2Q10E 1Q10A QoQ% KSA Oman Egypt* 73 82 -11% UAE 7 11 -36% Kuwait Kuwait 19 21 -9% Oman 3 3 4% KSA 4 3 32% Total 106 120 -12% UAE *Egypt figures includes other markets where there is no physical presence

Egypt

Source: HC Research

Egypt Financial Services 17

I) Brokerage: EFG Hermes’s cash cow (45% of revenue on average, CAGR 16.2%)

 Brokerage is the biggest contributor to revenue (45% on average), with leading positions in major markets.  Egypt is the largest revenue-generating market, while Kuwait comes in second.  Expected CAGR of 16.2% for brokerage revenue, driven by new market additions and further retail penetration.

Brokerage has been, and will probably always be, EFG Hermes’s backbone, delivering the bulk of operating revenue (a five-year average of 45%). Unlike asset management and investment banking, which only deliver revenue in an upward cycle, brokerage delivers commissions as long as volumes are decent. The company has maintained its leading position in the Egyptian market for some time now, booking a market share of 44% for FY09 (including both sides of transactions), while delivering an average of 61% of brokerage revenue. However, with most regional markets being a late addition to EFG Hermes, we expect Egypt’s contribution to gradually drop to 56% by 2014 given the company’s aggressive regional expansion plans into MENA markets. Egypt will however remain the biggest contributor to brokerage revenue, followed by Kuwait.

Chart 13: EFG Hermes’s Key Brokerage Markets

Egypt remains biggest revenue generator EFG Hermes is the leading broker in most of its existing markets

Oman Brokerage Revenue by Market (FY09) EFG's Market Executions and Market Shares (FY09) 50% 30 3% Kuwait Execusions USD Bil Mkt Share 40% 18% 25 20 30% KSA 15 3% 20% 10 10% UAE Egypt* 5 15% 61% 0 0% Egypt Kuwait UAE Qatar* Saudi Jordan* Bahrain* Morocco* Oman Arabia

*Egypt figures include other markets where EFG Hermes doesn’t have physical presence *Executions are based on our assumptions

Source: EFG Hermes, HC Research

Regional diversification and further retail penetration help weather the storm

EFG Hermes’s local success acted as a gateway for penetrating regional markets. This is an edge we believe EFG Hermes has over its foreign competitors, with its long track record of experience in the GCC markets and due to its first-mover advantage. We also believe EFG Hermes’s focus on retail, which currently accounts for more than 52% of its revenue, has supported its regional plans where most markets are retail driven. Retail will also remain its main growth area given the huge potential in underpenetrated markets like Egypt where the company has recently added five new branches. Both online trading and selective margin trading are two key areas for growth that are still underpenetrated and yield wide margins. Retail delivers better margins and better returns, but we believe it will have a lagged effect when markets head north as retail investors are usually the last to follow.

All markets in the region except Oman are driven by retail, and this provides the best platform for EFG Hermes to expand its operations in existing markets. Generally, institutional clients tend to remain with their brokers due to their longstanding relationship and the ability to demand better fees. However, retail clients do not have the same kind of relationship as institutions given the size of each account. Hence, fee structure and differentiated services would have a major influence in attracting and retaining retail investors. This phenomenon gives EFG Hermes the ability to attract more retail clients given better mobility. Given the wealth structure in the region and the population of Egypt (80 million), we believe retail will continue to drive regional markets.

Chart 14: EFG Hermes’s client composition versus major markets

EFG Hermes’s client base Client Composition of Major Regional Markets

100% Markets with no Online 11% presence 9% 20% 20% Western Call Center 80% 40% 6% 47% 50% Institutions 4% 60% 16% 60% 89% Regional 40% 80% 80% Institutions 60% 53% 50% 7% Retail and 20% 40% HNWI VIP 19% 39% 0% KSA DFM ADX Qatar EGX Kuwait Oman Retail Institutions Source: EFG Hermes, Regional Stock Exchanges, HC Research

Egypt Financial Services 18

Chart 15: Regional wealth structure to support retail trading

GCC economies have one of the highest GDP/Capita

40,000 GDP per Capita (USD) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0

Source: HC Research

On a local level, we expect Egypt to remain EFG Hermes’s biggest market. However, we doubt the company will be able to increase its market share, which is already very high, given an anticipated wave of consolidation across the board for a highly fragmented market with 142 brokers. Kuwait is another key market for EFG Hermes, where we expect the company to continue building up market share while delivering decent commissions. Despite delivering the biggest chunk of brokerage fees in the region, Saudi Arabia remains a tough market for EFG Hermes as commercial banks are still controlling the market, leaving EFG Hermes’s existing institutional clients and HNWI as its main client base. For markets like the UAE where capital market turmoil forced small brokers out of business, bringing down the total number of brokers in Dubai to 85 from 99, we believe this gives further potential for EFG Hermes to gain market share once markets rebound.

Although the company has no physical presence in Qatar, it attained a 10% market share through a local broker. However, in 1Q10 the Qatar Central Bank announced that banks are now allowed to enter brokerage, which we expect to hurt EFG Hermes’s margins. The Qatari brokerage market is still dominated by seven players and hence offers high pricing power for brokers. We believe the central bank made this move to introduce competition and bring down rates. Another recent announcement allows banks to invest in stocks on the Qatari stock exchange. This would enhance liquidity in the market and hence executions.

Table 11: EFG Hermes’s Major Markets’ structure

Markets Number of Brokers Est. Commissions (bps) Market Share of Biggest Five Players Number of Listed Stocks Egypt 142 12 29.5% 219 Dubai 85 15 28.7% 66 Abu Dhabi 96 15 27.4% 65 Qatar 7 25 91.2% 43 Kuwait 14 10 n/a 197 KSA 36 2 54.2% 141 Oman 24 40 47.6% 37

Source: Relevant Stock Exchanges

Across the board, volumes YTD are coming shy of last year’s. With an anticipated further slowdown in the summer and Ramadan, we expect lower volumes this year, further depressed by the Euro crisis and the global slowdown. Volumes are not expected to become healthy before 2011, making 2010 a more difficult year for EFG Hermes. The company is continuing with its expansion plans, eyeing new markets to the east like Pakistan, to the west like Morocco, to the south like sub-Saharan Africa, and already booking a 12% market share of total regional executions. We believe this is achievable due to its strong relations with foreign institutional clients, which can be its first portal to penetrate these markets. Syria is also a late addition, but we did not include any revenue from the entity given the short trading history on the exchange. However, we believe it could deliver decent flows given a lucrative commission of 34 bps to 56 bps. EFG Hermes has also recently announced starting ground operations from Jordan after it acquired a local broker. We have included flows from Jordan, but under the Egypt platform.

Egypt Financial Services 19

Table 12: EFG Hermes’s Brokerage revenue estimates Brokerage Fees 2007a 2008a 2009a 2010f 2011f 2012f 2013f 2014f Egypt GDP (USD bn) 130.3 162.4 188.0 215.8 248.1 273.3 297.8 324.3 Market Cap to GDP 107.2% 53.1% 48.4% 44.4% 42.1% 40.4% 41.3% 40.3% TO Ratio 47.3% 111.7% 90.0% 91.0% 91.0% 100.0% 100.0% 100.0% Total Executions (USD bn) 66.0 96.3 81.5 87.2 95.1 110.5 123.1 128.4 Market Share 39.0% 43.0% 44.0% 41.0% 41.0% 41.0% 41.0% 41.0% Revenue (EGP mn) 434.0 545.0 271.0 322.2 351.1 448.3 499.8 530.8 UAE GDP (USD bn) 207.6 261.4 230.0 252.7 271.5 293.0 316.6 343.1 Market Cap to GDP 124.9% 37.6% 48.0% 41.9% 45.1% 43.5% 50.4% 48.7% TO Ratio 58.3% 148.9% 60.2% 60.0% 60.0% 80.0% 90.0% 90.0% Total Executions (USD bn) 151.0 146.4 66.4 63.5 73.5 101.9 143.7 150.5 Market Share 10.4% 15.1% 11.8% 9.0% 13.0% 13.0% 13.0% 13.0% Revenue (EGP mn) 137.0 150.0 65.0 48.0 82.41 114.30 161.17 168.8 KSA GDP (USD bn) 385.2 475.7 369.7 438.0 477.3 516.5 556.5 599.0 Market Cap to GDP 134.7% 51.8% 86.2% 79.4% 75.8% 87.7% 94.4% 91.7% TO Ratio 131.0% 212.0% 105.7% 95.0% 110.0% 120.0% 130.0% 160.0% Total Executions (USD bn) 682.3 523.5 337.1 330.3 397.9 543.4 683.1 879.1 Market Share 0.9% 1.6% 1.0% 0.8% 1.0% 1.0% 1.0% 1.0% Revenue (EGP mn) 9.0 35.0 15.0 15.0 22.6 30.9 38.9 50.0 Kuwait GDP (USD bn) 158.2 111.3 135.1 146.3 155.0 164.7 175.1 Market Cap to GDP 67.8% 85.6% 72.6% 72.7% 81.5% 80.4% 79.2% TO Ratio 123.5% 79.3% 65.0% 65.0% 70.0% 90.0% 100.0% Total Executions (USD bn) 132.5 75.5 63.7 69.1 88.4 119.2 138.8 Market Share 23.5% 30.0% 35.0% 36.0% 36.0% 36.0% 36.0% Revenue (EGP mn) 40.0 78.0 74.9 83.6 106.9 144.1 167.9 Oman GDP (USD bn) 59.9 53.4 62.3 67.8 72.7 77.0 81.8 Market Cap to GDP 34.3% 44.2% 33.0% 34.2% 37.9% 41.9% 45.7% TO Ratio 46.2% 25.1% 20.0% 20.0% 20.0% 20.0% 20.0% Total Executions (USD bn) 9.5 5.9 4.1 4.6 5.5 6.5 7.5 Market Share 24.0% 18.0% 21.0% 21.0% 21.0% 21.0% 21.0% Revenue (EGP mn) 21.0 15.0 12.1 13.6 16.2 19.0 22.0 Qatar GDP (USD bn) 100.4 83.9 110.8 131.8 147.1 157.7 Market Cap to GDP 34.3% 44.2% 33.0% 34.2% 37.9% 41.9% TO Ratio 29.0% 25.0% 30.0% 40.0% 50.0% 60.0% Total Executions (USD bn) 25.5 24.2 34.9 53.3 79.2 99.7 Market Share 5.0% 10.0% 10.0% 10.0% 10.0% 10.0% Revenue (EGP mn) 14.0 13.6 19.5 29.8 44.4 55.9 Total Brokerage Revenue 580.0 791.0 444.0 472.3 553.4 716.7 862.9 939.4 (EGP mn) Brokerage 33.7% 48.8% 57.6% 47.9% 42.9% 43.8% 42.4% 38.9% Rev./Operating Rev. *Egypt figures include other markets where EFG Hermes doesn’t have physical presence **Markets where EFG Hermes doesn’t have physical presence Source: Company reports, HC Research, IMF, regional stock exchanges

Egypt Financial Services 20

II) Asset management set to fly once markets rebound (23.5% of revenue on average, CAGR 23%)

 Asset management is expected to grow at a CAGR of 23% driven by new money inflows (3.6% of FUM) on new funds.  Anticipated market rebounds to puff up fund-performance-related growth, with incentive fees going from 4bps by 2010 to c20bps by 2014.  Vast potential for asset management in Saudi Arabia, which is home to 48% of regional funds.

Asset management is another cornerstone for EFG Hermes’s operations with AUM reaching EGP25 billion by 1Q10 after losing c39% of its value since the financial crisis hit in 2008. The activity has been delivering a decent five-year average of 23.5% of total operating revenue. Although incentive fees are directly linked to market movements, management fees have been providing a sustainable revenue stream, but are being suppressed by the low-yield money market funds that now account for 51% of AUM. With fast regional expansions, asset management from Egypt now only books 44% of total asset management revenue, down from 76% in FY06, while the base remains Egypt-centric, booking 69% of total AUM with mostly Egyptian mandates being money market funds. Compared to regional players, EFG Hermes succeeded in booking a significant 9% of total AUM in the region.

Chart 16: Market Turbulence has wiped off 39% of EFG Hermes’s AUM value

EFG Hermes’s AUM breakdown (EGP bn) Fixed fees cushioned the drop in incentive fees (EGP Mn)

45 600 Portfolios Incentive Fees 40 Money Market Funds 500 Offshore Equity Funds 35 Management Fees Equity Funds 400 30 25 300 20 200 15 100 10

5 0 0 2007 2008 2009 2010F 2011F 2012F 2013F 2014F

FY07 1H08 FY08 1H09 FY09 1Q10

Source: Company reports, HC Research

All hopes are on Saudi funds

Home to 244 FUM, Saudi Arabia is by far the most promising market in terms of asset management, booking the lion’s share of 48% of regional funds. We believe EFG Hermes’s presence in Saudi Arabia will only be awarded through asset management with brokerage being completely dominated by commercial banks. The company has been adding up funds through discretionary portfolios that offer decent management and performance fees. Saudi Arabia’s outlook is even brighter with the launch of ETFs on Tadwaul, which is even better (in terms of liquidity and management fees) for foreigners than trading through swaps.

Chart 17: Saudi is by far booking the bulk of regional AUM

Regional AUM (USD mn) Number of Regional Funds by Location

70,000 Jordan Lebanon Qatar Oman UAE Bahrain Jordan,3 Oman,8 60,000 Egypt Kuwait Saudi Arabia

50,000

40,000 Bahrain,138 KSA,244 30,000 Lebanon,10 20,000 UAE,24

10,000 Kuwait,85

- Qatar,7 Egypt,57 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

Source: HC Research , Zawya Dow Jones

Egypt Financial Services 21

Strong outlook with 30 funds launched YTD

Asset management has already shown signs of recovery even ahead of an equity market rebound. Funds launched YTD reached 30 compared to 40 funds launched during the course of 2009. A surprising majority of these were equity funds, of which EFG Hermes is managing two: a money market and a fixed income fund. Not only do we expect a further trickle down of fresh funds from the region on excess liquidity, we also believe mutual funds would be the best investment alternative for retail investors that are still risk averse following the market crash.

We believe asset management activity will recover quickly once markets rebound, delivering a hefty 20% stake of total revenue. Performance fees would fuel the figure on a market uptrend, but we believe management fees would book the bulk of EFG Hermes’s asset management revenue given that most of EFG Hermes’s funds are in money market funds. As such, we estimate an average of 0.6% in management fees. On the performance fee side, with no high watermark the activity is well positioned to capture value on everything above the hurdle rate. On average we expect performance fees of 7% above the hurdle rate. We also see many opportunities on portfolios within the Saudi market. Both organic and inorganic growth are on EFG Hermes’s management schedule for asset management as the company is cautiously studying going into merchant banking without conflicting with its core business. Merchant banking describes the private equity activities of banking. A merchant bank invests its own capital in a client company while an investment bank trades the shares.

Chart 18: Net flows into MENA are starting to pick up

6 Net Portfolio Investments(USD bn)

1

2008 2009 2010e 2011F -4

-9

-14

Source: HC Research , Institute of International Finance

Table 13: Asset Management Assumption

2007a 2008a 2009a 2010e 2011f 2012f 2013f 2014f Beginning Balance (EGP bn) 11.4 35.9 23.0 24.4 27.4 33.5 40.7 49.3 Net Cash Inflows (EGP mn)* 12,374.8 (1,900.0) (4,885.7) 977.1 996.7 1,006.6 1,016.7 1,027.7 % of Ending AUM 34.4% -8.2% -20.0% 3.5% 2.9% 2.4% 2.0% 1.7% Performance-related Growth (EGP mn)* 12,125.2 (11,000.0) 6,286 2,030 5,113 6,214 7,516 9,053 % of Ending AUM 33.77% -47.83% 25.76% 7.4% 15.2% 15.2% 15.2% 15.2% Ending Balance (EGP bn) 35.9 23.0 24.4 27.4 33.5 40.7 49.3 59.3 Performance Fees (EGP mn) 379.1 218.1 11.9 11.4 64.4 78.3 94.7 114.1 % of AUM 1.06% 0.95% 0.05% 0.04% 0.19% 0.19% 0.19% 0.19% Management Fees (EGP mn) 131.9 273.9 148.1 155.4 182.8 222.8 270.0 325.9 % of AUM 0.37% 1.19% 0.61% 0.57% 0.55% 0.55% 0.55% 0.55% Total AM Revenue (EGP mn) 511.0 492.0 160.0 166.7 247.2 301.1 364.72 439.9 AM Revenue/Operating Rev. 29.7% 30.3% 20.7% 16.9% 19.1% 18.4% 17.9% 18.2% *Based on HC estimates

Source: Company reports, HC Research

Egypt Financial Services 22

III) Investment banking provides promising activities (26% of revenue on average, CAGR of 69%)

 Investment banking has the highest CAGR of 69%, coming from a very low base in 2009, and was the worst hit last year.  Increasing appetite for corporate restructuring for the big players while the small ones are still struggling to survive the global turmoil will deliver huge potential for further M&A deals in the region.  Huge potential in DCM as restricted bank lending may force companies to issue debt on capital markets. The company was the first investment bank to underwrite a fixed-income product in Egypt

Investment banking was the worst hit of all EFG Hermes’ activities due to very sluggish transactions. It went from being the second-biggest revenue generator for the company to the smallest by FY09, contributing only 6% to total revenue. Historically, investment banking was booking an average of 26% of EFG Hermes’s operating revenue. The company had been one of the major regional players, signing mandates all over the MENA region. As with the rest of EFG Hermes’s activities, the bulk of revenue is generated by the Egyptian team, booking on average 88% of total investment banking revenue. To date, the team has advised on M&A transactions worth over USD20 billion and raised equity worth USD12 billion and debt worth USD1.3 billion. We believe competition from foreign players is most intense on the investment banking side given their long track record in the region.

Better outlook with 1Q10 reflecting promising activity

Things are slowly picking up for investment banking activities. On a MENA level, total investment banking fees booked during 1Q10 reached USD175.9 million, up 11% compared to 1Q09. Of this, EFG Hermes accounted for a significant 7.4%, booking revenue of EGP72 million in 1Q10 versus EGP43 million for FY09. As always, M&A booked a bulk of 50% of MENA activity followed by ECM that also includes IPOs. In terms of transactions, the total value of deals executed reached USD10 billion by 1Q10, with another USD12.7 billion in the pipeline for 2Q10 compared to USD11.8 billion for the whole of 2009. As expected, real estate dominates the bulk of M&A in terms of sectors, while the UAE and Qatar were the most targeted markets. Going forward, increasing appetite for corporate restructuring for the big players while small ones are still struggling to survive the global turmoil will deliver huge potential for further M&A deals in the region.

Chart 19: 1Q10; an encouraging start for MENA investment banking activity

MENA IB fees: EFG Hermes booked 7.4% market share by 1Q10 Total M&A deal values (USD bn), higher 1Q10 activity

M&A 15.0% 100 Deal Value (USD Bil) (LHS) 500 166 1000 151 ECM 90 Number of Transactions (RHS) 450 36 DCM 86 Syndicated Loans 80 400 800 EFG's share of MENA IB Fees 70 350 413 10.0% 359 60 300 600 7.4% 7.5% 144 50 250 88 40 200 400 92 5.0% 30 150 3.7% 504 510 20 100 200 21 325 16 1.2% 51 10 50 88 0 0.0% 0 0 2007 2008 2009 1Q10 2007 2008 2009 1Q10

Top five MENA M&A targets by industry breakdown 1Q10 Top MENA M&A targets by country 1Q10 Real estate is still topping M&A activity in MENA Media and Entertainment 9%

Materials 10% UAE Qatar

Egypt

Financials Lebanon 10% Real Estate 40% Saudi

Industrials 31%

Source: HC Research , Thomson Reuters

Egypt Financial Services 23

ECM waiting for the upside signal

Unlike M&As, which hold up even in a downward cycle as many distressed entities seek consolidations for survival, equity capital markets remain highly challenging for equity raising and IPOs. The activity was severely hit in 2009, with total ECM raisings coming only fifth of those offered a year earlier. However, we sense a slight pick up this year with total IPO offerings YTD reaching USD1.1 billion versus USD2.0 for 2009, including the offering of Juhayna in Egypt, which was handled by EFG Hermes.

Chart 20: MENA ECM issuances hammered yet YTD IPO activity is showing a slow rebound

MENA ECM YTD offerings by country

40 Follow On value IPOs YTD by country (USD mn) 35 IPO 30 25 Saudi 20 Qatar USD bn 15 Tunis 10 Egypt 5 0 Syria 2007 2008 2009 1Q10

Source: Zawya Dow Jones, HC Research

Debt capital markets: Huge potential

With regional capital markets tumbling during 2009 and remaining literally closed for any capital raisings, many of EFG Hermes’s deals were put on hold pending market rebounds. As such, management began exploiting new areas as debt advisory, which cushioned sluggish growth in other areas. The team managed to successfully conclude the underwriting of the EGP1.5 billion Mobinil bond issue, making it the first investment bank to underwrite a fixed-income product in Egypt. DCM has proven to be a key growth area with lending still coming at high costs and forcing many corporates to go after bond issuances that showed increasing activity last year. As such, total DCM issuances in the MENA region reached USD31 billion by FY09—its highest ever. Bonds are also a favorable play on the tenor side.

Chart 21: DCM has proved favorable for the region, with dependence on lending and ECM declining

MENA external fund raisings MENA region is increasingly tapping DCM (FY09)

80,000 Loans Equity Bonds 100% 70,000 Loans Equity 90% 60,000 Bonds 80% 50,000 70% 60% 40,000 50% 30,000 40% 20,000 30% 10,000 20% 10% - 0% 2007 2008 2009 1Q09 2Q09 3Q09 4Q09 MENA Sub Saharan Africa Central and Eastern Developing Asia Western Hemisphere Europe

Source: HC Research, IMF

Investment banking is a key activity for EFG Hermes, and even though the company saw a drop on this front in 2009, we believe it should find lucrative opportunities in both M&A and DCM as markets rebound.

Table 14: Investment Banking Assumption

2009 2010E 2011f 2012f 2013f Total Transactions Executed by EFG Hermes (USD bn) 3200 2500 2750 3300 4125 Total IB Revenue 43.0 210.0 308.0 369.6 462.0 IB Revenue /Operating Rev. 6% 21% 24% 23% 23%

Source: Company reports, HC Research

Egypt Financial Services 24

IV) Private equity gaining prominence in the revenue stream (10% of revenue on average, CAGR 28%)

 Private equity has an anticipated CAGR of 28% driven by new fund inflows and an average 29% YoY growth during our forecast period, while markets are expected to go up an annual 10% to 15%.  Inflows are driven by ongoing and potential government spending on infrastructure projects in the region along with the business restructures.  The company is potentially committing further seed capital to further support growth.

EFG Hermes is a prominent regional private equity player underpinned by its platform in Egypt, the UAE, Bahrain, Qatar, Lebanon, Oman, and Saudi Arabia. Recently it launched a fund in Syria called EFG Hermes Syria with a target of USD250–USD300 million. EFG Hermes also closed the InfraMed Fund—the largest MENA infrastructure fund—in May with a capital of EUR400 million and contributing EUR15 million of its own capital. The total size of the fund is targeted to be EUR1 billion. All these point to increased interest in private equity activities in the region and hence growth potential for EFG Hermes’s private equity segment. Although MENA funds make up an insignificant portion of the global private equity industry, activities have gone up sharply.

Table 15: Private equity fundraising (USD mn), a regional comparison

Region 2001 2002 2003 2004 2005 2006 2007 2008 2009 Asia 7,064 3,221 4,770 7,667 18,348 26,886 36,768 46,809 17,690 US 110,000 68,200 49,300 92,000 151,800 254,700 325,800 287,500 95,800 Western Europe 35,432 28,823 33,890 37,510 85,030 148,157 119,809 112,199 18,632 CEE/CIS 575 530 406 1,777 2,711 3,272 14,629 5,559 1,586 Latin America 624 407 417 714 1,272 2,656 4,419 4,461 2,248 MENA 100 1,047 726 326 2,669 3,207 5,333 6,875 1,070 Emerging Markets 6,583 3,228 4,606 6,575 26,519 33,193 59,160 66,517 22,607

Source: Emerging Markets Private Equity Association

The global financial crisis has taken its toll on PE funds as they fell 71% globally to USD99 billion in 2009. The impact was more pronounced in the West due to the significant role played by the US in the global arena, which had a 79% fall in its PE funds in FY09. However, the MENA region fared better as the fall was contained to 34% with funds raisings reaching USD2.2 billion at the end of last year.

Chart 22: There is room for increased PE activities as the penetration rate is low

MENA PE investment vs. global and EM PE investment to GDP (2009)

4,000 25.0% 0.35% 0.32% MENA PE Inv. 0.30% 3,500 (USD mn) 0.27% 20.0% 0.30% 3,000 19.1% 0.25% 2,500 0.19% 15.0% 0.20% 0.17% 13.8% 2,000 12.4% 0.13% 0.15% 0.12%0.11% 1,500 9.4% 10.0% 0.10% 0.07%0.06% 1,000 6.0% 6.6% 5.0% 0.05% 0.02%0.01% 500 2.5% 2.2% 0.00% 1.3% 1.0% - 0.2% 0.3% 0.1% 0.6% 0.5% 0.2% 0.0% 2002 2003 2004 2005 2006 2007 2008 2009 MENA Fund % Global PE Emerging mkt Fund % Global PE

Source: Emerging Markets Private Equity Association

We expect PE activity to pick up this year, particularly in the MENA region, underpinned by a better economic growth outlook and increased government expenditure. Increased government spending on infrastructure and other projects involve the private sector and will most likely translate to increased PE activities in the region.

Egypt Financial Services 25

Chart 23: Global crisis has resulted in a drop in entry and exit transactions in 2009

PE entry and exits PE funds: Breakdown by location in 2009 (value and no.)

4,000 USD mn 100 North Africa Total Funds USD2.1 5%, 1 3,500 Levant 83 80 3,000 5%, 1 67 2,500 66 Turkey Egypt 60 11%, 1 5%, 2 2,000 GCC 10%, 3 1,500 40 1,000 29 21 18 20 500 16 4 - 0 MENA 2006 2007 2008 2009 64%, 5 Total size of entry transactions Total size of exits No of entry transactions (RHS) No of exits (RHS)

Source: Zawya Dow Jones, HC Research

Currently, EFG Hermes derives approximately half of its PE fee income from outside Egypt compared with none in 2007. Geographic diversification in line with its corporate strategy paid off, with fee income rising 20% YoY in 2009. EFG Hermes is continuing with its regional expansion as seen in the recent launch of the PE fund in Syria. Supported by its regional platform and solid cash, we believe EFG Hermes is well slated to benefit from the rise in PE fundraising.

Chart 24: PE’s share will continue to increase and contribute one-fifth of fee income in FY2014e

Breakdown of PE fee income in 2009 PE funds under management and fee income Total fee income EGP124 mn 20.0 Funds under Fee 4.5% management income/FUM 18.0 3.6% 3.6% (EGP mn) 4.0% 16.0 3.5% Success Fee 19% 14.0 3.0% 12.0 2.3% 2.3% 2.1% 2.2% 2.1% 2.1% 2.5% 10.0 1.7% 1.7% 18.6 2.0% 8.0 16.2 1.5% Management 6.0 11.6 Fee 4.0 8.3 1.0% 81% 6.3 6.4 4.9 5.3 2.0 2.4 2.9 0.5% - 0.0% 2005 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e

Source: Company reports, HC Research

Given that a higher proportion of the fee income comes from management fees, EFG Hermes’s PE segment offers to some extent a stable source of income (ruling out huge redemptions). During a downturn, exits will be affected as the PE investors wait for better timing. This, however, would be offset by management performance, which is independent of market performance. EFG Hermes derived in 2009 16% of its total fee and commission income from PE versus 6% in the previous year. Despite the downturn in the global PE industry, EFG Hermes managed to generate higher fee income, highlighting the resilience of the business segment. Given the increased launch of PE funds partly due to the current economic environment, we expect EFG Hermes’s PE segment to continue to play a key role in EFG Hermes’s fee income generation. We forecast PE contribution to rise to 20% at the end of our forecast horizon (FY14e) from the current 16%.

Table 16: Private Equity Assumption 2005 2006 2007 2008 2009 2010f 2011f 2012f 2013f 2014f FUM (EGP bn) 2.44 2.86 4.90 6.33 5.30 6.36 8.27 11.58 16.21 18.64 YoY % 13% 17% 71% 29% -16% 20% 30% 40% 40% 15% Revenue (EGP mn) 41.0 103.0 177.0 105.0 124.0 136.4 182.9 248.0 347.3 435.5 ROAF 1.8% 3.9% 4.6% 1.9% 2.1% 2.3% 2.5% 2.5% 2.5% 2.5% PE Rev/Fee Income 6% 11% 10% 6% 16% 14% 14% 15% 17% 18%

Source: Company reports, HC Research

Egypt Financial Services 26

Non-capital-market-related operations a buffer in hard times

 Treasury dealing and cash balances act as a buffer in tough times

 Execution risk is looming, with a delay in identifying the next target

 Better cost-management strategies paying off amid market turbulences

An extremely liquid balance sheet with treasury operations cushioning drops in capital markets

EFG Hermes’s other key area is its capital market and treasury operations, which include cash management, selective fixed-income investments, and FX. The activity also has much wider margins, booking an average 94% versus 25% for fee-generated income.

Prior to the divestment of the Bank Audi stake, EFG Hermes has long been blessed with a liquid and almost debt-free balance sheet. Cash and cash equivalents have been booking an average 25% of EFG Hermes’s total assets with the figure going to a significant 57% after the Bank Audi sale (cEGP6.96 billion by 1Q10). The balance has always been a buffer in the downturn, offering a steady source of income even at the lowest yield of risk-free rates. The average yield on the excess cash is 6%. This along with EFG Hermes’s stake in Bank Audi, gave the company a stable universal banking model to weather any turmoil in capital markets. After the divestment, with no targets yet identified by the company, we maintain cash as is on the balance sheet assuming it will be invested at risk-free rates. Again, in the absence of an income stream from Bank Audi, interest income on the vast outstanding cash balance cushions against market volatility, which is anticipated to increase on expected higher interest rates in the Egyptian market.

Chart 25: EFG Hermes’s liquid balance sheet, enhanced post Bank Audi divestment, to act as a buffer in bad times

Interest income to support earnings (EGP mn) EFG Hermes’s liquid balance sheet buffer in downturns

Interest Income EFG's Assets Breakdown (1Q10) 700,000 60% Receivables Audi Income 8% 600,000 50% Interest Income & Audi Income % of total EFG Intangible Assets 500,000 Income 40% 6% 400,000 30% Cash and Cash 300,000 20% Other assets equivilants inc. 200,000 10% 21% deposits 56% 100,000 0% 0 -10% Investments 2006 2007 2008 2009 2010e 2011e 2012e 2013e 9%

Source: Company reports, HC Research

Bank Audi divestment: Good timing yet execution risk looming

According to management, the company had to divest its stake in Bank Audi as hopes to gain control faded even though the investment provided EFG Hermes with a universal banking model with Bank Audi providing a sustainable revenue stream. The exit (January 2010) was well timed, delivering EGP752 million in capital gains in a deal worth USD913 million and executed at a 15% premium to Bank Audi’s market price at the time at a P/BV of 1.5x. Some 20% of the proceeds were distributed to shareholders in special dividends to reflect goodwill.

Chart 26: Perfect timing for Bank Audi divestment

Bank Audi Share Price

9.5 Share Price (USD) 9.0

8.5

8.0

7.5 EFG sold its stake on 18 January 7.0

6.5 1-Dec-09 1-Jan-10 1-Feb-10 1-Mar-10 1-Apr-10 1-May-10 1-Jun-10 Source: Bloomberg, HC Research

Egypt Financial Services 27

Next target is all about timing and valuation

With no targets announced to date, EFG Hermes has shown interest in acquiring various small banks (versus large targets like Bank Audi) that together can achieve its target of being a . A selection criterion is mainly based on bargain price, attaining significant control, proactive management, a clean loan book, and room for growth. In terms of location, the company’s first focus would be the Middle East as EFG Hermes has regional expertise. Asia and other emerging markets would come as a second option.

With no clear acquisition agenda we picked a few targets that might be interesting for EFG Hermes based on their valuations and ability to gain a controlling stake in them. Although another Lebanese bank would be a perfect match for EFG Hermes as Lebanese banks’ regional diversification would give it access to the its major markets, we rule out any of the big names given the highly unlikely scenario that shareholders would be willing to give EFG Hermes full control since most are majority held by private investors (i.e. Byblos and Bloom). We also rule out markets like Qatar, the UAE, and Saudi Arabia given the huge size of the banks in terms of market cap and the high level of government involvement like in Qatar. Although valuations in Egypt are compelling, we rule out the small banks on issues of asset quality, which is a key measure for EFG Hermes. As such, our guesses are down to a few players in each market that look attractive at current levels. However, we believe there is an execution risk in case management postpones the acquisition, with market rebounds pushing banking valuations higher. If EFG Hermes decides on an acquisition at an attractive price, it would have a positive effect on its EPS and fair value and could support our investment case. MENA banks are trading at an average 26% discount of 26% to our fair value.

Chart 17: Possible Acquisition Targets Controlling stake that can be bought by Bank Country PB PE ROE % Mkt. Cap (USD mn) excess cash United Bank Pakistan 1.1 6.5 18.2 753 100% Allied Bank Pakistan 1.5 6.4 27.4 538 100% Bank Permata Indonesia 1.7 15.6 12.0 1010 84% Jordan Kuwait Bank Jordan 1.2 8.7 15.3 503 100% Jordan Islamic Bank Jordan 1.6 10.3 14.6 407 100% Amman Bank Jordan 1.4 9.2 15.5 361 100% Bank of Jordan Jordan 1.2 8.9 13.9 318 100% Commercial Bank Kenya n/a 10.4 n/a 523 100% Banque Marocaine pour le Commerce Morocco 1.8 17.0 10.9 1405 61% Access Bank 0.8 7.1 11.8 996 86% First City Monument Bank Nigeria 1.0 6.2 n/a 902 95% Banque de Tunisie Tunisia 2.4 14.5 16.8 748 100% Banque de l'Habitat Tunisia 1.2 8.8 14.2 326 100% Bank Sohar Oman 2.0 26.7 7.9 548 100% Oman International Oman 1.6 12.2 13.4 662 100% Bank Dhofar Oman 2.6 19.0 14.4 1368 62% Kuwait International Bank Kuwait 1.2 n/a n/a 746 100% Al-Salam Bank Bahrain 0.6 11.9 5.6 317 100% Khaleeji Commercial Bank Bahrain 0.8 275 100%

Source: Bloomberg, Zawya Dow Jones, HC Research

Centralized regional operations helped in cost management, margins to bounce back to the high level seen in 2007

As the case with investment banks, overhead constitutes the bulk of operating expenses. With most of EFG Hermes’s headcount located in Egypt, we believe the company has saved a lot as human capital expense is by far the cheapest in Egypt compared to the rest of the region. With high operating leverage, margins have come under pressure in 2009, dropping to 8% after the market crash. Given the better growth outlook in the coming years with more focus on the promising retail segment and low-cost online services, we forecast the net operating margin to increase to 45% in FY2012e—in line with the pre-crisis level seen in 2007. In terms of markets, Egypt, Oman, and Kuwait have the highest margins respectively. With both Egypt and Kuwait being major contributors to EFG Hermes’s revenue, we believe margins will be further supported by the revenue mix. Also, with the company aggressively expanding into markets where it historically operated through a local broker, establishing ground operations will save large amounts of third-party fees.

Egypt Financial Services 28

Chart 27

Net operating margin and staff expenses to total expenses Net operating margin peer comparison (9M09)

1,400 Tot. Admin 80% Exp. (EGPmn) 25% 71% 71% 1,200 69% 69% 68% 70% 64% 65% 20% 62% 62%60% 1,000 58.7% 54% 53.3% 50% 15% 800 45% 44.7% 40% 10% 600 33.3% 30% 400 5% 20% 15% 15.1% 200 0% 8% 10% Goldman Naeem Beltone EFG Prime Morgan Merill JP - 0% -5% Sachs Stanley Morgan 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e -10% Net operating margin Staff expenses/Tot. Admin. Exp.

Source: Company reports, HC Research

Chart 28

Employee cost to Total cost – global comparison Cost per employee (USD ‘Mil)

0.60 Goldman 76%

MS 70% 0.50

Macquarie 69% 0.40 EFG 64% 0.30 Merill 62% 0.20 Nomura 59% 0.10 Deutsche Bank 56%

JPM 53% 0.00 EFG JPM DB Nomura MS GS 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Source: Company reports, HC Research

Egypt Financial Services 29

EFG Hermes in Brief

Since its establishment in 1984, the firm has been growing exponentially to position itself as a market leader across the region with ground operations in Egypt, Saudi Arabia, the UAE, Kuwait, Syria, Oman, and Jordan. EFG Hermes has been expanding both horizontally and vertically to cover a whole range of investment banking activities including brokerage, asset management, investment banking, private equity, and research. The company recently sold its 29% stake in Bank Audi, leaving it with more than USD1 billion in cash on its balance sheet.

Strengths Weaknesses

(i) Unique business model with operations across the region (i) High correlation to capital markets (ii) Strong liquid balance sheet with no leverage (ii) Barriers to further penetrate the biggest regional market: (iii) Strong franchise with leading position in most of the Saudi Arabia markets it operates

Opportunities Threats

(i) Re-rating of banks offers attractive acquisition potential (i) Execution risk with failure to identify a potential target (ii) Cash balance offers a steady source of revenue from capping return on excess cash to risk-free rate interest income (ii) Dubai Group divesting its stake in the company at (iii) Further expanding its retail base, which dominates trading distressed levels for immediate liquidity needs in regional markets (iv) A potential acquisition target underpinned by high free float

Egypt Financial Services 30

Rating Scale

Recommendation Upside Buy Greater than 20% Hold -5% to 20% Sell Less than -5%

Disclaimer

This document was issued by HC Brokerage, which is an affiliate of HC Securities and Investments (henceforth referred to as HC)—a fully fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services. The information used to produce this document is based on sources that HC believes to be reliable and accurate. This information has not been independently verified and may be condensed or incomplete. HC does not make any guarantee, representation, or warranty and accepts no responsibility or liability to the accuracy and completeness of such information. Expression of opinion contained herein is based on certain assumptions and with the use of specific financial techniques that reflect the personal opinion of the authors of the commentary and is subject to change without notice.

The information in these materials reflects HC Brokerage’s equity rating on a particular stock. HC, its affiliates, and/or their employees may publish or otherwise express other viewpoints or trading strategies that may conflict with the views included in this report. Please be aware that HC and/or its affiliates and the investment funds and managed accounts they manage may take positions contrary to the included equity rating.

This material is for informational purposes only and is not an offer to sell or the solicitation of an offer to buy. Ratings and general guidance are not personal recommendations for any particular investor or client and do not take into account the financial, investment, or other objectives or needs of, and may not be suitable for any particular investor or client. Investors and clients should consider HC only a single factor in making their investment decision while taking into account the current market environment. Foreign currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. Investors in securities such as ADRs, the values of which are influenced by foreign currencies, effectively assume currency risk. Neither HC nor any officer or employee of HC accepts liability for any direct, indirect, or consequential damages or losses arising from any use of this report or its contents.

Disclosures

We, Germaine Benyamin and Janany Vamadeva, certify that the views expressed in this document accurately reflect our personal views about the subject securities and companies. We also certify that we do not hold a beneficial interest in the securities traded.

HC is not a market maker in the securities of the subject company. HC, its affiliates, and/or its directors and employees may own or have positions in and effect transactions of companies mentioned in this document. HC and its affiliates may also seek to perform or have performed investment-banking services for companies mentioned in this memorandum.

Copyright

No part or excerpt of its content may be redistributed, reproduced, or conveyed in any form, written or oral, to any third party without prior written consent of HC. The information within this research report must not be disclosed to any other person if and until HC has made its information publicly available.

Issuer of report: HC Brokerage Building F15-B224 Smart Village KM28 Cairo-Alexandria Desert Road Egypt Telephone: +202 3535 7666 Fax: +202 3535 7665 Website: www.hc-si.com

Egypt Financial Services 31

HC Research [email protected]

Karim Khadr Regional Head of Research [email protected] +971 4 2935381

Tudor Allin-Khan, CFA Chief Economist/Strategist [email protected] +971 4 2935386 Amr Abdel Khalek Economist [email protected] +202 3535 7368 Nadine Weheba Economist [email protected] +202 3535 7358

NematAllah Choucri Telecoms [email protected] +202 3535 7352 Sarah Shabayek Telecoms [email protected] +202 3535 7366

Germaine Benyamin Banks & Financials [email protected] +971 4 2935382 Janany Vamadeva Banks & Financials [email protected] +971 4 2935384

Hatem Alaa Industrials [email protected] +202 3535 7354 Mennatallah El Hefnawy Industrials [email protected] +202 3535 7360 Mai Nehad Industrials [email protected] +202 3535 7356

Majed Azzam Real Estate [email protected] +971 4 2935385 Ankur Khetawat Real Estate [email protected] +971 4 2935387 Nermeen Abdel Gawad Real Estate [email protected] +202 3535 7362

Lovetesh Singh Petrochemicals & Fertilizers [email protected] +91 9772 755 777

Rehaam Romero Editor [email protected] +202 3535 7364 Ahmed Maklad Editor [email protected] +202 3535 7372

Mohamed El Saiid, MFTA Head of TA Research [email protected] +202 3535 7390 Wael Atta, CFTe Senior Technical Analyst [email protected] +971 4 293 5388 Sameh Khalil, CFTe Technical Analyst [email protected] +202 3535 7392

HC Brokerage – Cairo, Egypt [email protected]

Shawkat El-Maraghy Managing Director [email protected] Ext. 500 Khaled Abdelrahman Managing Director [email protected] Ext. 512

Mostafa Saad Local & Gulf Sales [email protected] Ext. 524 Hossam Wahid Local & Gulf Sales [email protected] Ext. 522 Hassan Kenawi Local & Gulf Sales [email protected] Ext. 528 Abou Bakr Shaaban Local & Gulf Sales [email protected] Ext. 518 Nihal Hany Local & Gulf Sales [email protected] Ext. 532 Mohamed Helmy MENA Sales [email protected] Ext. 502 Ahmed Nabil Fixed Income Trader [email protected] Ext. 516

HC Brokerage – Dubai, UAE

Hassan Aly Choucri General Manager [email protected] +971 4 293 5305

Nadia Kabbani Head of Institutional Sales [email protected] +971 4 293 5365 Anne Marie Browne Foreign Institutional Sales [email protected] +971 4 293 5301 Samer Azzam Foreign Institutional Sales [email protected] +971 4 293 5302 Mohamed Galal Head of Sales Trading [email protected] +971 4 293 5309

Egypt Financial Services 32