EFG Hermes surmounted new challenges and embraced opportunities in 2018 as we continued to execute our vision of transforming our Firm from a pure play investment bank into a leading financial services corporation with a more diverse product range and a strong footprint in frontier emerging markets (FEM). In addition to fueling growth, creating synergies, and unlocking cross-selling capabilities across our business lines, these transformative efforts will enable us to create a more sustainable business model that is less susceptible to volatility in capital markets.
While working to achieve this ambitious vision, our talented people continued to provide an unmatched level of service and unlock exceptional value for EFG Hermes’ retail, high-net-worth, institutional and corporate clients. Despite facing challenges such as volatility in FEM and thinning volumes in regional exchanges, we continued to deliver strong results across our three verticals: The Investment Bank, the Non-Bank Financial Institution (NBFI) Platform and the Merchant Bank.
The key driver of our success has been our unwavering commitment to the six guiding principles – the “Six Ps” – that also serve as indicators against which we assess our performance year-on-year.
Our people remain the solid foundation on which our Firm is built, and our commitment to hiring, retaining and developing the best professionals in the market has grown stronger as we have evolved. In 2018, our team grew in terms of size and diversity to reach over 4,400 members as we launched operations in Nigeria, Kenya, and Bangladesh while simultaneously expanding our NBFI product suite.
The Firm continues to attract the best human capital while maintaining a flexible cost base, with its employee expenses to revenues kept below the announced 50% target. These employees will be responsible for driving its future growth and enhancing its prospects. They will also be the foundation for the next generation of leaders of EFG Hermes, ensuring proper succession planning and business continuity beyond the current senior management team.
Accordingly, and with that in mind, in 2018, our HR Department has launched its progressive new learning and development program: The Academy by EFG Hermes among other important learning and development initiatives. This program will train the next generation of leaders within the Firm, equipping them with the critical thinking skills and professional competencies needed to drive transformation within EFG Hermes and across global markets. This year, we also explored new forums to facilitate communication between senior management and our growing and increasingly global employee base. These new channels will be fully operational in the first half of 2019 and will make sure that our employees have a direct medium to communicate their ideas and suggestions to the Firm’s senior management.
Our strong positioning across four continents, our global footprint and the significant progress we have made in our newest markets are proof that EFG Hermes has truly established itself as a leading financial services corporation in FEM. The Firm’s sell-side franchise continued to thrive in 2018, as we maintained our position as MENA’s largest broker and ECM advisor by market share as well as our status as the top-ranked research house in FEM. At the same time, our buy-side franchise remains the largest in the Middle East, managing a combined AUM base of USD 4.5 billion in public and private markets across Egypt, MENA, Europe, and FEM. Despite being a relatively new entrant in the market, our NBFI platform has already created a name for itself managing Egypt’s top private-sector microfinance house, a highly promising factoring business, a top-ranked leasing company and an innovative consumer finance fin-tech offering.
Geographical expansion has been a major focus over the past few years as we have grown our presence around the globe with a focus on the emerging frontier. In 2018, we planted flags in Kenya, Nigeria, and Bangladesh, bringing our total footprint to 12 offices across four continents. Today we have hubs in all of our main regions of focus including North Africa, the GCC, the Levant, West Africa, East Africa and South Asia, and with our expanded research coverage, we now have the ability to execute trades and provide advisory services for our clients across over 75 frontier emerging markets. While we may see further expansions during the course of 2019, we are also focusing a lot of our efforts on building our market share and generating sustainable revenue streams in new geographies.
In 2018, management led a successful push to utilize our extensive distribution network more effectively by adding a fixed income desk, increasing our structured product offerings and – even more significantly – scaling up our debt capital markets activity. I am also incredibly excited with the USD 150 million EFG Hermes Education Fund, our newest private equity fund offering launched this year in partnership with Global Education Management Systems (GEMS) Egypt. This fund will provide our limited partners with excellent exposure to the under-served K-12 education segment in Egypt while simultaneously meeting society’s need for more high-quality schools at all fee levels.
This year, we also made a significant addition to our NBFI product suite with the launch of EFG Hermes Factoring. I am confident that this new product offering will create important synergies in the form of cross-selling potential, especially with our leasing business. Additionally, the various offerings of our new NBFI platform – and especially our microfinance platform Tanmeyah and fin-tech offering valU – are strengthening EFG Hermes’ brand equity. Today we are positioned as a financial services powerhouse in the market as opposed to an exclusively corporate and institutionally-focused investment bank.
Going forward, fin-tech will undoubtedly play an increasingly important role in the global financial landscape, and EFG Hermes is committed to remaining ahead of the curve in embracing the potential of financial technology. In 2018, we continued to grow valU’s vendor network while incrementally refining the operation of the mobile application. Seeking to connect our interest in fin-tech with our commitment to driving growth and innovation in our markets, we also launched EFG EV, one of Egypt’s most powerful fintech-focused startup accelerator, in partnership with Egypt Ventures (an affiliate of the Egyptian Ministry of Investment and International Cooperation) through which we intend to invest in 30 of the country’s most promising startups over the next five years.
Thanks to the diligent efforts of all of our people, EFG Hermes achieved profits of EGP 1 billion at the end of 2018. Yet profitability remains the area where I see the greatest upside for our shareholders in the years to come. In recent years, our return on equity has remained in the high single- to low double-digit range, and while this has largely been due to factors beyond our control, our efforts during the past four years were mainly targeted at driving profitability and generating additional value for our shareholders.
I expect the ramp up of business across our Non-Banking Financial Platform and an increase in returns from our FEM business as we grow our presence in these markets to be the main drivers of this upside. An overall pick up in our incumbent markets brokerage business is also expected as daily traded values normalize from current levels. To ensure that these new revenue streams meaningfully contribute to the Firm’s overall profitability, we will continue to follow our cost-conscious approach to business and tightly monitor operating expenses.
EFG Hermes remains committed to making a positive difference in the communities in which we work, and the main way we do this is through the EFG Hermes Foundation, to which we try to donate a portion of the Firm’s profits every year. This year, we are proud to have launched a new EGP 70 million integrated sustainable development project to revitalize the villages of Naga’ El Fawal and Al Deir in Upper Egypt. In partnership with the Sawiris Foundation for Social Development, the Kuwaiti Initiative for the Support of the Egyptian People, and Orascom Construction, we are collaborating with local authorities in Luxor to rebuild homes; establish community centers, schools, and a sewage treatment plant; and launch educational and vocational training opportunities. Ultimately, this project is expected to benefit more than 60,000 people in Upper Egypt and revitalize the social fabric of these communities.
I am incredibly proud of all that we have achieved in 2018, and in 2019 we will continue to rigorously pursue our goals across the six pillars of our strategy. We will increase our focus on expanding and strengthening our position across our markets while driving growth and unveiling new products across all of our verticals. In particular, I am excited to witness the successful ramp up of EFG Hermes Finance platform and our expanding FEM business. The growth of the NBFI platform in particular should help create considerable value for our shareholders since these businesses typically enjoy a clearer and more consistent earning visibility and trade at higher multiples than our sell- and buy side-businesses.
With much of our product line still in its infancy stage, we do not believe our shareholders have seen the full impact of our strategy in the Firm’s reported net earnings and return on equity metrics to date. However, in 2018 we started to realize the early shoots of what we are implementing on a number of fronts, including a growing revenue stream from frontier markets as well as an expanding profit contribution from the NBFI platform. A consistent recovery in capital market activity taking daily traded values back to normal levels in our key markets will be an added bonus. In the absence of such an event, however, we still believe we have put in place a strong business model that will ensure the sustainability and growth of our business in the years to come.
Group Chief Executive Officer
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