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Tuesday, 25 May 2021

EFG Hermes’ Awad on the AIB acquisition, taking his franchise outside Egypt, and what will bring foreign investors back to the market — part 1 of 2

Few transactions have been as closely followed in Egypt’s banking and finance industries as has EFG Hermes’ acquisition of a controlling stake in the commercial bank AIB in a partnership with the Sovereign Fund of Egypt (SFE). Was the SFE serious about public-private partnership? Did EFG Hermes’ management have a vision for universal banking that could succeed where its earlier bid with Bank Audi never fully took off? Would the regulatory stars align?

The answers are “Yes,” “Yes,” and “It seems so” after the firm announced at the end of last week that it was acquiring a supermajority stake in Arab Investment Bank in a EGP 3.8 bn transaction that sees it partnering with the SFE. It’s a landmark transaction for the Sisi administration’s bid to show it is serious about partnering with the private sector to unlock growth.

The transaction in brief: Once the sale closes, EFG will become AIB’s controlling shareholder with a 51% stake, while the SFE will take 25% through its financial services and digital transformation sub-fund. The state-owned National Investment Bank will retain a 24% stake of AIB post-transaction, having previously held a 91.4% stake. We have background here and here. Group CEO Karim Awad confirms the acquisition should close in 3Q2021, subject to the usual post-closing conditions and regulatory approvals, including from the Central Bank of Egypt.

The stakes are high for EFG Hermes, which has now transformed itself from a huge fish in a small pond (Egypt investment banking) into a Cairo-headquartered universal bank with operations spanning 13 countries on four continents. On Awad’s watch, EFG established a market-leading non-bank financial services (NBFS — or non-bank financial institution, NBFI, as Awad calls it) platform that has leasing, factoring, payments, consumer finance, mortgage lending, microfinance and ins. under one roof. Its investment bankers, brokers, asset managers and private equity types now go to work each day in Cairo, London and New York — and in Dubai, Abu Dhabi, Riyadh, Nairobi and Lagos. Today, it’s on the verge of adding a commercial bank to its arsenal.

We sat down for an exclusive interview with Awad looking at what’s next for EFG Hermes and for the wider market. Edited excerpts follow. Part 1, covering the AIB transaction, is below. Part 2, which focuses largely on the domestic industry, will appear in this afternoon’s edition of EnterprisePM.

Among the key takeaways in part 1 of our discussion:

  • The AIB transaction is about cross-selling and synergies, not lower costs of funds — EFG has no intention of changing how things work with the relationship banks its NBFS companies already work with.
  • Partnering with the Sovereign Fund of Egypt has been a “great experience” and key policymakers have been supportive of the transaction.
  • How have investors reacted?

In part two THIS AFTERNOON:

  • Is EFG Hermes still in investment mode?
  • Will Awad & Co. take the NBFS arm outside Egypt?
  • What’s next for EFG Hermes the investment bank?
  • What will bring foreign investors back to the market?
  • Why is Awad excited about the state of the nation’s debt market?

ENTERPRISE: So, what have you done?

KARIM AWAD: We’re creating a one-stop shop for financial services of all descriptions, whether you’re a corporate client, an institutional investor or a retail client. Remember when we were talking on the podcast (listen: runtime, 34:07), and I said we wanted to transform the firm from a pure investment bank into a platform that can provide more services to clients? That’s what we had in mind. From leasing solutions to IPOs or long-term loans for corporates. From brokerage services through our app or at our physical branches, to a personal loan, ins., a mortgage or consumer finance for retail clients.

E: What will happen to the AIB brand name? Are we going to see EFG Hermes Bank?

A: I think it’s a bit early to discuss things like branding, but what’s clear to us is that there is plenty of potential at AIB. It’s a good bank with good potential — a good management team that has built infrastructure that includes a national branch network and a proper core banking system. Our ability to drive cross-selling will create a stronger brand there in the future, a brand that regardless of name will create a niche for itself in the market and provide its clients with a differentiated product offering.

E: Cross-selling is difficult, and most businesses struggle with it whether it’s the result of organic growth, M&A or a greenfield. Are you happy with how EFG is doing on this now?

A: I’m increasingly satisfied, yes. We’ve been particularly successful with our corporate clients, where you see our investment banking team discussing strategies and solutions that can include classical IB solutions, but also, for example, factoring and leasing. We’ve done this in a number of large transactions, particularly in the past couple of quarters.

We would like to see more of that on the retail side. I’m not as satisfied with where we’re at on that front, but it takes time for businesses to integrate and start talking to each other. Leasing and finance are the pathfinders at EFG Corp Solutions, though — they’re showing what’s possible, and we’ll get there on the NBFI and, eventually, the banking sides.

E: What’s missing from the banking or NBFS platforms?

We already have everything from mortgages and ins. to leasing, factoring, consumer finance, microfinance and payments all of that under one roof. Where the bank comes in is that you can do deposit taking, so that makes possible credit card lending, personal loans, corporate loans. In a market as fast-growing as Egypt, the NBFI and commercial banking businesses don’t compete with each other — there’s lots of room for growth, and if they work together, the synergy creation will be incredible.

E: How much is this about reducing your overall cost of funds by being able to take deposits?

A: That’s not the objective at all. It’s about cross-selling and synergies. Look, our NBFI business is very well funded with relationship banks and there will be no changes whatsoever on that front. If [AIB] wants to lend to our leasing or factoring businesses, and if that’s allowed within the regulatory framework and our rules on related-parties transactions, then so be it. Where we think we can help the bank, for example, is that we can help them get access to more microfinance, helping it meet its target of 25% of loans being to micro, small and medium-sized enterprises under the CBE’s directives.

E: How have investors reacted to the transaction?

A: Our shareholders know where we’re taking the business — that we’re a patient management team in the sense that we try to build a solid foundation. We’re creating value for our shareholders, but in a sustainable way. We were the number-one investment bank when we started down this path, and we charted out a series of moves that would enhance and smooth out our earnings. That’s why we pushed more into the buy side, it’s why we launched our NBFI and it’s why we’re now going ahead with AIB.

E: How is life with the Sovereign Fund of Egypt as a partner?

A: It’s been a great experience. We’re on the same wavelength with the team at the SFE when it comes to just about everything — what we want to do with the bank, our vision for the future. They’ve been helpful and supportive — instrumental, really. I also think it’s important that our community not just understand that the SFE is serious about public-private partnership, but that we’ve had the full support of the governor of the Central Bank of Egypt Tarek Amer and of Planning Minister and SFE Chair Dr. Hala El-Said, as well as of our chairperson, Dr. Mona Zulficar.

DON’T MISS PART 2 in this afternoon’s EnterprisePM, in which Awad discusses EFG Hermes’ forays into merchant banking and direct investment, as well as the expansion abroad of its NBFS arm. Karim also discusses what’s next for the debt market, and what obstacles foreign institutional investors see in Egypt.

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