PACRA Maintains Broker Management Rating of EFG Hermes Pakistan Limited

EFG Hermes Pakistan Limited ('EFGH’ or the 'Company') has the backing of “EFG Hermes”, an international financial services group. As a part of strategic re-allocation of its resources, the Group has declared an exit from Pakistan and has put up its ~51% ownership stake of EFGH for sale. However, the Group maintains its continued financial and non-financial backing for EFGH. The Company primarily provides equity brokerage. The market experienced low volumes and limited investor interest during 1HCY23, impacting the brokerage industry's revenue; however, since the start of 2HCY23, the market volumes have picked up and investor interest has managed to push the index to historic highs. The market volumes growth trend appears to be ongoing, resulting in positive market indicators for 2HCY23.The rating incorporates the Company’s association with astute sponsors, ‘EFG Group’, an international financial service group. EFGH has a robust governance framework backed by a board of 7 members including 4 non-executive and two independent directors. The management team comprises seasoned professionals with proper departmentalization and defined roles. Further, clients are provided with up-to-the-mark services in the form of mobile and web-based trading, access to traders and in-house customer services. A strong control environment emanates from group oversight and group internal audit functions which reports directly to the board Audit Committee. EFGH has established rigorous controls and policies to govern client relationships and handle grievance mechanisms. During 9MCY23, the equity brokerage revenue stood at ~PKR 87mln depicting a decline of ~6% (SPLY: ~PKR 93mln). The Company suffered from a loss after tax of ~PKR 101mln during 9MCY23 (SPLY: loss of ~PKR 68mln). The losses stem from the ongoing inflationary pressure increasing administrative expenses, and the prevailing high interest rates causing a surge in the finance cost. The Company’s realization of its planned strategy to focus on retail clientele may result in an improvement in the topline. EFGH does not partake in proprietary investment books, thus limiting market risk. The sponsor continues to support EFGH through a guaranteed loan facility of PKR 825mln. The equity base is considered low, amounting to ~PKR 128mln at end-Sep'23. Moreover, the equity injection of PKR 60mln during 3QCY23 by the Group signifies the Group's ongoing support.
Moving forward, it is imperative from a ratings perspective to maintain topline growth, revenue diversification, and profitability. Moreover, retention of key management personnel and further separation of management roles remain critical.

About the Entity
EFG Hermes Pakistan Limited, a publicly listed company established in 1999, provides securities research and brokerage services to institutional and individual clients. It is also engaged in investment banking activities. The Company is 51% owned by EFG Hermes Frontier Holdings LLC, a wholly-owned subsidiary of EFG Hermes Holding S.A.E. The focus of EFG Hermes Frontier Holding LLC is to increase footprints and explore new opportunities in frontier markets of the world. EFG Hermes specializes in asset management, securities brokering, investment banking, private equity and research. EFG Hermes is the first foreign investment bank and securities broker to be physically present in Pakistan. The Company operates from its head office based in Karachi, Pakistan.