PACRA Maintains Entity Ratings of EFG Hermes Pakistan Limited
EFG Hermes Pakistan Limited ('EFGH' or the 'Company') has the backing of a seasoned financial services group "EFG Hermes". The group has a presence across fourteen countries spanning four continents across the globe. EFGH primarily offers equity brokerage and research services, while MFS/MTS are also present. To cover its finance cost and augment the bottom line, the Company invests all excess funds into low-risk market T-bills. Rising interest rates, political uncertainty, and increasing inflationary pressure during CY22 have impeded investors' sentiments, adversely impacting volumetric activity at PSX. To address the volumetric decline, the Company shifted its focus towards retail clients, and as a result sustained its market share during 9MCY22. EFGH's revenue fell by ~48% during 9MCY22 to ~PKR 94mln (SPLY: ~PKR 181mln) while market volumes declined by ~57% during the same period. The profitability remained under stress, with the Company suffering from a loss after tax of ~PKR 68mln during 9MCY22. The assigned ratings incorporate the continued financial support of the sponsor through guaranteed loan facilities of PKR 825mln. During the 9MCY22, the sponsor reclassified its inter-company receivable, enhancing EFGH's equity base by ~PKR 118mln. The Company's equity has declined over the years due to losses, standing at ~PKR 207mln at end-Sep'22, and may be improved through further equity injections. Going forward, EFGH plans to further penetrate the retail clientele by enhancing its online presence by launching a customized mobile application. The recent volatility in trading volumes has heightened the exposure to business risk while going forward, capital market activity is expected to remain subdued amidst high inflation and interest rate environment. EFGH's revenue is concentrated in equity brokerage, and revenue diversification is required in the prevailing market conditions. The assigned ratings draw comfort from the strong governance and control framework of the Company. EFGH does not engage in proprietary book investments, thus limiting market risk.
The ratings depend on the management's ability to retain its market share and enhance the volumes and diversity of revenue to improve its competitive position in the brokerage industry. Retention of key personnel and profitability sustainability will remain imperative from a rating perspective.
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.