Non-banking financial sector in shock due to high interest rates

EFG Hermes working to improve its profit margins, hopes to improve economic conditions: Al-Ahly Pharos

The non-banking financial sector has been dealing with great pressure recently after the multiple increases in interest rates throughout the year, with the Central Bank of Egypt (CBE) raised them by a combined 3% to keep pace with the rise in inflation.
The rise in interest rates affected the cost of lending to non-banking financial companies, which have a business model that is largely based on borrowing and then re-lending. However, some companies were able to withstand the pressure and even achieve good business results during the first half (1H) of this year. On the other hand, many others were affected.
The consolidated profits of EFG Hermes Holding in 1H 2022 increased by 20%, achieving a net profit of EGP 906.8m — including minority rights — compared to profits of EGP 754.95m in 1H 2021.
Moreover, the company's revenues increased to EGP 3.98bn, up from EGP 2.84bn.
Furthermore, Al-Ahly Pharos Securities Exchange recommended increasing the relative weight of EFG Hermes' shares to a fair value of EGP 19.5.
Research also indicated that microfinance and consumer finance services represent about 36% of the fair value, while factoring and financial leasing represent about 7% of the fair value of the company's stock.
Al-Ahly Pharos also stressed that the group is working to improve its profit margins and hopes to improve economic conditions, as well as reduce reserved provisions to increase the contribution of lending activity to net profits to 50% over the next two years instead of 23% in 1H 2022.
Additionally, the research expects that the Arab Investment Bank will contribute about 12% of the fair value of the share within two years and improve the profitability of the group, as well as the return on equity. This would be done by completing other lending work and creating mutual integration opportunities with the rest of the group's activities.
It is also likely that the investment banking services arm — which contributes about 20% of the fair value — will benefit from the recovery in trading volumes in 2018 and the upcoming subscriptions through its large market share in the market.
In a related context, Arab African Stock Exchange International Securities (AAIS) revised its recommendation for EFG Hermes from buy to hold with a target price of EGP 14.33.
On the other hand, Beltone Financial Holding lost EGP 105.6m, compared to a net profit of EGP 8.5m.
The company's total revenues also decreased to EGP 110.39m, down from EGP 193.82m.
Moving on, the consolidated net profit of GB Auto increased by 35% to reach EGP 1.09bn, compared to a net profit of EGP 807.3m in 1H 2021.
Additionally, its revenues increased to EGP 15.67bn, compared to EGP 14.09bn, despite the market challenges.
Mubasher Research for Securities said that GB Capital — the investment arm of GB Auto's non-banking financial activities — has increased its revenues, which represent about 24% of the total collected revenues of the latter.
The research added that GB Auto's stock is currently trading at a profitability multiple of 3.21 times with a target price of EGP 5.93 per share.