PACRA Maintains Broker Entity Ratings of EFG Hermes Pakistan Limited | RW assigned

EFG Hermes Pakistan Limited ('EFGH' or the 'Company') is a venture of the EFG Hermes Group (the 'Group'), a seasoned financial services group having a presence across multiple countries. 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. There is an express understanding from the Group to extend financial and non-financial support to the Company in case of any contingency. As a testimony, the Group has already arranged a back-to-back guarantee for long-term loans to the Company amounting to PKR 825mln. Additionally, equity injection of PKR 60mln during 3QCY23 by the Group signifies the Group's ongoing support. The Rating Watch signifies the developing situation of the Group's exit and the potential merger and/or acquisition transaction of EFGH, as notified on the PSX. Market sentiments remained subdued during 1HCY23, with high inflation, economic uncertainty, and rising interest rates lowering investor confidence. However, since the start of 2HCY23, investor confidence has boosted on account of positive macro-economic developments and political stability, raising KSE-100 index to historic highs and elevating market volumes. The ratings incorporate EFGH's strong governance structure and a well-developed matrix organizational structure. A well-qualified and experienced team manages business operations, overseen by Group heads. The Company has a strong internal control framework with Group oversight available in the form of a Group internal audit function. EFGH's operations are concentrated to equity brokerage, whereas MFS and MTS are also present. The Company provides sound research services to its customers while online trading is also available. During 9MCY23, EFGH earned ~PKR 87mln from brokerage revenue (SPLY: ~PKR 93mln). The Company earned an operating profit of ~PKR 9mln on account of ~PKR 104mln gain on sale of proprietary investments. However, the highly leveraged position in a high interest rate environment escalated finance costs to ~PKR 122mln during 9MCY23 (SPLY: ~PKR 78mln), resulting in the Company incurring a loss after tax of ~PKR 101mln during 9MCY23. The Company invests excess cash in low-risk market T-Bills to augment its bottom-line, with the investment book standing at ~PKR 818mln at end-Sep'23. The equity base is considered low, amounting to ~PKR 128mln at end-Sep'23.
Moving forward, the realization of the merger/acquisition transaction shall be critical for the ratings. Meanwhile, continued group support remains vital. Moreover, improvement in topline and profitability is important.

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.