When the investment bank CI Capital was founded 10 years ago in May 2005, its primary objective has been to compete with EFG Hermes to control the financial services market, especially when Egyptian billionaire Naguib Sawiris sold 39% of CI Capital in August 2008 to the Commercial International Bank (CIB).
The business community also believed CIB will support the company’s plan to control a stake of financial services, equivalent to that of EFG Hermes. CIB had indeed completed the EGP 800m acquisition and lifted the company’s capital from EGP 50m to EGP 550m.
Ten years later, however, CI Capital is still unable to compete with EFG Hermes in the local or regional market.
The question remains: If the merger between Beltone and CI Capital is completed, will this create an equivalent competitor for EFG Hermes and change the map of investment banks in Egypt?
A few points should be noted first. Data suggests that the value of the acquisition of CI Capital is between EGP 900m and EGP 950m. The deal includes CI Capital’s stake in CorpLease for financial leasing (43%), since CIB has transferred of ownership of the company to CI Capital.
Based on stated revenues, the CI Capital-Beltone alliance is not on equal footing with EFG Hermes, though the alliance manages more assets and businesses than EFG Hermes.
An official source at EFG Hermes told Daily News Egypt, on condition of anonymity, that the fundamental criterion for judging the competition is not the volume of business, but rather the revenues and profits.
When looking at the asset management sector, the alliance manages financial funds and portfolios of some EGP 42bn ($5.43bn), whereas Beltone manages EGP 32bn and CI Capital manages EGP 10bn.
But analysing revenues show that Belton’s budget, which ended last September 30, has achieved EGP 11.536m with no available information on CI Capital. Meanwhile, EFG Hermes has made profits of about EGP 116m although it is only managing $2.8bn worth of assets.
According to the source, EFG Hermes makes more profits compared to the size of managed assets since it focuses on managing more assets that record better management fees, as they require more experience and effort than investing in debt instruments and limited-risks deposits.
He added that EGP 87m of EFG Hermes’ first nine months of 2015 revenues are registered on Arab markets, while the remainder of profits are recorded from the Egyptian market.
In terms of the brokerage sector, the alliance is relatively better than EFG Hermes, where the alliance’s market share, including transactions in the Egyptian Stock Exchange (EGX), since the beginning of the year until the end of November, record 24.9%, versus 15.4% for EFG Hermes.
“It is more prudent to compare the transaction happening at the stock exchange after excluding deals, due to the weakness of the commissions collected on the latter, that could be zero at times,” the source said.
Accordingly, the alliance share amounts to 15.26% of trading in the stock market, divided between 11.9% for CI Capital and 3.27% for Beltone, compared to EFG Hermes’ 16.07%.
As for promotion and coverage of IPOs, Beltone recorded revenues of EGP 11.536m in nine months. This rate is subject to increase when the undeclared revenues of CI Capital are taken into account. EFG Hermes, on the other hand, boasted EGP 149m worth of revenues, EGP 128m in Egypt and EGP 21m in Arab markets.
The source said EFG Hermes’ revenues from the sector amounted to approximately EGP 500m since the 25 January Revolution in 2011, where Arab markets accounted for a large share during the turmoil in the local market, where 25% of the company’s staff is based in the UAE.
The CI Capital-Beltone alliance will not reap gains on the short term, according to the source. “Both companies’ staff will continue doing their regular jobs,” the source said. “We will have to wait for a few years to see results arising from reducing expenses and improving profitability, which will attract new experts, deals, and businesses.”
In terms of financial leasing, CorpLease came in third amongst companies’ rankings during the third quarter, having provided funds worth EGP 312m, versus EGP 153m worth of contracts for EFG Hermes, which came in ninth place.
A report issued by Mubasher Financial Services (MFS) suggests that CIB will make profits of EGP 443m once the merger is complete. CEO of Naeem Investment Banking Youssef Al-Far said the merger will not impact the financial services sector.
“Both Beltone and CI Capital are strong competitors without the merger,” he said. “On the short term, it will be nothing but a transfer of ownership, where CI Capital is owned by the largest private bank, so the merger will not offer any fast expansion.”
Al-Far ruled out the possibility of Naeem entering any mergers or acquisitions in the upcoming period, where it focuses more on direct investment though the establishment of a fructose factory and its real estate projects through the bank’s real estate arm Reacap.
The unrest in the region has led the capital market business to decline and increase the burden of labour expenses, which will cause more mergers and acquisitions to take place, according to Al-Far.
The CI Capital-Beltone alliance will lower the number of heavyweight competitors in the financial services sector, Managing Director of Prime Holding Mohamed Maher projected.
He expected that the alliance will not acquire more stakes in the market, but rather may even reduce their shares. “For now, both bodies can represent both sides of a possible transaction, but when they merge they will only be able to represent the buyer or the seller,” he said.
Maher believes this may open up opportunities for other players to join the financial services sector. Cutting down on expenses will increase the profits of the alliance and enable expansions in the local and regional markets.
He also ruled out the possibility of Prime Holding’s entry in acquisitions or mergers, even though they have been given “enviable offers” in the past period.