Intermarket Securities Limited (Formerly: EFG Hermes Pakistan Limited)

CREDIT RATING REPORT | Dec-24

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Rating History
Dissemination Date Long-Term Rating Short-Term Rating Outlook Action Rating Watch
20-Dec-24 A- A1 Stable Maintain -
21-Dec-23 A- A1 Developing Maintain YES
23-Dec-22 A- A1 Stable Maintain -
24-Dec-21 A- A1 Stable Maintain -
24-Dec-20 A- A1 Stable Maintain -
About the Entity

Intermarket Securities Limited (formerly EFG Hermes Pakistan Limited) was incorporated on September 27, 1999, under the Companies Act, 2017 as a Private Limited Company. In November 2006, it was converted into a Public Unquoted Company. Effective from March 20, 2008 the Company was listed on the Pakistan Stock Exchange Limited. Intermarket Securities Limited acquired EFGH during CY24, with an effective merger date of 1st July, 2024. The Company is a full-service brokerage platform offering trade execution/settlement, investment banking & advisory as well as equities & economic research. The Company is headed by the CEO, Mr. Wajid Hussain, who has over 25 years of relevant experience.

Rating Rationale

Intermarket Securities Limited ('IMS' or the 'Company') has a sustained market presence. As a strategic move to increase its foreign clientele outreach, the Company merged with and into EFG Hermes Pakistan Limited, effective from July 2024. CY24 has been a great boon for the brokerage industry, specially after the lackluster market volumes observed during CY22 and CY23. Investor confidence rebounded during the year, with the declining interest rates providing the incentive to investors to shift from fixed income to equity securities. Market volumes surged and as a result, the KSE-100 Index continuously breached its historic high levels during the year. The momentum is expected to continue on during 1QCY25; however, improving macro-economic indicators and political stability shall remain key. IMS has diversified its revenue streams through equity and commodity brokerage, MFS/MTS, and corporate finance. Taking advantage of the market uptick, the Company's topline surged by a considerable ~90% during 9MCY24. Moreover, the topline was aided through ~PKR 151mln of realized capital gains on sale of proprietary investments. Consequently, the Company's bottom-line rose immensely to ~PKR 278mln during 9MCY24 (SPLY: ~PKR 17mln). ISL manages its proprietary investment book on an active basis to monitor risks, with proprietary investments constituting ~25% of equity at end-Sep'24. The Company's capital structure is leveraged at ~30% at end-Sep'24, with a strong equity base of ~PKR 1,775mln at end-Sep'24. ISL has a stable ownership structure, with majority ownership vesting with the sponsoring family. The business acumen of the primary sponsor, Ms. Erum Balwani, is well acknowledged. The Company has a strong seven-member board, with board committees chaired by independent directors. ISL has a functional organizational structure, supported by an experienced management team. Client services are sound, with economic and equities research present. The internal control framework is supported by separate internal audit, compliance, and risk management functions. ISL plans to enhance its market share by consolidating foreign clientele of EFGH, while focusing on improving its retail customer base.

Key Rating Drivers

Going forward, maintenance and improvement of product and customer diversification is vital. Moreover, growth of topline and sustainability of profitability margins remain key. Meanwhile, upholding internal controls, retention of key management, and diligently monitoring of risks are important.

REPORT CONTENTS
  1. Rating Analysis
  2. Financial Summary
  3. Rating Scale
  4. Regulatory Disclosure

Intermarket Securities Limited (Formerly: EFG Hermes Pakistan Limited)

rating analysis

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Profile
Background

Intermarket Securities Limited (formerly EFG Hermes Pakistan Limited) was incorporated on September 27, 1999, under the repealed Companies Ordinance, 1984 (now the Companies Act, 2017) as a Private Limited Company. In November 2006, it was converted into a Public Unquoted Company. Effective from March 20, 2008 the Company was listed on the Pakistan Stock Exchange Limited. Intermarket Securities Limited ('ISL' or the 'Company') acquired EFGH during CY24, with an effective merger date of 1st July, 2024.

Operations

IMS primarily specializes in equity brokerage services, catering to three key client segments: i) Foreign investors, ii) Institutional clients, and iii) Retail/High Net Worth Individuals (HNWIs). Additionally, the Company is engaged in advisory and underwriting services.

Ownership
Ownership Structure

Ms. Erum Balwani is the principal shareholder of Intermarket Securities Limited, holding a 43% stake in the company, while Mr. Muhammad Uraib Bilwani owns a 41% share. The remaining ~16% is held by various individuals and institutions.

Stability

Ownership is considered stable through majority ownership vesting with the sponsoring family.

Business Acumen

The Company sponsors possesses the relevant educational background and extensive industry specific working knowledge. The sponsors have multiple successful businesses within and outside Pakistan, with a diversified experience in the financial sector, primarily in the capital market.

Financial Strength

The sponsors have adequate financial strength and may inject further equity with increasing quantum of operations.

Governance
Board Structure

The Company’s Board of Directors (BoD) comprises seven members, which include two independent, four executive directors and one non-executive director. Ms. Erum Balwani, a non-executive director, currently chairs the board.

Members’ Profile

Mrs. Bilwani is the sponsor and chairwoman of Intermarket Securities. She is a successful Pakistani businesswoman and investor with diversified experience in the financial sector. She is also a philanthropist and has worked with various NGOs in Pakistan. Mr. Shehzan Hussain Moosani, an independent director, has over 20 years experience in Pakistan’s capital markets and has had a distinguished career representing some of the country’s leading financial institutions. Mr. Muhammad Ashfaq, an independent director, has over 25 years of audit and advisory experience primarily in Financial Services. He is a professionally established Chartered Accountant with varied certifications including ACMA (UK), CGMA (UK) and CPA (Australia).

Board Effectiveness

To ensure an effective control environment and compliance with reporting standards, the Company has constituted two board committees: i) Audit Committee, and ii) Human Resource and Remuneration Committee. Both the Audit and Human Resource committees are chaired by independent directors, enhancing governance oversight.

Transparency

Rahman Sarfraz Rahim Iqbal & Company Chartered Accountants are the external auditors of the Company. The firm is QCR rated by ICAP and is in the B Category of SBP’s panel of auditors.

Management
Organizational Structure

IMS has a functional organizational structure that clearly highlights each individual's roles and responsibilities. The functions of the Company are mainly divided into (i) Finance, (ii) Information Technology, (iii) Equity (Sales), (iv) Admin & HR, (v) Research, (vi) Regional Branch, (vii) Risk Management and Customer Services, (viii) Corporate Affairs and Compliance, (ix) Equity, (x) Online Sales and (xi) International Sales.

Management Team

ISL has a qualified and experienced management team to run operations. The Company is headed by its CEO, Mr. Wajid Hussain, who has over 25 years of experience in Pakistan’s capital market and has held key management positions throughout his career. Before joining Intermarket Securities Ltd in 2018, he was the CEO and Board member at Global Securities for almost 15 years. Mr. Syed Raza Jafri, Head of Equity, possesses more than 15 years of experience in sell-side equity research and sales. Mr. Zulfiqar Ali, the CFO, has over 20 years of experience in the banking and diversified financial sectors.

Management Effectiveness

The Company's senior management meet on a regular basis to discuss trends and opportunities, allowing for effective and dynamic decision making. Moreover, IMS trading system has a centralized real-time risk management system and allows for online trading. The core software functions include Equity Settlement, MM Settlement, Payroll, Accounting and Risk Management.

Control Environment

IMS has established Risk Management procedures for reviewing risk appetite, policies and controls put in place. IMS has an internal audit function which is instrumental in mitigating risk. IMS has a separate Risk Manager with well-developed policies in place. IMS's compliance department ensures that it is compliant with all the PSX requirements and SECP (Anti Money Laundering and Countering Financing of Terrorism) Regulations that pertain to its particular industry, as well as professional standards, accepted business practices, and internal standards.

Business Risk
Industry Dynamics

Low market P/E multiples, declining interest rates, and improving macro-economic indicators renewed investor confidence during CY24, resulting in high volumes for the brokerage industry. The trend is expected to continue during 1QCY25, with significant rate cuts providing the impetus to investors to shift their investments from fixed income to the equity market. The market P/E ratio is still considered low with ample room to improve, indicating that the brokerage industry shall continue to enjoy high volumes during CY25.

Relative Position

The Company enhanced its market position during the year through the strategic merger/acquisition, establishing itself as a leading brokerage house in the country.

Revenues

IMS's operating revenue is mainly concentrated on equity brokerage. During 9MCY24, the brokerage commission stood at ~PKR 528mln while during 9MCY23 it stood at ~PKR 227mln. The Company earned a net profit of ~PKR 277mln during 9MCY24 as compared to ~PKR 16mln during 9MCY23. The surge in topline is attributed to the market surge during the period.

Cost Structure

The Company's operating and administrative expenses stood at ~PKR 364mln during 9MCY24 (SPLY: ~PKR 226mln). The reason for the rise in expenses is mainly attributed to the consolidated figures of the two companies increasing the corresponding figures.

Sustainability

The Company is focusing on enhancing its Retail Clientele by improving its technology integration as well as its social media presence, while the hiring of additional resources for technological advancement is also under consideration.

Financial Risk
Credit Risk

The Company controls its credit risk through a variety of reporting and control procedures, including establishing credit limits based on a review of the counterparties' financial conditions. The Company monitors collateral levels on a regular basis and requests changes in collateral levels as appropriate if considered necessary.

Market Risk

IMS manages its proprietary investment book effectively to reduce exposure to risk. At end-Sep'24, proprietary investments stood at ~PKR 434mln, constituting ~24.5% of equity.

Liquidity Risk

The current assets of IMS stood at ~PKR 3,065mln at end-Sep'24 as compared to current liabilities of ~PKR 1,568mln.

Capital Structure

The Company's short term borrowings stood at ~PKR 431mln and long term borrowings stood at ~PKR 325mln. At the end of 9MCY24, the equity stood at ~PKR 1,775mln, resulting in a leveraging ratio of ~30%.

 
 

Dec-24

www.pacra.com

Intermarket Securities Limited (Formerly: EFG Hermes Pakistan Limited)

financial summary

(PKR mln)

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Sep-24
9M		 Dec-23
12M		 Dec-22
12M		 Dec-21
12M
A. BALANCE SHEET
1. Finances 388 135 114 80
2. Investments 495 304 840 841
3. Other Earning Assets 0 11 11 11
4. Non-Earning Assets 2,827 294 223 385
5. Non-Performing Finances-net 0 0 0 0
Total Assets 3,709 745 1,189 1,317
6. Funding 797 434 827 997
7. Other Liabilities (Non-Interest Bearing) 1,137 188 191 157
Total Liabilities 1,934 622 1,019 1,154
Equity 1,775 123 170 163
B. INCOME STATEMENT
1. Fee Based Income 523 31 116 242
2. Operating Expenses (383) (56) (206) (196)
3. Non Fee Based Income 269 36 115 45
Total Opearting Income/(Loss) 409 10 25 90
4. Financial Charges (104) (33) (112) (44)
Pre-Tax Profit 305 (23) (86) 47
5. Taxes (27) (3) (15) (18)
Profit After Tax 278 (26) (102) 29
C. RATIO ANALYSIS
1. Cost Structure
Financial Charges / Total Opearting Income/(Loss) 25.5% 325.5% 441.2% 48.4%
Return on Equity (ROE) 52.7% -35.1% -113.1% 25.4%
2. Capital Adequacy
Equity / Total Assets (D+E+F) 47.9% 16.5% 14.3% 12.4%
Free Cash Flows from Operations (FCFO) / (Financial Charges + Current Maturity of Long Term Debt + Uncovered Short Term Borrowings) 250.3% -36.6% 9.7% -187.8%
3. Liquidity
Liquid Assets / Total Assets (D+E+F) 58.5% 57.9% 79.4% 73.8%
Liquid Assets / Trade Related Liabilities 206.3% 244.2% 1027.9% 565.5%
4. Credit & Market Risk
Accounts Receivable / Short-term Borrowings + Advances from Customers + Payables to Customers 66.6% 11.6% 13.2% 6.3%
Equity Instruments / Investments 12.1% 7.0% 2.5% 0.0%

Dec-24

www.pacra.com

Intermarket Securities Limited (Formerly: EFG Hermes Pakistan Limited)

rating scale

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Dec-24

www.pacra.com

Intermarket Securities Limited (Formerly: EFG Hermes Pakistan Limited)

regulatory disclosure

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  1. Rating Team Statements
    1. Rating is just an opinion about the creditworthiness of the entity and does not constitute a recommendation to buy, hold, or sell any security of the entity rated or to buy, hold, or sell the security rated, as the case may be. (Chapter III; 14-3-(x))
    2. Conflict of Interest
      1. The Rating Team or any of their family members have no interest in this rating (Chapter III; 12-2-(j))
      2. PACRA, the analysts involved in the rating process, and members of its rating committee and their family members do not have any conflict of interest relating to the rating done by them (Chapter III; 12-2-(e) & (k))
      3. The analyst is not a substantial shareholder of the customer being rated by PACRA [Annexure F; d-(ii)]
      4. Explanation: for the purpose of the above clause, the term "family members" shall include only those family members who are dependent on the analyst and members of the rating committee.
  2. Restrictions
    1. No director, officer, or employee of PACRA communicates the information acquired by him for use for rating purposes to any other person, except where required under law to do so. (Chapter III; 10-(5))
    2. PACRA does not disclose or discuss with outside parties or make improper use of the non-public information which has come to its knowledge during a business relationship with the customer. (Chapter III; 10-7-(d))
    3. PACRA does not make proposals or recommendations regarding the activities of rated entities that could impact a credit rating of the entity subject to rating. (Chapter III; 10-7-(k))
  3. Conduct of Business
    1. PACRA fulfills its obligations in a fair, efficient, transparent, and ethical manner and renders high standards of services in performing its functions and obligations. (Chapter III; 11-A-(a))
    2. PACRA uses due care in the preparation of this Rating Report. Our information has been obtained from sources we consider to be reliable, but its accuracy or completeness is not guaranteed. PACRA does not, in every instance, independently verify or validate information received in the rating process or in preparing this Rating Report. (Clause 11-(A)(p))
    3. PACRA prohibits its employees and analysts from soliciting money, gifts, or favors from anyone with whom PACRA conducts business. (Chapter III; 11-A-(q))
    4. PACRA ensures before the commencement of the rating process that an analyst or employee has not had a recent employment or other significant business or personal relationship with the rated entity that may cause or may be perceived as causing a conflict of interest. (Chapter III; 11-A-(r))
    5. PACRA maintains the principle of integrity in seeking rating business. (Chapter III; 11-A-(u))
    6. PACRA promptly investigates in the event of misconduct or a breach of the policies, procedures, and controls, and takes appropriate steps to rectify any weaknesses to prevent any recurrence, along with suitable punitive action against the responsible employee(s). (Chapter III; 11-B-(m))
  4. Independence & Conflict of Interest
    1. PACRA receives compensation from the entity being rated or any third party for the rating services it offers. The receipt of this compensation has no influence on PACRA’s opinions or other analytical processes. In all instances, PACRA is committed to preserving the objectivity, integrity, and independence of its ratings. Our relationship is governed by two distinct mandates: i) rating mandate - signed with the entity being rated or issuer of the debt instrument, and ii) fee mandate - signed with the payer, which can be different from the entity.
    2. PACRA does not provide consultancy/advisory services or other services to any of its customers or their associated companies and associated undertakings that are being rated or have been rated by it during the preceding three years, unless it has an adequate mechanism in place ensuring that the provision of such services does not lead to a conflict of interest situation with its rating activities. (Chapter III; 12-2-(d))
    3. PACRA discloses that no shareholder directly or indirectly holding 10% or more of the share capital of PACRA also holds directly or indirectly 10% or more of the share capital of the entity which is subject to rating or the entity which issued the instrument subject to rating by PACRA. (Chapter III; 12-2-(f))
    4. PACRA ensures that the rating assigned to an entity or instrument is not affected by the existence of a business relationship between PACRA and the entity or any other party, or the non-existence of such a relationship. (Chapter III; 12-2-(i))
    5. PACRA ensures that the analysts or any of their family members shall not buy, sell, or engage in any transaction in any security which falls in the analyst’s area of primary analytical responsibility. This clause, however, does not apply to investments in securities through collective investment schemes. (Chapter III; 12-2-(l))
    6. PACRA has established policies and procedures governing investments and trading in securities by its employees and for monitoring the same to prevent insider trading, market manipulation, or any other market abuse. (Chapter III; 11-B-(g))
  5. Monitoring and Review
    1. PACRA monitors all the outstanding ratings continuously, and any potential change therein due to any event associated with the issuer, the security arrangement, the industry, etc., is disseminated to the market immediately and in an effective manner after appropriate consultation with the entity/issuer. (Chapter III; 17-(a))
    2. PACRA reviews all the outstanding ratings periodically on an annual basis. Provided that public dissemination of annual review and in an instance of change in rating will be made. (Chapter III; 17-(b))
    3. PACRA initiates an immediate review of the outstanding rating upon becoming aware of any information that may reasonably be expected to result in downgrading of the rating. (Chapter III; 17-(c))
    4. PACRA engages with the issuer and the debt securities trustee to remain updated on all information pertaining to the rating of the entity/instrument. (Chapter III; 17-(d))
  6. Probability of Default
    1. PACRA’s Rating Scale reflects the expectation of credit risk. The highest rating has the lowest relative likelihood of default (i.e., probability). PACRA’s transition studies capture the historical performance behavior of a specific rating notch. Transition behavior of the assigned rating can be obtained from PACRA’s Transition Study available at our website. (www.pacra.com) However, the actual transition of rating may not follow the pattern observed in the past. (Chapter III; 14-3(f)(vii))
  7. Proprietary Information
    1. All information contained herein is considered proprietary by PACRA. Hence, none of the information in this document can be copied or otherwise reproduced, stored, or disseminated in whole or in part in any form or by any means whatsoever by any person without PACRA’s prior written consent.

Dec-24

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