Conservative in Cairo

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Sylvester Adams / Photodisc / Getty Images

Egyptian investment banker Hassan Heikal remembers the dog day in 2008 when the biggest names in the business began to fall. As Lehman Brothers cratered and other titans braced for the worst, Heikal canvassed his contacts around the world. The news wasn't reassuring. "The mood was ugly," he recalls. "People were talking about another 1929 Depression." Within hours, Heikal and other bankers at EFG Hermes' Cairo headquarters were pulling their funds from Western banks — $500 million — and transferring them to government-owned banks at home.

That was just for safekeeping, a precaution to protect the firm from other peoples' disasters. It's no fluke that EFG, with operations in 10 countries from Oman to Morocco, not only survived the crisis but also is poised to bolster its position as the Middle East's leading investment bank. While the American giants were gambling on mortgage-based securities that imploded, EFG was carefully minding the store. "They had seemed like Neanderthals," says Thomas Volpe, CEO of Dubai Group, which took a 25% stake in EFG in 2007. "Now people are asking, How were those guys so smart?"

The short answer is that in EFG's conservative corporate culture, being risk-averse is not a career killer, as it had become on Wall Street. Unlike the big U.S. banks and some of EFG's Arab competitors, EFG largely stayed out of proprietary trading, which had proved lucrative before the crash and disastrous as the world went south. Lehman was leveraged more than 30 to 1; so were other investment banks. It didn't make sense to EFG, which was awash in cash and had zero leverage. "We just applied common sense in an industry with a lot of excesses," Heikal says. "They were betting double down. Sheep mentality, untamed greed, lack of regulation and [that's how] you find catastrophes like this."

Careful plodding made Heikal and co-CEO Yasser el-Mallawany the whiz kids of Arab finance. With a market capitalization of $2.2 billion, EFG ranks near the top among investment banks in emerging markets. EFG's hunker-down approach could not shelter it completely from the downturn. Its stock, traded in London and Cairo, got hammered, dropping 70%, to $2.14. To adjust, senior executives took pay cuts of up to 40% and slashed expenses. Yet amid the tumult, the company nonetheless managed to close eight deals worth $1.6 billion, including handling IPOs for two Egyptian companies in an otherwise dead market for new issues. Lately, EFG has moved further into debt advising. In December the firm underwrote a $270 million bond issue for Mobinil, a leading Egyptian cell-phone company in the midst of a major expansion. By May 2010, its share price had rebounded to $5.71. EFG registered a healthy $100 million profit in 2009 and followed that with an $87.8 million profit in the first quarter of 2010.

To many, EFG is the shining example of how the Arab brain drain can be reversed. The majority of its more than 1,000 staffers are Arabs who were educated at home. EFG's payroll includes former stars at Western banks who have opted to work for an Arab-owned-and-operated firm. El-Mallawany, 50, like Heikal a graduate of Cairo University, came on board in 2001 from former Chase affiliate Commercial International Bank in Egypt. Heikal, 46, spent a year working for Goldman Sachs in London before accepting an offer to buy 20% of EFG in 1995 for about $300,000 and return to Cairo as head of investment banking. At the time, his boss at Goldman told him he was making a mistake by giving up his big salary and promising future, but the decision has made Heikal a rich and happy man. "If you asked any of us if we would go back and work for a Goldman or a Morgan Stanley," Heikal says, "the answer is, 'Thank you. Been there. Done that.'"

EFG's rapid success is especially remarkable against the backdrop of Middle East economies hobbled by bloated government sectors, endemic corruption and regional conflict. From its origins in the 1980s as a small consulting firm founded by Heikal's uncle Mohamed Taymour, EFG went public just over a decade ago. After oil prices sank below $10 a barrel and Egypt's economy was rocked by recession, EFG had to fight off insolvency with a rights issue that raised $35 million from shareholders. Then, well before global investment banks saw the potential in Middle East markets like Dubai, EFG used its fresh capital to expand into the gulf countries as a new oil boom was born. "Ultimately, when the big boys came, we were already there," Heikal says. "Otherwise, we would have been eaten alive."

Today EFG aims to add commercial banking to its investment operations and become the first homegrown universal bank in the Arab world. With a war chest swelling to $1.3 billion after the sale of its 28% stake in Lebanon's Bank Audi, EFG is well positioned to shop elsewhere in the region. Its move into Syria and its plans to expand to Jordan and Libya illustrate a bullishness about the region's growth. Longer term, the company envisions a big move into sub-Saharan Africa, one of the last frontiers for investment banking.

Looking back, Heikal and el-Mallawany agree that they owe their success to having learned from EFG's early mistakes. Having bet big bucks on the nascent Egyptian stock exchange, they found themselves having to write down $50 million in losses when the Egyptian recession hit hard in 1998. Oddly enough, EFG may have escaped going bust when Citigroup, which had taken a 20% stake in the firm — and had much bigger problems — agreed not to oppose the rights issue. "Our management team was scared to death," el-Mallawany says. "We have been through a lot. That gives you resilience and a better appreciation of risk."

In his fifth-floor office overlooking Cairo's traffic chaos, Heikal questions whether Wall Street has learned any similar lessons. He is scathing about the failure of U.S. regulators but reserves his greatest scorn for the bankers he believes survived to err another day. "Most of these companies are not paying the price," he complains. "The risk appetite is back. Leverage is starting to come back. The execs are walking away as if they are saying, Sorry, it was a computer glitch." Shaking his head in mock disbelief, Heikal goes back to running the biggest and best investment bank in the Arab world. Very carefully.