Commercial International Bank Egypt (CIB) S.A.E. (COMI) Earnings Call Transcript & Summary

Good day, and welcome to the CIB Q1 2020 Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Elena Sanchez. Please go ahead.

Thank you. Good afternoon, and good morning, everyone. This is Elena Sanchez. And on behalf of EFG Hermes, I would like to welcome you all to CIB 1Q 2020 Results Conference Call. It is a pleasure to have with us in the call today, Mr. Hussein Abaza, Chief Executive Officer; Mr. Sherif Khalil, Chief Communications Officer; Ms. Yasmine Hemeda, Head of Investor Relations; and Ms. Nelly Zeneiny, Investor Relations Officer. At this time, I would like to hand over the call to Yasmine. Thank you.

Good morning, and good afternoon, everyone. This is our customary disclosure statement. This call is intended for investors and analysts only. As such, if any media representative has gained access to this call, kindly hang up now. Certain information disclosed during this conference call consists of forward-looking statements reflecting the current view of the bank with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the actual results, performance or achievements of the company to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including worldwide economic trends, the economic and political climates of Egypt, the Middle East and changes in business strategy and various other factors. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may materially vary from those described in such forward-looking statements. The bank undertakes no obligation to republish and revise forward-looking statements to reflect changed events or circumstances. And that ends the disclaimer statement. I will now hand over the phone to Mr. Abaza to give you a brief presentation of Q1 2020 financial results.

Thank you. Good morning, and good afternoon, everybody. Thank you for dialing in. I think we've been doing this for a long time, but this is a pretty special quarter. And for a change, it's not just a special quarter for CIB or for Egypt, it's a special quarter for the world, not in a good way. So I think just to walk you through. Our numbers for the first quarter held up very well on the top line in terms of revenue coming in because if you step back and remember, our balance sheet structure is such that more than -- almost 50% to 60% of our total assets are in sovereign paper and more than 60% of that sovereign paper are in bonds. So effectively, our principal revenue stream is sort of taking care of the next 3 to 5 years, in the sense that it's not susceptible to interest rate, it's not susceptible to anything going up or down. It's purely the Egyptian government paying on the government bonds. So effectively, our top line grew by north of 25%. We had the highest average top line revenue, EGP 6.2 billion, I think. And the rest of the income statements slowed down very nicely. We chose to take a EGP 1.65 billion provision, and this is not against specific losses. This is purely a precautionary prudent provision because nobody quite knows what will happen. I'm not saying we'll come out with no losses. I'm not saying we're going to multiply this number by 4. The whole idea was we had a very strong quarter in a very, very uncertain global time, so we decided to take a very prudent provision against what may happen. In terms of on-the-ground and what is happening, we've seen NIM expansion quarter-on-quarter. We've actually seen -- I'm talking local currency specifically. We've seen NIM expansion month-on-month, and this is continuing into the second quarter. So our NIMs for April are stronger than our NIMs for March and Q1 as a whole. So effectively, because of the structure of the balance sheet, it does give us that sort of luxury to work on. We've -- I think our main focus for the coming few months is that we will focus on each individual corporate borrower to assess how the COVID-19 crisis is affecting their cash flow stream because even though the Central Bank of Egypt gave a blanket holiday for debt repayment, and so debt moratorium for the last -- for the coming 6 months starting March 16, it's more important for us to keep track of the cash flows coming in from each operating company and compare this with our understanding of how this company should have been affected by the crisis. So to put it simply. Theoretically, we had a company that was making EGP 10 million a month. According to our understanding, and I've talked with them during the crisis, they should be making EGP 4 million or EGP 5 million a month. If we see the operating cash flow a lot higher or a lot lower, then there is something inherently wrong in the way we understand the business and the communication between us and the business. So it's going to be very much a matter of communicating very strongly and continually with the businesses. And we will not wait until the moratorium ends in September to start upgrading or downgrading companies. So -- and all the officers realize this, so this is an ongoing and constant process. The biggest factor is basically how long this lasts. And I think what we're working on in the bank is to try and recognize certain milestones that will sort of indicate a recovery or a recovery being imminent because it's important to be prepared before the recovery in order to cope with whatever demands the customers will have moving forward. The other challenge that I think is very important for us is what we've always believed to be the key success factor with any bank is access to cheap funding. And even though we saw the corridor rate come down by 300 basis points, Central Bank of Egypt brought it down by 300 basis points, we also saw the public sector banks issue CDs at a -- 3-year CDs at 12%, a 1-year CD at 15% and a 2-year CD at 14%. Now these are numbers that it is impossible to issue CDs at these rates and actually make a profit. So we're having to compete against that sort of -- these sort of rates, and we managed to do that in March, where you see deposit growth and NIM expansion. So I think the challenge there is, basically, if we were to lift our challenges effectively, the first would be maintaining asset quality in light of the effect of the crisis on the corporates and the individuals; secondly is accessing cheap funding; and thirdly, I think it's just basically staying alive. So having said that, I think a lot can be talked to Q&A for specific points. Thank you.

[Operator Instructions] And we'll take our first question from Naresh Bilandani with JPMorgan.

It's Naresh Bilandani of JPMorgan. Just 3 questions, please. First of all, in terms of the extraordinarily high provisions that you have taken, and you were kind enough to guide that trend earlier on the call, will you be in a position to shed some light on what are the macro assumptions that you are building into your IFRS 9 model from the medium-term GDP, inflation and exchange rate basis? And I realize this may not be that straightforward, but how should we think of the second quarter impairments? Would you reckon this is a peak and the trend into the near quarters could be lower from here? And I know this is still an exercise you are conducting with your corporates, but any further light that you can throw on this would be great. That's the first question. And the second question that I have is on the [ ST LTI ] result, which has gone into negative EGP 800 million from roughly about, I think, EGP 4.1 billion that you have at year-end. We did see a similar trend from other unit banks. But can you please confirm if this was caused by the mark-to-market on the international bond portfolio? And I assume this is not the treasury because those are mark-to-model and if you assume any recovery in this line in this quarter.

Sure. Let's start with the second one. The short answer is yes. It was because of the mark-to-market. But actually, there are 2 sides to it. We started off with a gain, with a positive number of about EGP 4 billion, as you rightly said, and we ended with a negative of EGP 800 million. So effectively, there's almost a EGP 5 billion swing. Now that is almost equal between the foreign currency, the Eurobonds and what happened, but it's also on the bond book. If you remember, in the last -- during March, a lot of the foreign investors were selling their bonds and they were selling them at a discount. So effectively, because there is no effective -- there is no efficient market, what happens is the banks get together and they list all the transactions that have happened in the last week or month. And the external auditors use this as a reference as a mark-to-market. So there was a EGP 2.5 billion impairment or unrealized loss on the -- in local currency and a similar one on the foreign currency. So that's for that part. Regarding our impairments moving forward, to be honest, if things continue as they are, this might turn to be the peak impairment. I don't think we'll be seeing the situation because of the structure of CIB's balance sheet in terms of a lot of bonds and a very high level of cost. And the actual nature of the large corporate in Egypt, the multinationals, et cetera, so the corporate book itself, the structure of it, I wouldn't add plus the -- a lot of our facilities come with support in securities, I really wouldn't see this number increasing each quarter moving forward. So to be honest, I think this would probably be the peak. Yes. Yes, definitely.

Understood. That's clear. Just in the first question that you took, on the bond portfolio, have you seen any recovery or a positive mark-to-market and they are not further into the second quarter?

Yes. Yes. We've gotten a EGP 3 billion gain now. So currently, as of end of April, this number is now a positive of EGP 2 billion.

Which is in sync with what we heard from the other banks.

Right.

[Operator Instructions] Our next question will come from Rami Sidani with Schroder.

My first question is I just want to take a step back and do a review of the general economic activity in the country, where Egypt has managed so far to execute a full lockdown. The numbers have been relatively under control. So I will ask if you could just give details of economic activity and what kind of recovery you would expect to see in the second half of the year, assuming more or less the same environment, but there's one thing that you have to do in the recovery and impact it sooner in Egypt. So if you could just discuss in detail how you would view the general recovery in Egypt at least for the second half. This is my first question. The second is about the [indiscernible] the downturn that [indiscernible] so if you can just discuss what kind of movement that you're doing differently in the bank. And as banks expect recovery in the second half, how capable are banks to [indiscernible]?

Rami, the line cut up badly, I believe, with your second question. I'll answer your first question first and then, sorry, I'll have to ask you to repeat your second question. But I think we're seeing very muted economic activity for now. A lot of it is coming from the curfew. A lot of it is coming from the fact that if you take down GDP, it's 70% consumption-driven. So once you're locking people down, you're closing stores, you're taking a break, this severely hampers economic activity. So I think, as I say in the beginning, what we're doing with CIB or what we're doing internally is we're trying to pinpoint or highlight what are your key milestones to look out for in order to sort of give us a heads-up that economic activity is returning. And I think one of them was resumption, not in tourism, but the flights between other countries because -- and a lot of the Arab states coming to Egypt is not considered tourism. It's more like a stroll in the backyard. But that is still some way away. And what is more important is as the curfew hours start decreasing, restaurants start opening, hotels and clubs, but not nightclubs, but just sporting clubs that we have absolutely no idea on. I think this will be a very important determinant of economic activity coming back. And so I think, effectively, our best guess is we see recovery in Q4 or we're hoping to see that in our business. Our wish is that we see a recovery in Q4. Could I ask you to...

Yes. How strong could be the [indiscernible] -- can you hear me okay?

Rami? I can hear you. I think how strong? It will be -- I don't think it's...

How expensive will this recovery be once -- when the tourism is not recovering or is not expected to recover?

No, it wouldn't be a decent recovery, but tourism is the second-highest dollar revenue in the country. Remittances is #1. Some of it, it will make a huge difference. But if we start seeing a bit of Arab tourism coming back towards Q4 because that's almost $800 million a month foreign currency revenues coming in. And among the other things we are looking for in terms of recovery is the global money market managers starting to hunt for yields and coming back to put money outside their home countries. So again, the recovery entails several aspects. It's not just consumption on the local, it is foreign flows coming back in because what we're seeing is not an Egypt-specific problem. So I think once people are comfortable, they will go back to old investment habits. So it could potentially -- okay, it needs tourism to be very robust, but we could have partial tourism again, tourists from Arab countries coming in towards the last quarter of the year, some fund managers, again, using the carry trade in the last quarter of the year and some consumption. So not a full recovery, but we see a decent recovery. That's the best -- the sort of best we see here...

And my second question was about the FX situation and where we saw a [indiscernible] and the advanced FX position has been negative. So I just want to hear your views on the currency level. And what are you seeing on the ground if you're seeing or certainly see any kind of shortage in dollars? And how -- what kind of capacity would banks have to cater for FX, especially if things or the economy restart in the second half of the year?

Sure. Again, I think in -- I mean we saw reserves come down by about $5 billion. I think there is talk with the IMF on an emergency facility and another standby facility, which is relatively good news. But definitely, right now, we don't see the short pitch on the ground because we are not seeing much demand for dollars. With the supply chain being partly disrupted with the curfews, with demand muted, it makes sense. So maybe if we start seeing the demand recover quickly, then we might see more demand for dollars than supply, if that supply doesn't come in either through more tourism or through more investments from abroad because some sources -- over here, we have the remittances, Suez Canal revenues, tourism and oil and gas, sorry. So I think, yes, there could potentially -- it's all about the pace of what happens and how quickly it happens. But we still have very plentiful reserves. We have the 2 facilities from the IMF coming up. So I don't think there's -- I mean we're in a much better position than we were back in 2016, 2017, when we got through -- and there was a lot of pent-up demand then for dollars. Sorry, I'm not too -- I think the country is in a much stronger position over the last 3 years than it has been -- than it was then.

And our next question will come from Adesoji Solanke with Renaissance Capital.

Can you hear me?

Yes.

Hello? Okay. I just have -- yes, this is Adesoji Solanke from Renaissance Capital. I just have one question. The $35 million paid for Mayfair Bank in Kenya, can you kind of break that up into what you paid for the actual book? And what is the additional capital injection?

Sorry, what we paid for the assets and what was the additional capital injection?

So the $35 million [indiscernible] in new capital and what you paid for the actual book.

Okay. So the transaction was $35,350,000. The $350,000 were we bought shares from some of the existing partners, and the $35 million is purely capital increase. It's all a capital increase. So 99% of the transaction is in the form of capital increase. All the money is coming into the bank.

Okay. So basically, 1/3 of $1 million paid for the previous existing book?

Yes, yes. It's 51% of the existing book. Yes.

And we will take our next question from Amit Mamtani with Goldman Sachs.

I just had one follow-up question on credit costs. Can you please break up your credit costs into how much is precautionary? And also, what exposure you think do you see as vulnerable? And how are you providing for them?

I think the budget for our -- I have the budget in front of me. Our admission budget for our first quarter credit costs was assuming we were going to do at least 12% or 15% loan growth in Q1, was going to be about EGP 400 million. That is the initial project. So forget about that. So of the EGP 1.655 billion, I would say north of EGP 1.3 billion is prudential. And because it's prudential, it's not assigned to specific sectors. It's just -- we did it in a way that we can easily assign it to specific companies or reverse it should we wish. So the bank -- of that one, more than 80% of it is purely prudential provisioning.

That's very helpful. But going forward, do you see any certain sectors as specifically vulnerable from the impacts of COVID-19?

Definitely. I mean tourism is -- I mean I'm talking in general. Tourism, in general, will be vulnerable now with tourists not coming in. A lot of the hospitality sector would be. Oil and gas, with what's happening and all the disruptions happening in it, there are potential -- but Amit, I'm talking sector as a whole, not specific, I mean, within each effect that you'll find different things. And I think you might find real estate, people not buying and selling houses at the moment. Auto sales are down. So I think, in general, a lot of sectors would feel a bit of the pinch. And I think it's the duration of the crisis which will be the main determinant of how badly specific companies suffer. By and large, you will tend to see that the smaller companies would tend to have more trouble than the larger companies. Whether they're multinationals or local, they will tend to have bigger pockets, they will tend to know how to cope with crisis better, have more strength and depth in terms of management. They can withstand a year of losses and carry-ons. So I think that's it.

And we'll take our next question from Kaitlin Byrne with Prudential.

The first question is just on your costs. So your cost simply increasing above inflation. Yes, so maybe you could just talk us through where the cost increases are coming and what we should expect from your cost line going forward. And then also just on your tax raise being at sort of 34% effective tax. I'm assuming that's mainly because of the tax on the treasury income, but maybe you could just clarify that. And I mean you've touched on it now, but this is your first time in real estate sector. I know there were issues before, especially with the developers. I mean are you seeing significantly more pressure there or similar to what was there before? Yes, that's it.

Sure. Okay. Let's start with the costs. A couple of things. Firstly, we started the work-from-home and remote working and stuff, so we had to buy lots of licenses upfront for a user to log-in from home. We also bought a ton of laptops. So if the corona thing goes away quickly, we're going to be in the market for selling a lot of laptops. If anybody wants some, inform me. That is one of our main cost items and the licenses on getting everybody linked up. The other thing is there were a couple of large donations to help the -- there was an EGP 80 million donation for the -- from each bank in the banking sector -- not each bank, but based on the profitability, our share was EGP 80 million. And we also -- those are a lot of other stuff in terms of donations for the corona thing. And Q1 costs, remember, if you look at the year-on-year-on-year, it's when the annual merit increase and profit share come in. So it's usually the highest cost, and it pares down. We've worked on our budget moving forward, and we're going to have a completely flat due for the year. So by year-end, it's going to be a 9% total cost increase by year-end, which should match the revenue increase or be less than. So that's on the total costs. For the taxes on treasury, yes, definitely. A lot about that, but there are 2 things. One is the -- that we bought more treasuries and most of the income is coming from treasury. The other is we still haven't finalized all the provisions. So even though we took a very large provision, some of it we still have to pay taxes on until we can prove that there is a corresponding credit loss against it and then we will get the tax holiday for it. So not all the provisions we took were tax-exempt because just how they stay, I'm going to take in EGP 2 billion of provision, would be an excellent coupon for the tax man. So the -- we pay taxes, and then we'll get a rebate or get a tax refund moving forward if we discover the we do actually need all these provisions. Coming to your last question on real estate, I would imagine, like everything else, it's probably slowed down slightly, so it's going to be an effort of payment and collection and cash flows. So depending on each individual real estate company, those that are highly leveraged and have themselves got payments to banks will be under more stress because I would imagine a lot of the buyers today won't have to -- would have to ask for some sort of delay or whatever. So I think there will be more stress. I mean there's definitely more stress in the entire system. So I don't see that real estate will be exempt from that. But mechanically, they depend on each individual company and their relationship with the banks and how highly leveraged they are and how much cash they have in their cash flows.

Understood. If I could just ask one more question just on you had mentioned remittances being the #1 sort of foreign exchange, do you know where most of the remittances come from, and whether they sort of pick up, and determining factors at play at the moment? It's hard to see whether remittances get higher or lower. And how dependent are they on, say, the strength of the economy in Europe -- or yes, actually, can you just give us a little bit of color then...

As far as I know, it's been very dependent on the Gulf, which is good news and bad news, I guess. As far as area, more than 60% of our remittances come from the Gulf.

And we'll take our next question from Ribal Hachem with Arqaam Capital.

Given the outlook now for the economy, where do you see loan growth and deposit growth in the year? So assuming your current outlook would actually materialize [indiscernible] contrasting loan growth?

I think loan growth, we will probably see local currency loan growth will be about 4% or 5% for the year. So we're assuming a certain recovery in Q4. And we would see the cost of growth north of 10%.

Okay. And so given that, can you give us some light on what is now the exposure on factors like regarding the overall, are they exposed like mostly real estate, mostly provision? How does the growth rate stand out?

Okay. Our exposure to real estate is minimum, it's always been very low in the bank. We're talking -- I mean it's not all about top side exposures. Tourism used to be one of our highest. It's now about between 5% and 6%. Because if you remember last year, if you look at our loan movements last year, you'll find we had 18% loan growth in local currency, but we had like 7% shrinkage in foreign currency. That shrinkage in foreign currency were the tourism companies repaying their dues because they've been having a good couple of years. So they started paying us back. So our tourism book has gone down. Where we'll find high exposure, we have high exposure in telecoms, we have construction, we have in consumer nondurable. And as I said, 65% of the book is in multinationals. And wherever they are, we'll probably be there. So it's mostly market leaders in most of the cases.

And so regarding Capex, so do you expect to get it by this year or is it related to 2021?

I would think 2021 would be the earliest. Again, a lot of companies -- I think everybody will be worried even if there is a recovery, the recurrence of the virus because this happened with the Spanish flu back in, I think, 1918. It came back 3 years. I mean came once, then it came back towards the second year, and then it came back slightly weaker the third year before it was finally eradicated. So I think even if we feel that it's gone, a lot of people will worry with winter coming in and a lot of companies don't like to do CapEx in November and December. They prefer to kick it back to the next year. So I would imagine that scenario, we will see 2021 CapEx, not 2020 to be honest. But again, that's my personal view, I'm just...

Okay. And here, my last question. Regarding sovereign yields, where do you see it going? What's your production status given your exposure...

That's an interesting question because I keep calling it wrong. So I'm giving you the background that I keep calling it wrong. I'll tell you -- I'll still go ahead and give you an opinion. I would imagine because on the one hand, on pure supply and demand and purchase deficits and all that stuff, you should see it going up. The government is doing a lot of effort to keep it under control. So again if the virus and the situation continue as we expect until September or more, I think sooner or later, we'll start seeing government yield build upwards. But that, again, is my view.

It's already up [indiscernible]

Yes, it's gone up from about 12% to 12.6%. And it seems as if it's slowly, slowly going up again.

And we'll take our next question from Prashant Premkumar with Consilium.

Most of my questions have been answered, but 2 follow-ups, if you will. On the provision line, how did we triangulate the extent of potential provisioning? Was it macro variables that you were looking at? Or are you seeing something from our stress pool of accounts? How did we triangulate around the EGP 1.3 billion prevention -- prudential provision number? And the second question is that, yes, CapEx has been pushed to next year potentially. But how do you see the inflation trajectory this year? And are you seeing a lot of supply lines get cut? And yes, GDP will be down, but is there a chance that food inflation and other levers to inflation kick up much more seriously than we expect?

Okay. Let's start with the second question. I don't think we're going to see a massive uptick in inflation because even though people are quarantined, there is still consumption happening. Judging from most people I see, they're actually putting on a hell of a lot of weight just by staying at home. So they're not eating very well. So I think there might be a slight uptick in inflation, but nothing is certain. Maybe low double digits, high single digits, that sort of thing, very manageable compared to the inflation we've seen into Q4. So nothing that I would -- at the moment, nothing which we'd be worried about. Regarding, as you said, triangulating our provisions, I don't think it is that scientific. We sought to exploit -- we really need to take a huge provision. So what's the biggest -- let's take EGP 1.3 billion. But maybe it's slightly more scientific than that, but we still haven't done the in-depth analysis with the companies because the companies themselves are not quite sure as to what's happening. The -- because things got progressively more serious during March. And then we got into Ramadan, which in and of itself has its own special nature. And as they talk about relaxing the curfews after Ramadan, then we are talking about having a decent June. So the company has been -- still haven't given us clear data to -- it's very difficult for us to get the scientific -- I would love to give you a great formula that makes sense, but unfortunately, I don't have it. So it was basically -- let's take a very large amount, and this is what we came up with.

And our next question will come from [ Catherine ] with [ Genesis ].

Could I ask -- could the emergency fund [indiscernible] and that the expansion in our [ order book ] service?

Interesting. Yes, it -- I think there is so many -- difficult, yes, to be honest.

Yes, that's my feeling. It's been such a long time, and we've had so much pains that this actually could be a weirdly interesting fund that you take.

Yes. It's just -- yes, yes, I'm glad somebody else is saying this because everybody is sort of looking at me like a rating unit whenever I say this stuff. So thank you for saying this, and I hope that you can call this someday, [ Catherine ], so we can hold you to it.

I'm not making any promises. On the other hand, the EGP. I don't know if that is the greatest use of asset and bonds holding the EGP.

Yes. I agree with you. And we've had this comment from a lot of investors saying the government should not be drawing down on reserves to defend the currency. And this crisis has been happening before and it always ends in tears. And I mean I lived through it several times before, most recently 3 years ago, so I really don't know if it's just a sort of short-term measure hoping that tourism will come back and fill the void, I really don't know. But yes, I think every investor I've spoken to has come around to feeling that it is overvalued. But I really don't know at the moment. Demand for bond at the moment is quite muted because of what's happening.

Going back to the first question, which is the end of emergency fund. If the emergency funding does end up being a bit expansional, which sectors and which companies have -- or which activities do you think would begin to show it first? But I don't really [ plan to say ] demand in terms of the investing ahead of the demand in your experience.

I think there will be a combination of 2 things. One is where there is most pent-up CapEx demand because we've had no CapEx demand for 10 years. So you've got -- I keep saying this, only about one of the companies, which we keep telling you, I'm holding some machines together with duct tape and there is massive demand in the market. So you've got the people who have been promising to do CapEx and been keeping it down the road. So they are the ones who are sort of ready to go regardless of what sector their individual companies, and they're quite large, and most of them are multinationals. But I would imagine, again, consumer nondurables and food, pharmaceuticals, they're always the sectors that are always ready to expand. And they've been very -- they're able to do that successfully over the past.

But you don't have any sign of that yet?

No, not yet. Not yet. I think the companies are still reading. They just can't see the light at the end of the tunnel. I think they don't know when it's going to happen.

And we'll take our next question from Sharat Dua with Fiera Capital.

I'll start off with just following up on the last question from [ Catherine ]. Are there any known conditions at all alongside the sign up of emergency funding? Or it's -- there's nothing that we know of that they require from the authorities?

Nothing that I know of.

Okay. All right. Fine. And also following up on one of the earlier questions, if I could. So on the costs, you mentioned some charitable donations. You mentioned EGP 80 million. I think in your release, there was some figure of EGP 120-something million. So is it if we put those 2 together, that you've actually made over EGP 200 million...

No, no, no. That EGP 120 million includes the EGP 80 million. Please don't say that.

All right. So that's a one-off. That's included in the other expenses. And basically, you're saying that by the end of the year, you expect the cost growth to be 9% for the full year.

Yes. Yes. Yes. We've got a plan in mind. We just had our Board yesterday, and I discussed it thoroughly with them. We know exactly where we're going to cut the costs, and hopefully, donations will be a very large part of that cost-cutting.

Okay. Well, I mean, it depends on what the needs of the country are as things go from here, I guess. And from a tax point of view, so the 34.5% tax rate, you said it's too high because you haven't got the full credit for the provisions. But obviously, this is the first time that we have also seen a meaningful withholding tax number coming from the treasury holding. So what -- are we saying it should be somewhat maybe halfway between the 28%, 29% and the 35% on a more normalized basis, where given that your booking is going to be more skewed towards treasuries?

Yes, yes, probably something like that, yes. Yes. So it will be higher than we've seen it before, but not as high as you're seeing it today.

Right. Okay. And then just a couple of questions on my end, if I can take a bit more time. First of all, just on the trading income, I mean, it's a relatively small contributor, but obviously, noninterest revenue is low at the moment anyway. And the first time I've seen you, you have a trading loss if you strip out the FX of some significance. Is that specific distortions in the bond portfolio? Or just some gradings went wrong in this period? I mean just what's the nature of that?

I can get back to you on this. I'm not very sure. So I will have to get back to you because I don't want to say something that turns out to be completely false. I want to make something [ that I'm confident with ]. But definitely, I come back to you...

All right. And the last question really is, I mean, you talked about the NIM and the funding costs. And funding costs, as you've done really well is like funding costs in this period is concerned, you're still growing the deposits high single-digits and you are targeting 10% growth from here. I just want to understand how that's really possible in this environment when you have got state banks offering such incredible yields on fund treasuries? When as an economy, which is partially curfewed and so on, liquidity is likely to be affected for both individuals and corporates. Now how can you continue to grow deposits at 10% plus when you're -- when the economy is suffering and when you're offering lower rates than some of the big competitors?

Sure. Okay. A couple of things. One is, remember, I keep mentioning this every time. All of the other private sector banks in Egypt have limits on their sovereign holdings. So effectively, in years like 2020 when the potential for credit growth is not very high, they are not as competitive going out to get deposits because they can only place them in sovereigns. So you'll find that competition today for deposits is less competitive than it was 4 months ago, when everybody was expecting market loan growth. I'm talking there of PPI, like Credit Agricole, like HSBC, who have limits because Egyptian sovereign paper is 150% risk weighted. So if Egyptian economy just buys sovereign paper and they consolidated all the cleared Credit Agricole balance sheet, they have to take 150% risk weighted. Whereas if they lend it to different a corporate, some of the investor, they only take 100%. So during these years, and we sold it in 2016, we sold it in 2017, we sold it before 2011, you'll find that competition from the rest of the private sector is not strong. So even though the public sector are giving us very stiff competition with -- in a completely unrealistic rate, we're getting a bit of relief there. Secondly, most people keep their money in different liability classes. So they will keep some money in CDs, some money in time deposits and some money in CASA. What we are trying to do is try and get the CASA portion and forget about the CDs. So even when we have some of our clients wanting the 12% or the 15% or the 14%, we tell them, fine, keep your CASA with us and take whatever you need and put it to a national bank in Egypt. So it's more about -- and it's more about motivating and focusing of sales people as to what we are trying to get. Again, it's not easy. If it were, it will be growing more, but that's basically what we're trying to do. And we seem to be managing it because April numbers have come in and they're actually a little bit better as well in terms of NIM, in terms of CASA versus the rest of the book. And that is -- I've always said is the critical success factor for any bank in Egypt.

Is there a natural limit on the rate of growth of this if the economy suffers again due to lack of tourism and lack of normal activity, just where are clients and customers getting the funds to deposit from? Or are they -- is it still a switch of cash held at home just under the bed or something...

I think that's something I forgot to mention, the lack of banking penetration. The fact that 150% of the informal economy is at least 4.5x the size of the formal economy. And the fact that so many people are on bank, but you still have a massive pool to go out and get. So the current pool can grow by 100%, and we still don't have all the cash in the economy there. And there is a very solid trend towards more and more people opening bank accounts and using plastic, and it's gaining traction.

And we'll take our next question from [ A.J. ] with [ Greer ].

I had 3 questions, largely on the strategy and performance-specific numbers. So in terms of the provisions that you made, and you've talked about that you're looking at Q4 of this year when you think the recovery will take place, what is the NPL number that you are looking at on your book? That's my question number one. If you can answer that, I can ask the other 2 questions later.

Sure. Okay. I think we haven't, as I said, because we are still talking to the companies, and the companies themselves are not quite sure. We would hope that by the end of this quarter, what we have is, as I started to say in the beginning, we know what the average monthly cash flow of each company was last year. We will try to work out with the companies what they think the average cash flow is this year during the crisis, and then we make sure that this actually is happening. And then we will be able to come up with a solid number as to NPLs because just because the company today is not able to meet all its financial payments, it doesn't mean that I can't reschedule some principal. It's interesting, and some principal is being met, then that's fine. So again, it becomes a call as to which companies will be downgraded and which ones -- even if 2 companies don't actually meet their financial payments on time. With one company, I would be willing to reschedule, with another company, I'd be immediately calling the loan. And it's just a matter of if a company need to stress something or not, and that's very important factor. So I think it's a little bit premature for us to make a call on that. However, again, I keep reminding you, with 65% of the book being multinationals and the rest of the corporate book being the largest corporates in Egypt, they tend to be safer than a small SME book that would be less robust. But again, I'll probably have more solid numbers for our next call, I guess.

Got it. Got it. So another question on the acquisition that you made with Kenya, the Mayfair Bank. What's the thinking behind buying the bank in Kenya? Pretty small, obviously, compared to what your size is. Also given that it's obviously for the growth, but there's no lack of growth in Egypt as such comparatively given -- since you talked about the low banking penetration and whatever factors we can think of. So what's the strategic thinking behind that? And does that add to, I presume, CIB in terms of any other things other than just the investment gains?

Yes. Okay. I think -- okay, the way you think it went and still goes at the moment is, back in 2016, when we had the big devaluation, we started seeing a lot of companies who have never exported before starting to export. And at the time, we were using The Commercial Agreements, which were for East and South Africa -- in Southern Africa, where there were low custom duties. So it made sense for these companies to start exporting to East Africa. First of all, logistically, the distance was short. And secondly, low customs, so it is 30% cheaper. And the same quality that was acceptable in Egypt was acceptable in East Africa. So we -- every time we invest in Kenya, there's always been an Egyptian expo of some kind, which turned out to be 6 or 7 companies getting together, filling up a couple of containers, shipping them down to Nairobi and selling them -- selling whatsoever, whatever was in them. So the guy who have a fridge there. And you say, "You have it in other color?" He said, "This is the only one I have, take it or leave it." And we started talking to these guys, and we found that it is extremely liquid and it's successful for them. So there was market trade. And Egypt is the second largest importer of Kenyan tea in the world. So there is 2-way trade. So we thought what we wanted basically was a trade hub more than a bank. So we decided to look for a small bank that will be clean, clean with any legacy issues, we -- which is why we picked Mayfair, it's the youngest bank in the system, it's been there for 2 years. We have excellent partners, 31 shareholders there, all of whom are successful businessmen who will, in the future, help us in growing the business. And the fact that we structured the deal such that our acquisition would come in as a capital increase rather than be given to shareholders who would lead the bank, we think was the best thing. So not only are these guys with us now, the bank now has an extra $35 million in. We can use the relationships there and on the Egyptian, Kenyan export-import sort of -- it's starting off as an export-import sort of business, and then we will grow it as we keep it. We're not there to compete with Standard Chartered at the moment in deposit gathering and stuff, it's very much about using digital capabilities and banking on the Egyptian, Kenyan trades.

Got it. Got it. If I can squeeze in 1 more question, I've taken much of your time. So just on the expense that you've done for digitizing the bank being forced by COVID for this year. As you've pointed out that you had to buy laptops and all. So that's been a one-off expense in a way, but it can be looked at in a different way that it will probably help you digitize the bank and reduce the cost. So how do you look at it, this expense? And do you think there's a further expense to it because this will probably quick on the process of digitizing the bank as such?

I think the bulk of the expense have been done, but exactly -- that's exactly what you saw. Yes, it's a big expense right now, but it's something we would have done anyway as we want people to have laptops to be able to work remotely. Every time you read an article, every other article is all about how the new office spaces are going to be smaller, how people are going to work remotely, how the crisis has -- opportunities in crisis and stuff. And we think it's for certain jobs in the bank, you do not typically have to be present. I think it's very, very important for the senior management to be present. And I think it is very important for certain jobs where you're meeting people to be present. But other than that, jobs that can be done at home as long as they are given certain deadlines and follow-ups, then just take it responsibly. Doesn't mean that you're given a job, you can do it just as well at home as long as it's done. So yes, I think it was a very good investment, even though we were forced into it. But I think we're ultimately happy we did this. But I don't see any very large investments for the next year or 2. This is probably -- we got to where we want it to be in 2 years in terms of hardware in a couple of months. So hopefully, there won't be any [ expense ] this time.

And we'll take our next question from [ Sachim Mutokawa ] with [ Ashland ].

Just wanted to ask 2 things, please. One was just the sort of 4% to 5% growth on a base case you're talking about, was that blended or local currency? And then the other question is just in terms of the payment holidays that Central Bank has been talking about or interest repayment holidays, what's the sort of uptake in the sector as far as you understand? And is there any sort of way that you're seeing that manifesting itself in the interbank market because of the sort of potential to have delays in actual cash receipts of the banks?

Well, first of all, the 5% I was talking about is local currency. Probably, foreign currency might be slightly negative or flat. So it's not the blended, it's the local currency line growth. Secondly, yes, the way the moratorium works, it's not just debt -- it's not just interest, it's interest and principal. And effectively, what happens is, unless the company comes in and says they do not want to make use of it, then you automatically have to apply it to the company. So far, about 20% to 25% of the companies have said that they will pay back interest at least. So some of them are paying back everything. Most of them are saying they'll pay back interest and we'll keep the principal payment until after September. We haven't yet seen that because it's only -- it hasn't been a month. It's been 16th of March, it's been -- almost 3 weeks since it's been implemented. So effectively, I think what you're seeing is banks will have some sort of cash squeeze in that. We will not be getting the cash in, which may or may not be true. In terms of CIB, as I said, 50%, 60% of our balance sheet is sovereign paper. So it's not that the government pays the interest and then the bonds, then we were fine. That was the bulk of our money coming in. But yes, it might. It hasn't yet. I haven't seen it yet manifest itself on the interbank.

And we'll take our next question from John Niepold with SQM.

Quick question. Going back a little bit what [ Catherine ] was talking about. This idea that funding could be expansionary and also alluding to the fact that the economy is going to do pretty well and recover fairly -- is going to recover. A lot of that depends on the outcome from the COVID outbreak, right? Now unlike other countries which have really locked things down, Egypt has done it to some extent. But has done this a little bit less severely than a lot of other countries. You have curfews, you don't have lockdowns and that kind of thing. If that works, it's relatively better for the economy. If it doesn't work, then people going back to work is going to take longer or you could have a bounce that's a negative bounce and that kind of thing. What is the -- and I'm not trying to get into some sort of rumor mill or anything, but how is the situation going on the ground and with cases? And how does that look going forward? Because Egypt is a place which is crowded, or at least Cairo is, so on paper, it's the kind of place where an outbreak could be kind of bad. But so far, it doesn't seem to be. Patients are being -- the government hospitals are taking care of things. They are also doing all the testing and everything. So it's a little bit hard for us from the outside to see how it's going or what the expectation is for when things will begin to open up and whether that will be kind of a smooth process.

Yes. I think we keep discussing this amongst ourselves because, again, have you been sitting here in December and saying, well, you got the virus to test this and that. What would happen if it comes to Cairo? That would be hell. There are 27 million people, you've got people all over each other. Egyptian society, we don't really have a lot of personal space. People, I think -- how unfortunately -- so you would have expected, to be honest, we have about 400 fatalities. Obviously, I would expect it. Had you told me that there's been 40,000, I would not -- that would not have been an exaggeration. So even if the numbers are not accurate, that's nowhere near what they could have been. And it's not because it hasn't been here long enough, I think it has. I do not have an explanation for it, but it seems as if the curfews are working slightly. What we heard is that after Ramadan, the curfews will be lifted or shortened. Restaurants will be opened again. Cinemas will be opened, sporting clubs, that sort of thing. But they'll do it slowly. And what -- they're trying to sort of educate people to wear masks and behave responsibly rather than lock them down. Whether this -- that is successful, then I think it will lead to a much quicker recovery. But again, you have the risk of suddenly having spikes coming in. But I think that the plan is after Ramadan, they will sort of loosen up, but focus more on getting -- on how people behave in terms of wearing masks and not touching as much, I guess.

Our next question is from Aybek Islamov with HSBC.

So I wanted to ask you about your sort of open FX position, net flowing assets for CIB as of the latest, if you can tell us what it is like April, May. So there is Central Bank data, which show that there is some special swing in net flowing assets going negative at the end of March compared to April. So it looks like -- I don't know which banks, but probably state-owned banks are now short to dollars. So I'm curious what exactly that has on you? Yes. What effect that has on you? And also...

We have a policy we do not go short. At the moment, we have almost like, I think, $2.9 million long. But tomorrow, this could be absolutely flat or $1 million short. So what we tend to do based on the interbank and based on knowing that we're getting money next day, we try basically to stay square. So we might go up to $4 million or $5 million short- or long-guided way, but we never go either short or long for more than a week. But we never go short for more than 2, 3 days, and we have no intention of doing so. And at the moment, we're just slightly long.

Very long. Okay. And secondly, let's say -- if, let's say, when there's a depreciation you should count in the range of 15%, 20% towards the end of this year, how is that going to impact your inputs into the ECL, expense credit loss model calculations? Does it have any impacts at all?

I think we already were at EGP 18. So today, 15%, 20% -- 15% will take us back to EGP 18. So it should not have such an asset decremental effect on the models, I think. Again, it will be -- it will cause inflation, it will depend on the cost profitability of the company, but it will not have a massive impact in terms of negative ratings. I don't think so.

Okay. And the third question, I'll be very quick. What sort of extension in loan duration can you tolerate? Let's say, your customers are not paying, you want to give them a longer-term loan. Bulk of your loans are working capital as far as I'm aware. So what sort of duration risk can you manage from the asset liability management perspective?

I think if you look at in terms of our -- between our equity base and between long-term funding, we haven't booked any long-term loans in the past 10 years. So effectively, if we have any problem in terms of funding, we can always sell off bonds. So it will never be a problem in terms of -- at the moment, we still have plenty of room. But even if we see a tripling in the medium term because we were expecting the CapEx growth, remember? And we have the funding lined up for that. But even if we are forced to move working capital into long term, we still have the ability to do that. Either revenue through maturity mismatch, we still have plenty of room in capital to grow and sell bonds in the case of [indiscernible]. We don't want to do that because of profitability issues.

And we'll take our next question from Naresh Bilandani with JPMorgan.

Sorry for hogging the bandwidth, I promise just 2 more questions. One is, we've been doing about the new banking levies coming under the Banking Act. The way I understand it is it's like a 1% fee for sector development and then there is some deposit insurance fee. Can you please address us about the status of the plan? And if these could turn out to be a reality and how should this have to return? And the second question is on the line in your other expenses, which is the release of other provision, which I think is in the size -- range of around EGP 350 million to EGP 400 million and this has been there for the past 2 quarters. Could you please throw some light on that on what deals are contingent provisions are?

Sure. That I will get back to you on. But let me answer your first question about the banking law. The banking law was discussed yesterday in Parliament. And it's going to be rediscussed on mid-May. And nobody was clear as to which items will be changed and what will be done -- but we heard about the 1% development tax which will be taken from the bottom line of the banks. I'm not sure about the deposit insurance one, and I'm not sure what changes will be done. So I know that the law will be rediscussed again in mid-May. But if I have any other news, I'll tell you definitely.

And there are no further questions at this time.

Thank you very much, Hussein, and the Investor Relations team for your time today. And thank you, everyone, for dialing in the conference. Thanks. Have a good day.

Thank you. Stay Safe. Bye.

And that does conclude today's conference. Thank you for your participation. You may now disconnect.