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

Good day, everyone. Welcome to CIB Egypt's FY '21 Results Call hosted by Goldman Sachs. Today's call is being recorded. The call is intended for investors and analysts only and not intended for the media. Any media personnel on the call should disconnect at this point. Now I would like to turn the call over to Waleed Mohsin from Goldman Sachs. Please go ahead, sir.

Thank you much. Good day, everyone, and thank you very much for joining us today. It's my pleasure to welcome the CIB management today represented by Mr. Hussein Abaza, CEO and Managing Director; Mr. Sherif Khalil, Chief Communications Officer; and Ms. Yasmine Hemeda, Head of Investor Relations. So without any further delays, I'll pass on the call to Ms. Yasmine. Yasmine, please go through.

Thank you, Waleed. 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 have gained accessed 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 bank 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 the 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 or revise forward-looking statements to reflect changed events or circumstances. And that ends this statement. I will now hand it over to Mr. Hussein Abaza to give a brief overview of the results.

Good morning, good afternoon, everybody. Thank you for dialing in. I think -- I don't know if you had a chance to have a look at the numbers. I'll go through them very quickly, and then what we want to do this year is walk you through how we tackled certain issues quarter by quarters and the impact it had. And then we'll open it up for Q&A. So I think on the sort of the headline numbers. Net income is up 30% year-on-year. Total revenues were up 3%. ROE is 27 -- 21.7%, up from 18%. So all in all, I think it was a very, very successful year in terms of balance sheet and income statement. But let me first walk you through how we approached the year. When -- for those of you who've been sort of -- we've been talking to throughout the year, we were hoping for a year of improving quarters, and I think this is what we got. First, in terms of COVID and its impact on the economy, and then the pure economy itself, and then moving forward into consumption, GDP growth and, consequently, demand for lending. So as the year progressed, we highlighted 3 or 4 areas of focus where we really wanted to -- that we felt would make an impact, and the best thing is to simplify. So just by focusing on 3 main areas, on the local currency side, our main strength has always been the cheap cost funding base. So in order to do that, we focus very much on that. And if you look at the progress of these numbers, so for the first half of the year, CASA only compromised -- only comprised around less than 37% of new acquisitions. However, as the second half progressed, and we started focusing more and more on CASA, for the second half of the year standalone, CASA represented more than 96% -- actually, more than 97% of new acquisitions, which brought our total CASA acquisitions for the full year up to 58%. So 58% of all new deposits in local currency coming into CIB in 2021 were in CASA, and the bulk of that came in the second half of the year. Of course, retail banking did a fantastic job. 73% of all retail banking deposits coming in were in the form of CASA. During the second half of the year, in IB, we managed to offload some very expensive deposits that have been dragging down or pushing up our cost base. So that was on the local currency funding side. On the lending side, we actually managed to grow our lending book for the first time in over 15 years by 29%. And I think that's a very, very solid number given that we're still not completely out of the impact of COVID. Companies are still recovering. Consumers are still recovering. Last winter, we were still feeling the aftereffects of Omicron. So I think a 29% local currency loan growth was achieved, and that, I think, was very good. It pushed up -- despite the huge growth in loans and deposits, we still managed to increase our loan-to-deposit ratio, while bringing down our cost of funds. The second thing we started looking at is the foreign currency part of the balance sheet. We started the year with the foreign currency net interest margin just over 1%, 1.02%, 1.03%. So -- and the foreign currency part is slightly trickier because with local currency, any excess funds can always be invested in treasury bills and bonds. On the foreign currency side, excess funds are basically loss-making. You're placing them at pretty much the same rate or a lower rate than you're paying for them. So we worked on both sides of the equation there. On the liability side, what we did was we offloaded and got rid of expensive time deposits. We actually managed throughout the year to get rid of a total of about $175 million of expensive funding. And we replaced them with around $620 million of CASA to give us a net-net growth of just under $450 million, but all of it in CASA. So that changed the funding mix completely and consequently brought the cost of funds down. On the lending side, in the first half of the year, we had a lot of payoffs on the foreign currency book. Our foreign currency loans actually dropped by -- just a second, we -- it dropped by about $280 million in the first half. In the second half, we not only booked $280 million, we also booked another $105 million above that. So we ended the year with positive loan growth on the foreign currency side and much cheaper funding on the foreign currency book, which actually brought our foreign currency NIM up from 1.03% in Q1 to 1.47% in Q4 on a standalone basis. The total foreign currency NIM for the year was 1.19%, but it increased quarter by quarter by quarter, and that's the good news because going into 2020, it's the 1.47% NIM that we're carrying forward, not the 1% that we started off with. And then finally, as a final result of that, the last thing I really want to focus on is all of the growth that you're seeing this year is coming from core banking income, which impacted positively in terms of fees and commissions. Our recurring fees increased by over 17%. The only drop was in the nonrecurring part of capital gains, which dropped slightly by less than 5% or 10%. As a result of that, if you break down our performance quarter by quarter, you'll find that our total NII, net interest income, actually grew from the first quarter to the second quarter by 5.6%, from Q2 to Q3 by 7.3%, and from Q3 to Q4 by 5.4%. So effectively, our first quarter NII was around 5.6 billion. Our fourth quarter NII was 7 -- 6.8 billion. And that, I think, is very important. It's the momentum going forward because that is the sort of performance we should be bringing back into 2022. The other good thing is because of the loan growth, our tax rate went down from 36% last year to just under 30% this year, which had a positive impact, as I said before, on ROE. So I think on the back of that, I'll stop here and open it up to Q&A.

[Operator Instructions] Our first question comes for Aybek Islamov with HSBC.

I wanted to ask you about how you think about your NIM, net interest margin, sensitivity to expected rate rises in the U.S. What do you think could be the impact on the Egyptian treasury yields and how you're positioning ahead of the rate hikes? So that will be my first question. Secondly, I think what's your sense on the foreign currency loan growth this year. I know you're trying to deemphasize foreign currency loan book. You're shifting more towards local currency, which is a high yield. So what are your thoughts here? And I think thirdly, National Bank of Egypt still appears to be a shareholder in COMI. They have 8% stake. Do you have any color as to how long they intend to hold that stake in COMI?

Sure. Great. Thank you, thank you, Aybek. Let me take your questions one by one. Now as everybody is expecting, there are going to be rate rises in the U.S. The impact of that should be -- let's step back and see what's happening in Egypt. In Egypt, we've seen the 2 interest rates -- the 2 main interest rates. The policy rate and the sovereign rate have decoupled over the last couple of years, where the policy rate has come down by 400 basis points and the sovereign rate has actually gone up this year from the beginning of the year -- in the last 12 months. And it's now gotten to the stage where the risk-free or sovereign rate is...

Okay. The speakers have reconnected.

Apologies for that. I hope you can hear me now. I'm sorry, let me -- so I hope I'll resume where I was cut off. We were talking about the 2 interest rates decoupling in Egypt. And the reason behind that is primarily the sovereign yields went up in order for the carry trade to be attractive. And the carry trade is very important because during COVID, the main sources of dollars coming into Egypt, which are exports, Suez Canal revenues and tourism, were very badly impacted. So for the economy to be able to function and for GDP growth to happen, we need to have -- importers need to have access to dollars to buy them. So the carry trade is providing a vital source of dollars. So that carry trade will continue to be a very important source of dollars. Consequently, coming to Aybek's question, as interest rates in the U.S. start rising, then I would imagine, for the carry trade to remain competitive, we would expect to see that going up. If that goes up then, basically, since -- first of all, we have chief funding coming in at the CASA level where current accounts are 0 cost, our equity base is over GBP 70 billion. The endowment effect of 0 cost funds in a rising interest rate environment is always positive. So you would expect it to have -- just as banks always have problems as interest rates come down, we get the benefit of interest rates coming up. So I would imagine that to have a positive impact on NIM. On the FX loan side, it's not that we were emphasizing FX loan growth. It was basically a response to demand because the companies who are allowed to borrow in FX are companies that have revenues in FX. So tourism is one of them. Exports are another. Oil and gas are a third. And we are seeing the recovery in all 3 of these sectors, which is why in the second half of 2020, we actually booked loans of about -- almost $400 million after we've seen payoffs in the first half. So if this trend continues, then I would expect to see more demand from the hotels as bookings. First of all, bookings over Christmas were very strong. Expected bookings in Easter look very good. So if this continues, we'll start seeing working capital lending. We'll also start seeing some CapEx lending in the hotels as they refurbish because they need to bring some of the rooms up to par. We're seeing the export book, especially some of the textile manufacturers are seeing exports coming through from Europe and the U.K. So that part of the book, we're seeing demand on. So we should see a decent loan growth on the FX side. In terms of NBE and their holding, we have spoke -- I've spoken to them formally and informally. I know the Chairman there, and he's emphasized more than once that it is a purely financial holding. And at the right price, they would be very happy to sell. He did not quite tell me what the right price was, and I didn't feel it was my place to ask. But they've shown no inclination whatsoever to -- I mean, they only attend the AGM because we asked them to attend the AGM, so they make up the quorum. So they have no intention of taking a Board seat. They've had these shares for years. They've never shown any intention of taking any sort of managerial or proprietary stake. So for them, it's a financial investment, and I hope they make good money out to it one day.

And if I may, one follow-up. We discussed the NIM impacts of rising U.S. rates, but what about capital ratios? Are you looking to cut duration of your securities to...

Yes, yes. Sorry, sorry. I forgot to mention that. Of course. Yes, we've already started that because I don't think anybody has been taken by surprise that the expectation of rising interest rates in the U.S. has been there for a while. If you look at our duration on our sovereign book, we've shorten duration where possible. We've offloaded some of the long-term bonds, not the very expensive ones, but some of the others. We've shorten duration on T-bills. And when we've needed -- if we need any long-term funding, we've already taken it and locked in the prices of today rather than waiting for interest rates to come up. So yes, we've -- we did the opposite of that several years back when we were expecting interest rates to come down. So it's not -- it's exactly what you're saying, short-term asset duration, lengthen deposit duration is needed.

[Operator Instructions] We'll go next to Rahul Bajaj at Citi.

This is Rahul from Citi. Questions from my side. The first one is on dividends. If I recall correctly, after the third quarter call, you talked about some sort of slightly higher dividend ratio this year to kind of compensate for the missed dividend for 2020. But it doesn't seem to kind of have pleased the Street in terms of the value of dividends this quarter -- this year. So just wanted to hear your comments on what you're thinking about dividends going forward. And is this kind of 20%, 23% like the run rate where you expect dividends to be in the near future? So that's my first question. My second question is around the SME regulation. So if I recall correctly, you talked about this new SME regulation kicking in later this year. I just wanted to understand how much sort of leg room you have now on the S and the M components of SME. And do you think there is a possibility that the deadline could be pushed ahead in the future? Those are my 2 questions.

Thank you. Let's start with the dividend. Yes, you're right. We -- I did say several times that management were going to propose a high dividend. We had a Board meeting -- we've had Board meetings and Audit Committee meetings over the last 3 or 4 days, and it was discussed at length at the Board. And I think it was felt that the -- we should be looking at an increasing payout ratio. And the possibility was also discussed yesterday that we would split -- not split this, but we pay out the 20%. By the way, this is the highest dividend we've ever had because our dividend payout ratio was always 15%. This is 20%, and this is the highest profit we've ever made. So in terms of absolute and rate, it's very high. So I think what we wanted to do is build it up gradually. The possibility was discussed yesterday at the Board level that we would come back in a couple of months and propose a second dividend if things settle down in terms of COVID. But the general outlook is a higher payout ratio moving forward rather than a lower payout ratio, all things being equal. On the SME regulation, you're right. We -- it's the end of this year, and we're expected to have about -- not about, 15% of our portfolio as of 2020 in medium-sized companies. This comes up to GBP 18 billion. We're almost at GBP 14 billion, so we need to book another GBP 4 billion in the next 10 months, and I think that's quite achievable. On the assets, we need to reach GBP 12 billion, and we're almost at GBP 4. billion or GBP 5 billion. And I think this is where -- sorry, where it for. And this is where I think the challenge has always been and will continue to be is getting to that number in time when the entire banking system is chasing the assets as well. Whether I think there is a possibility that the deadline will be extended, I genuinely don't know. We might have more clarity as we approach. But I know that there are other banks who are in the same boat as us, and we'll see it as we get closer to the deadline.

[Operator Instructions]

Perhaps while we wait for questions, Hussein, a couple of questions from my side. Sir, if you could talk about some of the incremental provisions that you took during the quarter. You're only starting off a very high NPL coverage base, so just if you could comment on the incremental provisions you took during the quarter, that would be very helpful. And then perhaps a little bit of your comments on the effective tax rate going forward. Historically, there's been talk of a bank tax, some incremental taxation, et cetera. But as your loan book evolves more towards lending, how do you see the effective tax rate evolving?

Thank you very much, Waleed. Yes, in Q4, remember, I was saying we -- there was large foreign currency loan growth. Now some of these loans are covered by guarantees to the -- from the Ministry of Finance, which effectively would mean that they are 0 risk-weighted. However, because these are foreign currency loans and the guarantee is in Egyptian pound equivalent, under IFRS 9, we have to take a full provision for them. So despite the fact that there is minimal credit risk, the risk here is that if this company defaults, the Ministry of Finance will pay us the equivalent amount of the free market rate, but in Egyptian pounds. So it's more about us being able to avail these dollars in order to pay off the amount, which for -- there is no credit risk and its availability of foreign currency risk. And given the amount of dollars we generate from our own balance sheet, we were happy to take that risk. We calculated the whole thing. So -- but under IFRS 9, we still had to take a full provision against it. So part of the provision you're seeing there is purely due -- it's not a credit risk, but rather an anomaly in IFRS 9, the bulk of the provision that you've seen in Q4. Regarding the tax rate, as we move more and more towards lending, which is -- which we did this year, our total loan book grew by 20%. Our local currency loan book grew by 29%. Our loan-to-cost ratio grew. And as a result, our tax rate went down. So if we should continue at the same emphasis on lending, then you should see a tax rate below the 30%, rather than above the 30%. 30% seems to be the swing point. It can go up to 36%, as we saw last year when the emphasis -- or most of the income was coming from sovereigns due to the taxation. There is no further talk on any extra bank tax at the moment, so fingers crossed. I actually haven't heard it for a while, so let's pretend you didn't say this, Waleed. We don't want to remind anyone. But other than that, I think...

And at this time, I do not have any other questions holding. I'll turn the call back to management for any additional or closing comments.

We're good, Waleed?

Yes. Sir, any final or closing remarks from your side? .

No. I think Sherif is very happy now. He can go play tennis early. Well, thank you very, very much, everyone. And if you have any follow-up questions, Waleed knows how to get hold with us. Most of you, I think, have our numbers. We're very happy to take calls moving forward, and we hope to start seeing you physically in Cairo soon, all of you, [Foreign Language].

Thank you much, Hussein. Thank you much for attending. And that wraps up today's call. Thank you much. Keep well. Have a good day. Thank you.

Thank you, everyone. Bye.

Again, ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may now disconnect.