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

[Audio Gap] Results Conference Call hosted by CI Capital. My name is Amr Amin, Head of Corporate Access at CI Capital. And today, I have the distinct pleasure of introducing CEO and Managing Director, Mr. Hussein Abaza; Head of Investor Relations, Ms. Yasmine Hemeda; and Investor Relations Senior Officer, Ms. Nelly Zeneiny. Following an overview of CIB's quarterly performance, the floor will then be open to a Q/A session. [Operator Instructions] I now give the floor to Yasmine Hemeda.

Thank you, Amr. I'm now going to read our safe harbor statement. 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 earnings 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 as well as 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, revise forward-looking statements to reflect changed events or circumstances. And that ends the disclaimer statement. I'll now hand it over to Mr. Hussein Abaza to give a brief overview on the first half results.

Thank you very much. Good morning, good afternoon, everyone. Thank you for dialing in. I think over the second quarter of the year, we saw much less change than we did in Q1 and Q4 of last year. So we did not witness any further devaluations. We didn't see any further policy rate changes. However, we were impacted by the policy rate changes that happened on the interest rate side with the 300 basis points that happened in Q4 of last year and the 200 basis points that happened at the end of Q1 of this year. And they had a very positive impact on our numbers, as you can see. The good thing is it's a sustainable -- most of the growth that you can see on underperformance is coming from where it really should be coming. It's coming from our NII. It's coming from control of expenses. It's coming from controlling cost of funds and a quality loan portfolio and impairments, again coming under control. So if you look at actual performance, as I'm sure some of you must have had the opportunity. We've actually seen net income growth of 81% year-on-year. And we've seen revenues grow by 74%. And the cost to income has dropped to 16%. Primarily, this is driven, as I said before, from NII. So if you dig down into the numbers, not only did we see deposit growth at a time when there was very, very competitive deposit growth, because the public sector banks were issuing long-term instruments at high yields. We not only match that, and we actually grew our deposit base by [indiscernible] EGP 75 billion. During June and into July, we're now looking to focus back on the CASA. We've locked in the CDs, and we're now focusing more on CASA. We're still at a 53% CASA to total deposit, which is, I think, higher than the market average. And the -- if you look at our NIMs, we're looking today, I think at record NIMs. Our local currency NIM is 920 basis points and growing. Our foreign currency NIM is 3 -- 180 bps, and the blended NIM is around 730 bps. All of these are -- we're still to see the benefit or the full benefit of reinvesting our T-bill portfolio into the higher yielding rates. So it's not as if these are one-off items. In fact, there's very, very few one-off items in the financials. This resulted in a return on equity north of 41% for the first half. Actually, the second quarter ROE on a stand-alone basis was about 49%. So I think all in all, it's been a pretty good quarter and a very good half. So I think I'll just stop here and focus on specific questions. I'll leave it up to you guys.

[Operator Instructions] We'll start with Waleed.

A couple of questions then, please. Firstly, I mean, very strong set of results, as you alluded to, I mean, across all lines, no issues on the provision line. Margins expanded, good growth in the balance sheet side. Your thoughts on the macro, I mean, how do we kind of have -- what do you [indiscernible] do you see towards an FX adjustment and interest rate adjustment? How does it solve itself? That's one. Number two, I mean, on the provisioning side, you have a very strong buffer. You had another good quarter on provisioning. What are the risks here? Which kind of sectors are you monitoring? Are you worried about any particular areas at this moment? And then finally, I mean, your strategy in terms of now growing the balance sheet, how you're thinking about placements versus lending. We saw during the quarter, you had a pretty big increase in new form banks. So you use some of the liquidity on that front. So how are you kind of thinking about managing the balance sheet? Obviously, it's visible that you're making a very high ROE as you alluded to, but how are you thinking about some of these factors at this moment?

Sure. Let's take them one by one. Let's start with the macro, everything will feed off with that. I think the backdrop, we've said before and we continue to say this, I don't think necessarily a devaluation is the [indiscernible]. And the reason we say this is, for the first time, when there has been talk of devaluation, the actual flow of dollars into the country is almost at an all-time high. You look at tourism revenues, most [indiscernible] hotels are at occupancies north of 90%. The 5-star hotels are charging $500 and $600 a night. And this is not money that's coming in off the books. This is money that's sitting -- if you look at our growth in deposits, foreign currency deposits, a lot of this is just lying there in current accounts in CASA because the Four Seasons, the Marriott and others are doing very well. Exports are doing very well. [indiscernible] revenues and remittances are doing very well. So on a supply and demand issue, I don't think there is an issue that always used to cause or push for a deval. What is happening today is that we have a backlog of import requirements. And unless that backlog is resolved, people who have dollars are not willing to sell them. And that is what needs to be done. Where this sort of -- how this backlog can be done could be from asset sales that we've been hearing about. But as long as the backlog is there, if you put yourself into the shoes of the CFO of one of these companies, why would they sell dollars? The dollar has now become an investment in and of itself, even if it's yielding nothing in line in the current account. So it's not a supply and demand issue. So even if the devaluation goes from 30% to 40%, we're still looking at a very similar situation. We still have a backlog. So I think it's less the elephant in the room. Once the backlog is cleared, once there is a function in market, then we will go back to the normal behavior of selling dollars, using these dollars to buy T-bills and whatever as any good CFO in one of these companies used to do throughout the period. On the impairments, I don't think we're worried specifically about any sectors. If anything, I think the bank is very, very well impaired, we have about EGP 30 billion of provisions on the balance sheet. I think one very important number I would like to draw your attention to. It's not that we have coverage on almost 12% of the portfolio, all of our risk-weighting ones are fully secured. They're not even included in the impairment calculation. So you do not take an impairment on a risk-rated one. This is -- these are companies that have loans that are covered -- fully covered by assigned cash, over time deposits or guarantees from the first class bank. So there is no credit risk involved, i.e., impairments are not calculated. If you remove that part of the portfolio, basically, we have coverage just under 18%, which, to be honest, based on the performance of the portfolio is, I will not say excessive, but at least it doesn't give us any sleepless nights. So we're not really worried about sectors. It's more the market leaders will tend to do better, and that's always been -- we've got the top 850 corporates in the country. We're pretty comfortable with the borrowers we have. In terms of strategy, you are seeing -- if you remember, we issued CDs in May, we collected a lot of money. And the strategy has always been a liability-driven one where you collect a lot of money, and you cater to whatever credit demand is there. The fact that the money is currently in the CBE deposit auction as opposed to being lent out, it will be lent out as long as the demand is there. But when you have a very short window when you collect EGP 45 million, EGP 50 billion, and it's not logical to find that money leaving. But -- and again, let me stress, we've never ever been in a situation where we will put money in T-bills rather than lending it. What we do is we collect a lot of money, lend out to whatever is needed and put the excess at the best possible gain based on tenure and stuff, and that continues to be the strategy. So a deposit-driven strategy after the CDs and when we had to compete with the National Bank of Egypt [indiscernible], we're back to collecting CASA and maintaining that CASA, that high percentage of CASA, which makes our cost of funds much more managed. I hope I answered the questions.

That answers all the questions. Just one other area. From a capitalization perspective, quite comfortable where you are in terms of your growth needs, et cetera, and some of the volatility that we've seen on the FX side?

Yes, of course. I think if you look at where the biggest hits to CAR have come, they really haven't come from the FX as much as they've come from the interest rates on the local currency bonds on the available-for-sale bonds. We've already seen 1,000 basis points hikes. So I think we've basically weathered most of the store. We're still at 19%. At the rate of capital generation, profit generation, we're generating, yes, we do feel comfortable. I mean, in that sense, we don't feel that there is anything that's inhibiting growth. Whatever growth is happening or not happening is happening as a result of the demand from our customers. And that is basically -- is where the rate of growth has been determined. All of the loan growth that you saw, the EGP 17 billion, EGP 18 billion in the first half of the year is coming from local currency working capital. Nobody is looking at CapEx. We are seeing some foreign currency loans, but we're seeing a lot more foreign currency payoffs. And this makes sense because if you remember, during the 2 years of COVID -- start of COVID, there was a debt moratorium, especially on the tourism sector. Now the tourism sector is doing very well. So if they're not going to pay us back in good years, and they don't pay us back in bad years, then that's not a loan. That becomes a contribution. So it does make sense to see some payoffs coming in. And that's where we're seeing tourism is doing well. They're doing some payoffs. They're also starting to borrow some money as well. But the net-net on the dollar exposure is negative, which is I mean we're not worrying about it. It's good to see. So yes, CAR, we're comfortable with that at the moment.

We have a question from Rahul from Citi asking if you think this over 40% ROE short term -- is this short term or is this a new norm for the bank?

I think it's difficult to say with any degree so there are so many moving parts. We have to admit a large -- banks make more money with rising interest rates. How long are we going to see these super rates? I'm not sure how long, because we are making a lot of money from 24% [indiscernible]. But we're also paying a lot of money on our CDs. So I think historically, if you look at over the last 7 to 8 years, our NIMs have moved between 5.5% on a blended NIM to 7.3%. So maybe 40% is great. I can't promise this is the new norm, but I would have been targeting -- or we, as a management team, beg your pardon, have been targeting 30% and above 30% for a while. I think we can safely say 30% to 35% is where with some degree of certainty on the medium term as in for the next 2 to 3 years. Beyond that, it would be -- I don't think you can put much credibility to anything anybody says given what's happening over 2 to 3 years. But yes, I don't see -- for this year, we should maintain above 40%, maybe most of next year. And then we go into the 30s, which is not too bad.

I see [indiscernible] has his hand raised, so I will enable your mic.

So could you shed some light on what drove these very strong deposit growth during the quarter? And how are you seeing deposit flows so far in July? My other question is, what is the reason for the 43% expansion other provisions? It expanded to EGP 682 million. And I know you shed some light on policy rate, but do you think other hike is possible this year?

So let's take it one by one. So I'm writing it down. Okay. The first was the deposit growth. Remember, I was talking about the CDs. When we had the interest rate hikes, the policy rate hikes I was talking about, we had 300 basis points in Q4 of last year and 200 basis points at the end of Q1 this year. The public sector banks reacted by issuing high-yielding CDs. So we -- in order not to lose market share, we did the same thing. In fact, what we decided the second time around was not -- just not to be defensive, we wanted to be aggressive and gain market share. What we did was we -- our CDs were actually higher yielding than the public sector banks for the first time in history. But what we did was we put a minimum threshold of EGP 3 million per CD. The idea was to attract new-to-bank wealth customers. And we actually managed to attract almost 2,000 wealth customers. Usually, in any given month, you would attract 15 to 20 wealth customers. So to get 2,000 in one swoop, I think, was a strategy that management worked on. The idea from that is that you then -- these are new-to-bank customers. Then if somebody has EGP 3 million minimum cash lying around that he's willing to lock in for 3 years in a CD, he must have a lot more cash that you as a bank can start making money out of. And that was the idea. And so a big bulk of that jump in deposits came from that CD strategy, which happened in May, if I'm not mistaken. Moving on to provisions. As I said, the -- under IFRS 9, a lot of the provisions you take are not arbitrary. You look at not only your past historical, but you also look at the future outlook. And given the uncertainty. When you're modeling in things like, what's the expected FX rate, or what's the expected inflation rate? So all of the current macroeconomic indicators are not very favorable. In addition, you also run key scenarios of macro [indiscernible] indicators, one of which is the worst case. So given what we are seeing now, the risk guys can really come up with some amazingly bad worst-case scenarios. That forces you to take more impairments than you actually need. And that is something we're working on and working to fix moving forward. But that it's not a signal that we haven't seen bad loans, but we're going to see bad loans on the contrary. The loan book has been extremely robust. And I think what we're trying to work on is to come up with a more realistic impairment model to match the actual performance of the book. moving forward. But this is a process where we need to talk to external auditors. We need to talk to the Central Bank. It's not something that we can suddenly decide instead of taking 10% impairment, we would need to make it 2.5%, because we feel that's enough. It has to go through a very, very rigorous [indiscernible] testing and checking, but we are working on it, and we're working through it. In terms of great hikes, I think most economists or most consensus seems to be within the coming 6 to 9 months, no more than maybe 2%, but that is again a consensus. We have heard it said by people at the Central Bank. I think the last time the governor was speaking of the IIF and the IMF meetings, the spring meetings, he did mention that rate hikes might not be the most effective way to look at inflation, especially because this is not demand-driven inflation. So that's the sort of theme that we're starting to hear more and more, not just locally but globally. So I think even if there are rate hikes that are not going to be of the magnitude or severity anywhere near the 1,000 basis points you've seen. So I mean, our view is that we've pretty much reached close to the end of the rate hike cycle.

All right. Perfect. But just on deposit flows so far in July?

Sorry, [indiscernible], can you repeat the question?

Yes. Just on deposit flows so far in July, if you could shed some light on that, please?

We're back to the normal level of more than 50% of deposits coming in the form of CASA. So comparing July -- usually, summer months are slow. So comparing July to last July, it's still up. But it's back to normal, and we're back to -- we no longer have the sort of abnormality that we had to compete on CDs and as I said, the strategy to get the wealth customers. So they're back to good flows, and they're back to the right ratio of over 50% CASA.

I see Randolph has his hand raised. So Randolph, I just enabled your mic.

I just wanted to ask two questions. The first one is your -- the losses we see under other comprehensive income. Can you just guide what you expect that to be for the full year? I think for year-to-date, there's around EGP 10 billion. And then the other question is, if we did have another devaluation, can you just talk us through the impact on net income and balance sheet? If that did happen, let's say, I know you say it's not -- you don't think it's going to happen, but let's say, it did happen, just a preferential remind us what the impact would be taxed.

Let's start with the losses. The losses are basically -- the bulk of these losses are coming from the available-for-sale bond portfolio with the interest rate hikes. So basically, for the rest of the year, if there is a 1% or 2% interest rate hike, then we're looking at a minimum amount compared to the 1,000 basis points we've had over the past period. Again, this will be more than offset by the profits generated on a monthly basis into the P&L. On the deval, basically, every EGP 1 -- let's put it this way, every EGP 3 to EGP 4 will give us less than 1% difference on CAR. So if there's a EGP 10 or EGP 5 or EGP 3, then that will have a negative drag on CAR. But there are things that we are doing and various levers we're using to offset that, so that 19% is not a static number. Our target is to push it up comfortably into the 20s without panicking and over -- being overcautious, because the last thing you want to do is push it into 22%, 23% now. And then as that bond portfolio starts maturing these unrealized losses reverse as interest rate -- the interest rate cycle reverses, then these losses reverse. So -- and you suddenly find you guys were complaining like crazy when CAR was 32%. So I think sort of low 20s is the comfortable area to be in, and this is where we're sort of guiding it. So that's on the detail. I don't know if I answered the question.

And perhaps just on the deval...

Sorry, yes, the deval on the P&L, right? Now as you know, we're perfectly matched in terms of assets and liabilities. We also had about 30% to 40% of the balance sheet is in foreign currency, which is generating almost 4% NIM. So on a monthly basis, we're generating $15 million to $23 million, $24 million of net profits. That will revalue upwards. We also have a slightly long dollar position, very slight. So that would [indiscernible] will make an FX gain on that. Nothing -- there's nothing negative. I mean we've gone through several devals, and that's basically been -- you'll suddenly see our loan book in dollars will look much bigger, but that will be offset by deposits in dollars, because they're perfectly matched. That $20 million a month that we're generating will be multiplied by a bigger number. So you see a bit of a profit boost. And the deval on the risk-weighted assets is offset by the Tier 2 capital, which we've taken, and we've increased. So there shouldn't be a negative drag beyond what I was telling you that the 20, 30 bps.

One more hand raise, and then we'll get through the questions in the Q/A box. Naresh, please go ahead.

Yes, Hussein. It's Naresh Bilandani from JPMorgan. Just two quick questions, please. One is your operating expense level is looking quite low. And I think based on the headline number, your cost to income ratio is probably now the best in MENA banks. So despite the inflationary pressures, how are you managing this low level of OpEx? Do you reckon there's an element of underinvestment and you just being cautious at this stage, which, if reverses at some point, can push the cost higher? Or there could be a readjustment of the salaries in the current environment? I'm just trying to gauge the sustainability of the current low level of OpEx compared to the healthy revenues that you are generating from the franchise. So that's the first question. The second question is, on the previous call, you had talked about shifting a portion of your bond portfolio from FVOCI to [ FVICE ] amortized cost. But I think the balance sheet is showing that probably hasn't really occurred unless you can please correct me on that. I'm keen to know if that is still on the plan and if at all, how can that help your capital position going forward?

Let's start with the bond portfolio. That is -- it's -- we need to go back to Central Bank. We need to go back to auditors. But it will not impact CAR at the moment. What it will do is if there is a further interest rate hike, it will mean that there is no impact on CAR, but it doesn't [ post. ] What reverse is all of these losses is the actual bonds maturing. All the interest rates reversing, and I think as we were saying, we don't think there's much more hiking left in the cycle, regardless of the tenure. I'm not sure when we're going to start seeing cuts, but I think we're more likely to see -- I mean, if there are incremental interest rate hikes, they're not going to be a lot, and we're pretty much near the end of the cycle, unless we've all got to wrong. And so the impact of that is not going to be massive on CAR, it will just prevent volatility moving forward. Yes. I think our cost -- if you look at our costs, they've actually gone up by 31%. And if you take out the devaluation impact, would you -- could or you could not because we do have costs in dollars. So no, we haven't underinvested at all. The good thing is because of that $20 million of profits that we generate on a monthly basis, that covers our IT costs are consulted all costs in dollars. So that's why we -- there's an offset there, which we managed to do. The other thing we do is if there is this potential that we get bonuses and stuff. We try to do it like one-off bonuses rather than increasing our fixed costs on that. But I think the drop in cost to income is more a function of the massive rise in income rather than -- are being sort of stingy and not paying people, if I may put it as bluntly as that. [indiscernible] clear by everybody on the table. So quickly before they beat me up to Naresh. And we can talk privately by this, okay?

We'll get through some of the questions in the Q/A box. [indiscernible] from Arab African is asking about the new digital banking license as issued by the CBE. Do you believe that CIB intends to obtain this license?

Yes, of course. I think we've said for a long, long time, we've always said we were going to. What was issued recently was more of a handbook of how to apply for a license rather than a handbook of how to operate a digital bank. So we're complying with that. We're looking at what the capital requirement is, what sort of info needs to be in the business plan that has to go. So yes, we are, absolutely. We've never made the secret of our intention to go into digital banking.

Okay. And then [indiscernible] from Prime is asking: What are your thoughts on the new 7% and 9% U.S. dollar, 3-year CDs issued by state-owned banks today? What kind of effect do you think it will have on the market? And is there a possibility for CIB to follow suit?

There's always a possibility. I don't think there's a high probability at the moment. We'll wait and see what's happening in the market. It depends on what the idea behind it is. If the idea behind it is to get money from abroad or people who have money outside the banking system to bring it in, and we see that working, then we might easily do it. If it results in cannibalization of existing money, then it just becomes very expensive. And remember, I was saying on the dollar book, we're actually seeing loan payoffs. Our loan-to-deposit ratio in dollars is 36%, 37%. So there's no pressure on us to react too quickly. We're going to take our time, look at the market and do what we think. So either way, we have comfortable buffers. And as a management team, we've looked at certain buffers, if we see attrition rates hitting certain numbers, we already have in principle approval to issue these CDs and the decision -- because to issue CDs, you need to go back to a Central Bank. So the management team was preemptive. They got initial approval or in-principal approval. Should we want to, we can. So it's just a matter of deciding to do it. But based on -- we don't want to jump the gun and sort of do something internationally. We'd like to see what's happening in the market first.

Okay. We have a question from Zintle Twala of Steyn Capital Management asking about Stage 2 loans that they represent around 30% of total loans. What percentage of those are performing loans versus those that are due to macro risks such as sovereign downgrades?

Okay. More than 85% of these are performing loans, because the definition of Stage 2 loans, for example, if you have a company that is performing, but it has been downgraded 2 notches from the day it's coming to the bank, that becomes a Stage 2. So for example, I don't want to name names. We have some very large companies that came into the bank as a risk-rating 2 and are now risk-rating 4. Risk-rating 4 is still better than the bulk of your portfolio. There are certain sectors which are regardless of how well the company is doing in that sector are considered Stage 2. So it is -- it looks like an alarming number, but it definitely isn't. And each of these loans is -- has its own impairment against it. So it's not -- it's -- the bulk of them, as I repeat, are performing loans. Otherwise, we see more migration. This number hasn't changed a lot. Had they been Stage 2 not performing, they would not be hanging around the Stage 2. They'd be moving into Stage 3.

We have a question from Colin Smith of All Africa Partners asking about your 3-year CDs at the moment? Are they fixed rate, or are they floating?

They're fixed.

Okay. A question from Ahmad [indiscernible] asking if you can discuss the overall banking system drivers, deposit growth, loan growth and quality, asset mix shifts, cost of risk, et cetera. And more specifically, what are you seeing from the large state banks that may give you pause or concern?

Okay. Sure. I think from the large state banks, as you saw, there is a lot of disruption there. To be honest, it's -- we deal with the interest rate fluctuations. We deal with the FX moving. This is part of being a bank in Egypt. What really causes us a lot of concern, and I think I'm speaking on behalf of the management team is when you suddenly find the state-owned banks coming up with -- or any banks, let's not pick on anyone, coming up with CDs that are loss-making under any scenario. And then the decision is do we bite the bullet and take some losses? Or do we bite the bullet and have attrition of your deposit base? So that, it just becomes -- because you're mixing sort of national interests with pure economic interest, and that becomes -- but at the moment, I was going to say, we haven't seen much activity until they issued these dollar CDs, but I think on the dollar side, there's much less impact on balance sheets of the banks. But that is the most disruptive thing. It's not on the lending side. It's more on the rates that you -- and you want to -- we put a huge priority on our low-cost deposit franchise. That is the -- one of the primary drivers that allows us to have such high NIMs and consequently ROEs. So anything that disrupts that, we're always very, very careful, and it always takes the highest priority.

Okay. I just forgot to mention that Ahmad was from Helios, but A question from Nader Ashraf from NAEEM asking about the $250 million from the IFC. Is that part of the plan that CIB had announced to raise a total of $1 billion?

Well, I think if you remember, we had a Tier 2 capital loan of $100 million from IFC. Because it's a Tier 2 loan, the way Tier 2 loans come in is you have 5-year grace and then you start repaying. So we were going to start repaying part of the IFC loan this year for the next 5 years. So what we did was we prepaid the whole thing. And we took $150 million loan to replace it. So the net-net gross impact is $60 million. And then there's another $100 million, which is a pure loan for green financing and sustainable financing, which we're doing again with the IFC. So that's the $250 million.

Okay. We have a question from Seki Mutukwa from Ashmore Group asking during the first quarter results call of this year, he believes that you had guided for 250 bps COR for the year. The run rate is much lower year-to-date given stable NPLs and high coverage. What has driven the positive surprise in asset quality versus your initial guidance?

The performance of the companies and the performance of the economy. If you remember back when we were doing our budgets, we were doing our budgets towards November, December. We honestly did not think that T-bill rates are going to reach 24. We thought that we could see devaluations beyond the 35, 36 to 40. We thought that the economy would be much slower. So we thought -- we always start off very, very conservatively. As a matter of fact, if you're talking about guidance, I was guiding for something like EGP 20 billion to EGP 22 billion of profits. It does seem pretty obvious, we are going to exceed that. So we always prefer to be very conservative with you on everything we do. And then we guide upwards as we move along. So we look at our budgets more of sort of a worst-case scenario rather than a proper budget. Internally, we then have shifted to different numbers for our -- because otherwise, we would lock up shop and go after the North Coast for the rest of the year. So in order to keep everybody motivated, we're doing a new forecast for numbers that we have to achieve. But I think it's because we put in a lot of very conservative assumptions, and one of which was that we would take something like EGP 6 billion of impairments. But part of that is due to the model anyway. So that, as I mentioned before.