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

Good afternoon and good morning, everyone. This is Elena Sanchez from EFG Hermes, and I would like to welcome you all to CIB's Q1 2024 Earnings Call. We are pleased to have with us in the call the following speakers from CIB, Hussein Abaza, Chief Executive Officer and Managing Director; Amr El-Ganainy, Deputy Chief Executive Officer and Managing Director; Yasmine Hemeda, Head of Investor Relations; and Nelly El Zeneiny, Investor Relations Manager. I would like to hand over the call now to Yasmine Hemeda. Please go ahead.

Thank you, Elena. Good morning and good afternoon, everyone. This is our customary disclosure statement. This conference call is intended for analysts and investors only. If any media have accidentally 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 along with 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 revised forward-looking statements to reflect changed events or circumstances. And that ends the disclaimer statement. I'll now hand it over to Mr. Abaza to give a brief overview on the quarter results.

Thank you very much. Good morning, good afternoon, everyone. Thank you for joining. I think it's safe to say we had a very eventful quarter in terms of things happening, but pleasantly eventually, let's put it this way. We had the long-awaited devaluation on the 7th of March, which took the official rate from 30.9% to where it is today at around 47%, 48%. We also had 2 interest rate hikes one on the 24th of March of 200 basis points -- sorry, 24th of Feb, 200 basis points and one immediately after the deval of another 600 basis points. We had the IMF announcement increasing the package to Egypt. We had the Ras el Hekma deal worth a total of $35 billion, $24 billion of which fresh funds. So a lot was packed into the 3 months. Thankfully, the balance sheet and the shape of the balance sheet was very much able to take advantage of all this in the sense that we continued with the strategy of attracting locals deposits with our CASA almost 55% of total deposits. At the same time, using -- going out to the top borrowers. However, it must be said that a lot of the credit growth was suppressed because of the lack of dollar availability prior to the 7th of March. So most of the loan growth that we saw, which is the 3% or 4% in local currency, was all done from the 7th of March till today. And the momentum is continuing into April and May. So that bodes well for the rest of the year. The excess liquidity was utilized between the CBE deposit auction and the shorter end of the T-bills. And we took advantage of the distribution, as we always try to keep our interest rate -- interest cost down and maximize on the yield. So net interest margin has increased on terms of local currency, it's around 11.5%. Foreign currency remains around 4%, and the blended NIM is very close to 9.5%, but increasing month-on-month. As a net result of this, we saw a record top line -- sorry, record bottom line for the quarter of around $12 billion. And the good thing is the only nonrecurring item of that is about $100 million due to the devaluation. Other than that, this is all core [ incoming ] solidly. The return on equity for the quarter is just shy of 50%, 49.9%. And despite the fact that the devaluation cost is about 290 bps of CAR, we still managed to retain CAR at 25.2%, which I think is a very healthy [ line ] for us, and that's the target we would like to keep for a while. There is a loan growth of around 4% in local currency. Deposit growth despite the public sector [indiscernible] high yielding seasons having to follow [indiscernible] manage to maintain asset at 55% and the deposit base by 1% as well. So I think all in all, we -- it's a quarter we look back on with happiness, but more importantly is what's happening in the economy moving forward. With the availability of dollars now, our backlog is completely finished. We're seeing on the [ interbank at ] CIB. Prior to the deval, we were looking at $2 million to $3 million a day CIB's contribution. Today, we're looking between $30 million to $50 million on any given day. So this will reflect in further loan growth because, as you know, a lot of the working capital loans are only drawn down when the dollars are made available for importation of raw materials. So now this is happening. We've also seen increases on the international credit card limit spends. All of their lines, all of the dividends, all of the titrate, all of this stuff has been finished. So definitely, we're in a much better place looking forward in terms of confidence because it was all a confidence issue more than a supply and demand. In the sense, we were seeing dollar flows coming into tourism, hotels were keeping dollars, but people were not willing to sell at $30, $50, seems to be the price that the market finds fair. Even if there is a nonformal market, there is a differential of 1 or 2 pounds. It's no longer the differential of an official rate of 31% and the black market rate of 70% or 80% or whatever. So I think looking forward in the last 2 months, we're in a very, very different place from where we were in the first 2 months of the year. I think I'll just open it up to Q&A for specific questions, if you want.

[Operator Instructions] We just received one question on trading revenue, noninterest income. Can you please comment on the nature of the trading revenue that you earned in Q1 2024? And what amount is in your view, recurring -- recurrent?

Yes. A part of that was due to the devaluation. And another part was an off-balance sheet currency and interest rate swap, which was fully offset with taxation. So as I said, of the total bottom line of the $11.9 billion, just over $100 million is nonrecurring. Everything else is business as usual.

Another question on your expected real growth for deposits and loans in 2024.

Sure. Most of this will happen on the local currency front, but there will be some loan growth. Let's break it down. In terms of local currency loan growth, I think we're expecting to see between 30% to 40% local currency work in capital loan growth for several reasons. One, there was pent-up demand and a lot of the loan growth was not happening because there were no dollars available. Now there are dollars people borrowed in order to buy dollars in order to import. Secondly, in order to import the same amount of -- or the same units you were importing last year, you need to borrow 60% more. So because $100 equivalent, it goes up from 3,000 to 5,000. So it's conservative enough to say we're looking at, as I said, 30% to 40% loan growth. On the deposit side, the focus now especially in view of what happened on the CD front, we're focusing a lot more on the CASA, and we're looking to grow our CASA base by 20% to 25%, at least, again, for the year, local currency. On the foreign currency loan side, we have been seeing a lot of payoffs, which is something that we are very happy to see because most of the foreign currency borrowers are hotels. And during 2020, 2021 and the beginning of 2022, there was almost a sort of debt moratorium because of the pandemic. So now that they are starting to have high occupancy rates, they're not only paying off the dues of this year, but also the late dues that were not paid off. So it's healthy to see that. It's not something we're unhappy with. But on a net-net basis, we should see single-digit loan growth on the foreign currency side as well. So 30% to 40% local currency loans, 3% to 7% foreign currency loans on the local currency deposit, 20% to 25% growth on the local currency CASA. And I think we're going to slow down on the CDs, unless we're forced to do anything, but I don't think that's happening at the moment.

There is another question on guidance. Given the strong Q1 performance, what is the updated guidance on loan growth that you already mentioned, NIM cost-to-income ratio and net income and return on equity for 2024?

Sorry, I'm writing it down and return on equity. Okay. That's a long list. NIM, I think, we'll still see some NIM expansion. As we speak, let's recap, our blended NIM is 9%, our local currency NIM is 11.5%, and our foreign currency NIMs is 4%. The 4%, I think, will stay pretty much where it is. We are seeing expansion on the local currency NIM. It might -- it will probably reach about 13% by year-end. So we'll see a blended NIM just north of 10%. On the cost to income, I think we will see it staying around where it is in Q1, which is below 20% because there is obviously a cost pressure in terms of any of the contracts that are dollar-denominated, but income is coming in strongly to cover it. Net income, we were guiding initially for just under $40 billion for the year. We brought this up to around $43 million, $44 million. It should -- I think we can safely guide it around $46 million and see how things go. I always prefer to be cautious and guide upwards and come and surprise you in December, we cut 20% of my guidance. ROE should stay at the levels you're seeing, which is nice, it's around 50% at the moment. And it seems as if this is the level we should be maintaining that the numbers I'm saying.

Okay. There is another question on credit quality. Please, can you talk through Stage 3 NPLs, and if you expect this to continue to grow this year.

Not really because I think, if anything, the economic environment is improving rather than getting worse. However, you might have noticed over the past couple of years a disconnect between the amount of provision we're taking and the way asset quality is behaving. And that, I think, is -- if you're going to err on the side of caution, it's the best way to do it. So what's happening at the moment is due to the -- I think I might have covered this in a few other calls, but bear with me. Due to IFRS 9 and the fact that we moved to IFRS 9 just before the pandemic, our forward-looking scenarios are basically very pessimistic. So the -- once this happens, you go back and you change your PDs historically in order to come up with the model. So as a result of that, we've been taking very large provisions. And thankfully, the asset quality has remained much more resilient than the model was predicting or requiring. On the basis of that, we've now reached a stage where our provision coverage for NPLs is 240%, which is irrelevant, beyond the 100% doesn't mean anything. Our provision coverage for the entire book is around 20%. And if you remove the nonperforming loans, our provision coverage, if you remove 100% of the nonperforming loans, and that is not realistic because not all nonperforming loans are at 100% loss, and we do have collateral on some of them. But assuming the worst-case scenario and take 100% provision against all of our nonperforming loans, you're left with your performing book. At the moment, we have coverage of 15.5% on the performing book, which is 1 in 6. That is a ridiculously high number by any standards, especially given the quality of the loan book where you've got the top 800 borrowers in Egypt, you've got the top multinationals in Egypt, and you've got companies that have gone through the last 13 years and been very, very successful. So on the basis of that, we are talking to our external auditors and talking to the Central Bank to revisit the model and the PDs on the model. And hopefully, that should result in us taking a more closely correlated provision to the asset quality performance. But in terms of to ask -- actually to get back to the question, it's doing very much. We're seeing, as I said, very strong performance. And given what's happening in the economy, if anything, we should see an uptick rather than the downturn.

Another question on deposits and funding costs. Can you comment on the recent trends on cost of funding and local currency deposit growth, how we see it is to maintain CASA deposits in the currently high interest rate environment.

It's never easy because that is truly the formula to profitability. That is a differentiator between -- because all banks have a very similar asset side, in the sense that your [ CAGR ] rates are equal for everyone, the CBE deposit auction is equal for everyone. And if you're lending to the top borrowers in the country, they have choices. What differentiates any bank from another is the way they manage the cost of funds. And I think it's -- CASA is the obvious go-to. So it's never easy, but I think I must comment management on the way they've been able to identify pockets of CASA, where they've been going after the sort of the cash flows of medium-sized companies and tracking them and using that, giving them funds and giving them special services in order to attract these and gain the CASA. And I think the -- a lot of our retail focus had been on attracting the CASA, maintaining the CASA and keeping it [indiscernible]. The good thing is, very few people deal with the bank [indiscernible] only. People who will come in, they will buy a CD, but they will need liquidity because you're legally not allowed to break a CD for a year. And if you're very stuck, you will borrow against it at 24%, which is ridiculous. So people keep part of their funds in current accounts, part of it in savings and part of it in CD. And I think the name of the game is to make sure that you attract that part that is in CASA, even at the cost of issuing of CDs. So it's never easy, and we have a lot of discussions as a management team as to should we issue CDs, at what price should we issue CDs, what is the cost benefit analysis. If we don't, what is the risk of losing CASA. It's never an easy question, but so far, I think it's been managed. Each time we've had to counter, the public sector banks issued very high-level CDs. We've done it in different ways. The first time it happened, we completely ignored it. There was an [ outflow ] of $15 billion, which we managed to get back 4 months later. The second time we issued slightly lower-yielding CDs, but longer tenure. The third time we issued the same CDs with a very high threshold in order to maintain sort of wealth customers, and it's a different tactic every time. But what we've seen in the last CD issuance is there seems to be a fatigue. There wasn't the uptake that we've seen. So to give you a numerical example, last year, when we issued CDs at 22%, we got about $40 billion in 3, 4 days. This year, we've been -- it's been there for 1.5 months, and we've only gotten $12 billion. And I think we were taking a decision this morning we'll probably close it down. So the market is moving, and it's more a focus on avoiding that and trying to find the CASA that's the name of the game at the moment.

Okay. A question on the NIM outlook. How should we think about the NIM evolution over the coming years, given the expectations that interest rates will decline? What is a sustainable NIM in the medium term?

I think that's an impossible question to answer. If I can get it in the next 10 to 12 months, I'd be the world champion. So let's stick to a reasonable outlook. I mean, if I can foresee them for 3 years, I'd go off on my own and be a billionaire. But let's stick to what I can safely try and say. What we're doing is, again, the focus is on cost of funds. If we can maintain cost of funds, then -- again, the view on sovereigns will differ because sovereigns is not a policy decisions. Sovereigns are a pure result of supply and demand. If we see more carry-trade money come in and the economy starts improving, then sovereign yields will come down. But the timing is when. Everybody thinks sovereign yields will come down because we're looking at sovereign yield of 28%. But will they go up first before they come down? And that's a question to look at. My personal view, and it might not be shared by all my colleagues, there are several views. One is sovereigns will lag slightly behind the policy rates, and we will start to see them come off towards next year. At what speed, at what rate is very difficult to ascertain. However, the one thing that you can do is you play the short end of the curve until you feel that they are going to start coming down, then you look in the 12 months. It sounds very easy and basic, but it's more difficult to do than that, but that's basically what you do. What I'm trying to say is, we probably can guarantee or have a very good view on earnings for 2024 and most of 2025 because of the 12-month T-bills available. Beyond that, NIM should come down. NIMs of 13% or 14% in local currency are unheard of. This is [Technical Difficulty]. These are NIMs that we are taking advantage of and enjoying. But a more sustainable world to the NIM local currency would be definitely between 7% to 9%, and that would be considered very, very profitable. When we will get to that, that should be the normal run rate, whether we get to that at the end of 2025, at the end of 2026, I personally feel is beyond my fortunetelling capability. But I would imagine for the forthcoming 18 months, we're probably safe on seeing NIMs at the level that they are at today or slightly higher.

Another question on credit quality. How much of the loan book is actually overview and not categorized as Stage 2 or 3 due to the model -- due to the IFRS model?

It's -- no, no, no. The categorization, we do based on the performance of the asset. But the provisioning we take because the problem is we're taking a very high impairment underperforming book. That's the problem. Maybe I didn't explain it properly. Whatever is overdue, we will put in stage 2 or stage 3, there's no problem there. The excess impairment we're taking, we're taking on the risk rating 3, 4 and 5, and we're taking impairments of 6% and 7% on performing loans, and that is what's causing the problem, not the -- so everything is correctly classified. It's just the probability of default calculated on performing loans is much higher than the real probability of [indiscernible].

And given the current depressed shares valuation, would you be considering a buyback -- share buyback?

We'd love to, but banks are not allowed to buy back the shares. And it's not a Central Bank decree, it's [indiscernible]. So for that to change, it has to go to parliament, it has to -- and at the time when our shares were at GBP 20, that was the right thing to do, we could have done it, but we approached the Central Bank, and that's when we were informed something that they had to go to parliament with. So it's not there anytime soon. But I'm not sure if it's too depressed. I think we're at 2.5x book, and it's pretty okay, yes.

All right. Another question on CASA deposits. What is the average balance per CASA deposit account? Does retail money dominate the CASA deposit funding?

Retail and SME, and it differs. On the retail side, it will be a much lower balance than the SMEs.

Another question. Book value is up 11% Q-on-Q. Fair value through other comprehensive income gains stood at 0.5% of risk-weighted assets in Q1 2024. Where do you see this going by the end of 2024, when will the bank consider increasing the duration of the securities?

Okay. I think I sort of have answered it without meaning to the last question. First of all, the Ministry of Finance is not issuing long-term bonds, and they shouldn't at these rates. So as long as we feel interest rates are not -- still might increase or are not going to be cut, it's safer to stay on the flexible and short end, especially since all 4 durations, the 3, 6, 9 and 12 months are 25.9 something. There are bps, I mean, literal individual bps, 3, 7, 8 bps between one and the other. Once we think the outlook is that interest rates will start coming down, then you try to go to the longest possible duration you can. But at the moment, there are no bonds available. So it's just common sense here is what we're doing.

Okay. The following question, what, if anything, are you hearing about the commencement of any basic infrastructure works relating to Ras el Hekma?

I personally haven't heard anything yet. I'm sure it will happen. And probably, I would imagine there will be subcontracting to the large contractors, like the Hassan Allam [indiscernible], I would imagine, but we haven't heard anything yet.

Okay. Next question, update on the [ net ] USD position after devaluation.

We're square. We are square. We generate -- remember, we generate about $20 million to $23 million every month of profit in dollars. That's the 4% NIM on our foreign currency balance sheet. And we sell it into the interbank. We use it for other expenses. So we're either square or slightly long, but we don't [ show it ] at all.

Another question about inflows, so far in the bond market since the EGP depreciation devaluation.

I think on the money markets -- bond markets, there hasn't been an active bond market. As far as I understand, there's been about $16 billion, $ 10 billion of fresh funds, $6 billion were people who were in the carry-trade and were waiting in the queue to leave, but then recycle the money once the deval happened. But it was money that was out of the after the market and came back in. So $16 billion, which is around EGP 800 billion that came back into the market. And that happened in the first 2 weeks after the -- so it happened during -- from the, say, [ 7th ] of March to 21st of March. And that's one of the reasons why we didn't see the sovereign yields pick up the 600 basis points similar to the policy rates. It might be that there is a lag. And once the sudden burst of money, the impact of that is no longer felt, then we'll start seeing the rates pick up. We'll see because it's a pure supply and demand as opposed to policy rates, which are decided.

There is another question, which I think you have already partly answered, the question on working capital financing needs from devaluation and improved access to FX. Is this going to help loan growth in Q2?

Sorry, on the loan growth? Yes, absolutely. With the dollar availability, people will draw down the Egyptian pound loan in order to buy dollars to import raw materials. That is the bulk, maybe 70% of working capital needs. So yes, we -- and that is the reason -- one of the reasons we were guiding our loan growth forecast from around 20% up to 40%. And we've already seen April and May have been as we speak, good months in terms of loan growth, stronger than Q1.

I see no other questions. We can perhaps wait for a couple of minutes to see if there are any other questions coming through.

Sure. No problem, Elena.

Can you explain the positive change in the fair value of financial investments through other comprehensive income, although yields have increased?

They actually didn't increase. The Eurobond -- because it covers both local and foreign. On the Eurobond, the Eurobond performance improved, and we have Eurobond portfolio. And on the other bond market, there was -- because there was no activity, we stayed pretty much stable, so it didn't increase. It didn't -- there was no deterioration.

There are no additional questions at this time. Therefore, I think we can conclude the call. I would like to thank Hussein -- sorry, just someone has a question. Just bear with me. Hello. Okay. Just a few came through now. Can you shed light on the EGP 14 billion other operating expenses?

Yes. Okay. Remember, I was saying we had the off-balance sheet -- sorry, on the revaluation, we have a revaluation of assets, which came in as income, and we have a revaluation of provisions and liabilities, which comes in as an expense, and they net off each other. So you find one of them is a $16 billion, the other is a $14 billion, and the provisions takes up the difference. And we had an off-balance sheet swap that took some -- it's a little bit complicated, but the net-net result is everything offsets the other because of accounting some things come in as expense, others come in as income and they don't net out. So you have to see them and that's why I said, on a net-net basis, it's only $100 million difference for the full -- for the devaluation on the bottom line process.

And another question. How long does -- how long do you expect for the consumer and business to recover from devaluation compared to previous to prior devaluations?

That -- this is an interesting question because this time, it's slightly different because the devaluation was actually lower than the [indiscernible] market rates. So if you remember back in the last quarter of last year and the first 2 months of this year, everybody was pricing the dollar well above 50%. So in a sense, when the dollar came in officially at [ 50 ] and is available, to a lot of businesses and a lot of consumers, this is actually cheaper. So the recovery, I think, is actually happening as we speak. Last time this happened, it took maybe 1.5 years. This time, I think we're actually seeing revenues of companies, talking to companies and seeing companies, it's already we're seeing goods coming in cheaper than they were 2, 3 months ago. First of all, companies that are not producing essential goods had no access to dollars and were buying them at 80, 90. Now some of them are having access. And even if they don't and they buy them at the unofficial rate, they're buying them at 50. So for those of us living in Egypt, I think you'll see a lot more variety in the market and things are coming in cheaper. So I think it's -- with a lot more -- it's a different situation than most times.

Guidance on cost of risk for 2024?

Yes. As I said, we're looking at -- looking at our PD models again, our budget initially was around EGP 6 million to EGP 6.5 billion until we get clearance from the Central, but that was on loan growth of 20%. If the loan growth is going to go up to 40%, but we managed to get the clearance from the Central Bank, then we should be slightly below that number. But I'll stick to my guidance on our budget of about EGP 6 billion to EGP 6.5 billion until we have clarity on how and when the Central Bank will allow us to change and actual loan growth coming through. So let's stay with that initial budget guidance.

Another question. Do you include profits intake profits in regulatory capital adequacy ratios at the end of Q1?

Yes, yes. On a monthly basis, our profit at just under 1% to CAR. And if we hadn't included the $12 billion profits, our CAR would be 300 basis points, maybe yes, 200 something basis points less than it is today. So yes, it is included.

A follow-up on the provisioning guidance. Does it include the amount included in other operating expense?

Yes, because that is related to contingent provisions. So basically, difference between them is if a company borrows a direct loan, then you see that in the impairment. If a company, like a contractor, we issue a letter of guarantee on behalf of that company, that's considered the contingent, and that is taken in other expenses. It's an accounting issue. So yes, when we talk about it, we talk about the entire amount, both together will be [indiscernible].

On capital adequacy ratios, question just came through. What was the impact of the devaluation in March on the regulatory capital ratios?

About 290 bps -- sorry, about 390 bps. It's almost 20 bps per pound, roughly. It's not linear, but they need -- so GBP 19, 20 bps around just under 400, 390 bps.

What approvals specifically are you seeking from the central bank relating to your provisioning? And how long does it take to get this approval typically?

Yes. What we want is to change the probability of default on the historical model. And it's -- there's no time line because this is the first time it's happened. IFRS 9 has only been introduced recently. So -- and I think given all that's been happening in Egypt, I think the Central Bank has been focusing on what's happening on the devaluation on the FX market. So there have been priorities. And as long as -- I think as far as Central bank is concerned, we are adequately or more than adequately provisioned. So it's not really something that [indiscernible] saying we're under provisions, we need help. So I would imagine during this year, we'll probably get the responses to how to go about it.

All right. I see no additional questions in the queue. Therefore, we can now conclude the call. I would like to thank Hussein, Yasmine and the rest of the Investor Relations team for their time today. And thank you all the participants for joining the call. Have a good day.

Thank you very much.