Earnings Call: Q1 2024

May 13, 2024

Summary

Q1 net income reached EGP 11.9bn, largely from core business, as FX access and lending momentum improved after devaluation. 2024 net income guidance rose to EGP 46bn, with 30%–40% local-currency loan growth targeted.

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 Ganainy, 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 climate 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. That ends the disclaimer statement. I will 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 is safe to say we had a very eventful quarter in terms of things happening, but pleasantly eventful, let us put it this way. We have had the long-awaited devaluation on the 7th of March, which took the official rate from 30.9 to where it is today, around 47.48. We also had two interest rate hikes, one on the 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. A lot was packed into the three 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 low-cost deposits with our CASA, almost 55% of total deposits. At the same time, 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 USD availability prior to March 7. Most of the loan growth that we saw, which is the 3% or 4% in local currency, was all done from March 7 till today. 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. 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, is around 11.5%. Foreign currency remains at 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 record top line, sorry, record bottom line for the quarter of around EGP 12 billion. The good thing is the only non-recurring item of that is about EGP 100 million due to the devaluation. Other than that, this is all core income coming solidly. The return on equity for the quarter is just shy of 50%, 49.9%. 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 level for us. That is the target we would like to keep for a while. As I said, loan growth of around 4% in local currency. Deposit growth, despite the public sector banks issuing high yielding CDs, us having to follow suit, we still managed to maintain CASA at 55% and grew the deposit base by 1% as well. So I think all in all, it is a quarter we look back on with happiness. More importantly is what is happening in the economy moving forward. With the availability of dollars now, our backlog is completely finished. We are 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 are 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 have also seen increases on the international credit card limit spends. All of the airlines, all of the dividends, all of this stuff has been finished. So definitely we are 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. Fifty seems to be the price that the market finds fair. Even if there is a non-formal market, there is this differential of one or two pounds, it's no longer the differential of an official rate of 31 and a black market rate of 70 or 80 or whatever. I think, looking forward, in the last two months, we're in a very different place from where we were in the first two months of the year. I think I'll just open it up to Q&A for specific questions if you want. Thank you very much, Hussein. We will move to the Q&A. If you have a question, you can write it in the Q&A chat, or you can also click on the raise hand button and I will unmute your microphone. We'll pause for a couple of minutes to receive some questions. We just received one question on trading revenue, non-interest 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, recurrent? Yeah. 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. As I said, of the total bottom line of the EGP 11.9 billion, just over EGP 100 million is non-recurring. 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%-40% local currency working capital loan growth for several reasons. One, there is 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 or the same units you were importing last year, you need to borrow 60% more. Because $100 equivalent goes up from EGP 3,000 to EGP 5,000. It's conservative enough to say we're looking at, as I said, 30%-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%-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. During 2020, 2021, and the beginning of 2022, there was almost a sort of debt moratorium because of the pandemic. 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. It's healthy to see that. It's not something we're unhappy with. On a net basis, we should see single digit loan growth on the foreign currency side as well. So 30%-40% local currency loans, 3%-7% foreign currency loans. On the local currency deposit, 20%-25% growth on the local currency CASA. 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. Okay, thank you. 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? I'm sorry, I'm writing it down and return on equity. 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 NIM is 4. The 4, I think, will stay pretty much where it is. We are seeing expansion on the local currency NIM. It'll 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 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 EGP 40 billion for the year. We brought this up to around EGP 43, EGP 44. I think we can safely guide at around EGP 46 and see how things go. I always prefer to be cautious and guide upwards than come and surprise you in December and cut 20% off 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 at the numbers I'm saying. 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. 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 once this happens, you go back, and you change your PDs historically in order to come up with the model. 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 100% doesn't mean anything. Our provision coverage for the entire book is around 20%. If you remove the non-performing loans, our provision coverage, if you remove 100% of the non-performing loans, and that is not realistic because not all non-performing loans are at 100% loss, and we do have collateral on some of them. But assuming a worst-case scenario and take 100% provision against all of our non-performing loans, you're left with your performing book. At the moment, we have coverage of 15.5% on the performing book, which is one in six. That is a ridiculously high number by any standard, 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. 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. Hopefully, that should result in us taking a more closely correlated provision to the asset quality performance. But in terms of the asset, actually, I ask quality to get back to your question, it's doing very well. We're seeing, as I said, very strong performance. Given what's happening in the economy, if anything, we should see an uptick rather than a downturn. Thank you, Hossam. 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 the differentiator between any Because all banks have a very similar asset side in the sense that your CAIBOR 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. I think CASA is the obvious go-to, so it's never easy, but I think I must commend 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. I think a lot of our retail focus has been on attracting the CASA, maintaining the CASA, and keeping it present. The good thing is very few people deal with a bank on one product only. People will come in, they will buy a CD, but they will need liquidity because you are legally not allowed to break a CD for a year, and if you are 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. 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 CDs. So it is 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 do not, what is the risk of losing CASA? It is never an easy question, but so far, I think it has been managed. Each time we have had to counter the public sector banks issuing very high-level CDs, we have done it in different ways. The first time it happened, we completely ignored it. There was an outflow of EGP 15 billion, which we managed to get back four months later. The second time, we issued slightly lower yielding CDs, but longer tenor. The third time, we issued the same CDs with a very high threshold in order to maintain sort of wealth customers, and it is a different tactic every time. But what we have seen in the last CD issuance is there seems to be a fatigue. There was not the uptake that we have seen. To give you a numerical example, last year when we issued CDs at 22%, we got about EGP 40 billion in three, four days. This year, it has been there for a month and a half, and we have only gotten EGP 12 billion, and I think we were taking decision this morning, we will probably close it down. So, the market is moving, and it is more a focus on avoiding that and trying to find the CASA that is 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. Let's stick to a reasonable outlook. If I can foresee NIM for three years, I'd go off on my own and be a billionaire. 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 sovereign yields will differ, because sovereign yields is not a policy decisions, sovereign yields 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. The timing is when? Everybody thinks sovereign yields will come down because we're looking at sovereign yields of 28%, but will they go up first before they come down? 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, sovereign yields 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 assert. 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 lock 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 not a NIM. These are NIMs that we are taking advantage of and enjoying. But a more sustainable workable NIM local currency would be definitely between 7%-9%, and that would be considered very profitable. When we will get to that should be the normal run rate. Whether we get to that at the end of 2025 or the end of 2026, I personally, is beyond my fortune-telling capability. But I would imagine for the forthcoming 18 months, we're probably safe on seeing NIMs at the level that they're at today or slightly higher. Thank you, Hussein. Another question on credit quality. How much of the loan book is actually overdue and not categorized as Stage 2 or Stage 3 due to the model, due to the IFRS 9 model? No. The categorization we do based on the performance of the asset. But the provisioning we take, because the problem is we are taking a very high impairment on the performing book. That is the problem. Maybe I did not explain it properly. Whatever is overdue, we will put in Stage 2 or Stage 3. There is no problem there. The excess impairment we are taking, we are taking on the risk rating 3, 4, and 5, and we are taking impairments of 6% and 7% on performing loans, and that is what is causing the problem, not the. So everything is correctly classified. It is just the probability of default calculated on performing loans is much higher than the real probability of default. Okay, thank you. Given the current depressed shares valuation, would you be considering a share buyback? We would love to, but banks are not allowed to buy back their shares. It is not a central bank decree, it is law. So for that to change, it has to go to Parliament. At the time when our shares were at EGP 20, that was the right thing to do. We could have done it, but we approached the central bank and that is when we were informed it was something they had to go to Parliament with. So, it is not there anytime soon. I am not sure if it is too depressed. I think we are at 2.5 times book. It is pretty okay. 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. 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 half 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. As long as we feel interest rates still might increase or are not going to be cut, it's safer to stay on the flexible and short end. Especially since all four durations, the 3, 6, 9, and 12 months are at 25.9 something. There are bps, literal individual bps, 3, 7, 8 bps between one and the other. Once we feel 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 a common sense yet, is what we're doing. Okay. 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. Probably, I would imagine there will be subcontracting to the large contractors like the Hassan Allam, the Orascom, I would imagine. We haven't heard anything yet. Okay, next question. Update on the USD position after the devaluation. We're square. 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. We sell it into the interbank, we use it for our own expenses. So we're either square or slightly long. We don't short at all. Another question about inflows so far in the bond market since the EGP depreciation, devaluation. I think on the money markets. On bond market, 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 recycled the money once the deval happened. But it was money that was out of the market and came back in. So it was $16 billion, which is around EGP 800 billion that came back into the market. And that happened in the first two weeks. So it happened from the, say, 11th of March to the 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 this 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. Mm-hmm. There is another question which I think you have already partly answered, the question on working capital financing needs from devaluation and the improved access to FX. Is this going to help loan growth in Q2? Sorry, on the- Loan growth. Loan growth? Yes, absolutely. With the USD 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. Yes, and that is one of the reasons we were guiding our loan growth forecast from around 20% up to 40%. We have already seen April and May have been, as we speak, good months in terms of loan growth. Stronger than Q1. Thank you, Hussein. 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. Can you explain the positive change in the Fair Value 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 a Eurobond portfolio. On the other bond market, because there was no activity, we stayed pretty much stable. So it didn't increase. 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, someone has a question. Just bear with me. 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 EGP 16 billion, the other is EGP 14 billion, and the provisions takes up the difference. 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. That's why I said, on a net-net basis, it's only EGP 100 million difference for the devaluation on the bottom line profits. How long do you expect for the consumer and business to recover from devaluation compared to prior devaluations? This is an interesting question because this time it is slightly different because the devaluation was actually lower than the parallel market rates. If you remember back the last quarter of last year and the first two months of this year, everybody was pricing the dollar well above 50. 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. The recovery, I think, is actually happening as we speak. Last time this happened, it took maybe a year and a half. This time, I think, we are actually seeing revenues of companies, talking to companies and seeing companies, it is already we are seeing goods coming in cheaper than they were two, three 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 do not and they buy them at the unofficial rate, they are buying them at 50. For those of us living in Egypt, I think you will see a lot more variety in the market and things are coming in cheaper. I think it is a different situation than most times. Thank you, Hussein. Guidance on cost of risk for 2024? Yeah. As I said, we are looking at our PD models again. Our budget initially was around EGP 6 billion to EGP 6.5 billion. Until we get clearance from the central bank, that was on loan growth of 20%. If the loan growth is going to go up to 40%, we managed to get the clearance from the central bank, then we should be slightly below that number. I will 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. Let us stay with that initial budget guidance. Another question. Do you include interim profits in regulatory capital adequacy ratios? Yes At the end of Q1? Yes. On a monthly basis, our profit adds just under 1% to CAR. If we had not included the EGP 12 billion profits, our CAR would be 300 basis points maybe. Yeah, 200 and something basis points less than it is today. 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. Basically, the 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 is considered a contingent, and that is taken in other expenses. It is an accounting issue. So yes, when we talk about it, we talk about the entire amount, both together will be settlement. On capital adequacy ratios, a 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 is almost 20 bps per pound, roughly. It is not linear, but EGP 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? What we want is to change the probability of default on the historical model, and there's no timeline because this is the first time it's happened. IFRS 9 has only been introduced recently. 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. As long as, I think as far as central banks, we're adequately or more than adequately provisioned, so it's not as if we're saying we're under-provisioned, 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, Yasmin, 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. Thank you very much.