Earnings Call: Q4 2023

Feb 12, 2024

Summary

FY23 net income rose 84% to EGP 29.7bn, with blended NIM at 7.55% and ROE at 39.7%. FY24 guidance targets EGP 38bn-40bn net income, while FX-market volatility and borrower pressures remain key risks.

Hello and welcome everyone to CIB's 4Q 2023 results call. This is Monsef Morsy from CI Capital, and today we have the pleasure of having on the call from CIB management, Mr. Hussein Abaza, Ms. Yasmine Hemeda, and Ms. Nelly El Zeiny. Following a quick presentation of CIB's quarterly performance, the floor will be then open to Q&A session. For asking a question, please use the raise hand button, and I will open the line for you to direct your questions to management. Or you can instead use the built-in Q&A box to type any questions you may have throughout the duration of the call. Without any further delay, I now give the floor to management, to Yasmine, to say the safe harbor statement, and then we can move to Mr. Hussein. Yasmine, the floor is yours. Thank you, Monsef. Good morning, and good afternoon, everyone. This is our customary disclosure statement. This earnings 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. That ends the disclaimer statement. I will now hand it over to Mr. Hussein Abaza to give a brief overview on the financial year results. Thank you very much. Good morning, good afternoon, everyone, and thank you for joining the call. I think looking back on 2023, it was very much defined by rising interest rates, and this is continuing into 2024. During 2023, the corridor rate was raised by 600 basis points from the bid of 13.75% to 19.75%. In January, we continued with another 200 basis point rise. The impact of that on banks, even though it was a very difficult economic environment, but at the end of the day, if a bank had a proactive view and managed its assets and liabilities properly, it would prove to be very lucrative. When we saw the policy rates going up and actually, we as a management team had anticipated this to happen. We managed the balance sheet in such a way because what tends to happen is you have the policy rate moving up, followed by the CBE deposit auction, followed by the sovereign needs. What we focused on, as usual, was deposit gathering, and by that, low-cost, cheap deposit gathering. We maintained a 55% CASA rate. However, this was not without its challenges because in January and in April, and again towards the end of the year, public sector banks issued very expensive CDs. We had to follow suit in different ways in order not to attract deposits, but rather to defend our deposit franchise, because the problem with losing customers is they don't just take away the money that they're going to buy a CD with, but they withdraw their CASA as well. It was, I think the retail team and the management team did a very good job of not only defending the CASA franchise, but maintaining it at 55% and maintaining, I think, one of the cheapest costs of funds in the banking sector. Having said that, we still managed to grow our local currency deposits by north of 25%. As I said, we actually grew the CASA franchise very slightly from a 53.1% to 53.6%. So we maintained that very lucrative, cheap deposits. We, on the other hand, managed to take advantage of, as I previously mentioned, the 600 basis point hikes in the corridor and very similar hikes both on the CBE deposit auction and on the T-bills. In addition, the loan book retained its quality. We did not see almost any deterioration. However, we continued to take prudent provisioning because we're not sure about the economic environment moving into 2024. So we thought it prudent to conservatively take on some management overlays, and we did this towards the end of fourth quarter when we were sure of the quality of the earnings. So in effect, a lot of what we put on is purely prudential management overlays for this year. During Q3, if you remember, we took a write-down on the Kenyan investment. Again, this is purely an accounting write-down based on the fact that we had quite an aggressive budget, which is probably being 12 to 18 months forward. So we took the accounting write-down and all going well, there's a large chance that we would reverse a big chunk of that depending on the performance as we move on. The end result of all I'm saying is we saw NIM expansion on the local currency side from about 750 basis points to 930. For the full year, 750 was the beginning of 2023. We ended the year with 930. On the foreign currency side, we started off the year at about 250 basis points and ended the year just under 400 at 3.99, with a net result that our blended NIM went up from 610 basis points to 755. Even despite the high provisioning we took, because of the prudent asset liability management and the fact that two things impacted our lower tax rate. We had a much lower tax rate this year. Instead of paying a tax rate of around 33%, the tax rate was closer to 29 because of two reasons. One was utilizing the CBE deposit auction as opposed to the T-bills and bonds. The other was that most of the provisions we took this year are directly related to loans and investments rather than contingent liabilities. Because of the law, they provide a higher tax shield. On the back of that, we saw profits rise to exactly EGP 29.7 billion, which is 84% above last year, giving us an ROE of 39.7%. With the profits that we've retained, and we took more tier two capital loans in order to protect our tier two capital against any devaluations, our CAR rose from 22.7% to 26.2%. Despite that, we still saw the aforementioned ROE expansion. I think with that, I'll leave you and open it up to Q&A. One last thing, I think. With the new provisions we took, we now have a provision coverage on NPLs of about 300%, which is meaningless. However, as we usually do, if we deduct the non-performing loans and assign 100% provisions to them, and we deduct the risk-rating ones, which are risk-free, our performing risky portfolio has a coverage north of 13%. Again, the global average is 3%-4%, so 14% shows that we really have taken a lot of prudent coverage and we're comfortable where we're sitting despite all of the volatility we're seeing in the region. I think I'll open it up to Q&A now. Thank you, Yassin. We'll now open the floor to questions. As a reminder, please use the raise hand button or type your questions in the dedicated Q&A box, and we will be reading them out for management. I'll wait for a few seconds until we receive your questions. Our first question comes from Yassin Ferris. I'll open up your line. Yassin, your line is open. Yes. Hello, and thank you for the call. I have three questions. The first one is, are we correct if we're assuming that your negative FX position has worsened to around EGP 53 billion? So 56% of equity, if we combine the EUR and the USD balance on the balance sheet, looking at note 3.2.2. Is it possibly reduced through derivatives? The second question is, how will this impact your capital adequacy if the pound falls or depreciates to 50 times? The last question is, where do you see NIMs in 2024 without further rate hikes? If we assume 100 basis point rate hikes, how will that affect NIMs? That's all. Thank you. Let me take them one by one. Okay. On the FX, you're looking at note 3.2.2. This is purely the on-balance sheet financial assets. However, because if you look at note 39, this includes any forwards and futures, the off-balance sheet forwards and futures and swaps, you'll see that we have a very small, short EUR position and a much larger long dollar position. On the foreign currencies, we're actually long. On the individual, the only slightly short position we have is EUR, but it's offset by a long dollar position. So the difference between the two notes, again, just to make it easy for everyone, is one is the pure assets and liabilities on the balance sheet. The second note is the total position of the bank, which includes the forwards where we've sold forward or bought forward, and we're actually slightly long. So there's no risk there, just to be absolutely clear. In terms of FX, if the EGP goes to 50, since we do not have a short position, it will not impact us. On a pure CAR, we are 50, then 20, we'd lose about 6%, about 500 basis points of CAR. Slightly less once we get the African Development Bank loan because it comes in foreign currency. So it'll be less than five, so we'll still be above 21%. Mind you, every month, we add about 75 basis points to CAR in terms of bottom line profits. So already in January, CAR is already slightly higher. Your third question was NIMs. Where do we expect NIMs to go? Again, already in January, our local currency NIM is above 10%. If you look at it logically, what's happening is, first of all, we're starting to move some money from the CBE deposit auction into T-bills. T-bills, by the way, every time you buy T-bills, and we've seen T-bill yields go up from the beginning of the year by at least 100 basis points. It takes at least four or five months for this to factor into your holdings, because by the time you reinvest, the average life of your T-bill portfolio takes about four to five months. So for the next four to five months, you should see constant increases in the T-bill yields, which we still haven't seen. Sorry, let me rephrase this. The increase in T-bill yields over the last four months, you will start to see factored into our NIMs. So it's very easy to predict NIMs simply on the last four or five months of T-bill movements. So effectively, short answer to your question is, we're going to see them expanding well above 10%, maybe 11%, and depending on what happens. Because we've already seen 200 basis points this year. With another 100 basis points, it might go beyond that. The reason I'm not very sure is we might see the public sector banks come in with CDs. We might have to increase. But if all goes well, easily, we could see them crossing the 11% on the local currency. All right. Thank you so much. You're welcome. Thank you. We have a couple of questions in the Q&A box, of which two is discussing the potential for dividends. So what would be the expected or the proposed dividends for 2023, and when is this expected to be paid? Whatever dividend will be paid will be paid after the AGM, because it has to be approved by the AGM, and the AGM is at the end of March. The expected dividend, we've run a few scenarios, and we probably will pay a cash dividend. I think the proposed cash dividend is about 55 piastres per share, which comes up to about almost 5%-6% payout ratio. The reason we're not being more generous is, again, because of the volatility, where if we see a high devaluation, it will impact CAR. We would rather keep a CAR in the mid-20s today, whereas it would be much more efficient to run it at below 20% in a less volatile environment. It's more about capital management than anything else. Because if you remember a couple of years ago, everybody was saying our CAR was 52%, and this is too high. In a matter of a year and a half, it dropped down to below 18%. Let me just say something. Even though CAR is, a lot of people focus on it, no banks in the world have ever died because of CAR. They've died because of liquidity or lack of liquidity. While CAR is important and now we have a very nice and healthy CAR, liquidity is a much more important number. As management, as running a bank, this is the first thing you look at, real liquidity and the quality of your assets and the quality of your liquidity. Both are very important. CAR is a regulatory number that we have to keep an eye on. Thank you, Yassin. Our next question is regarding the outlook for interest rates in Egypt. What's your view regarding the interest rate outlook in Egypt, and can you give us a broad guidance for the bank's key parameters? Interest rate outlook. I think we've already seen 200 basis point increases, hikes in January. I think we're expecting maybe another 200 basis points. But again, to be honest, we're very close to uncharted territory here. We're looking at, I think the current, if I'm not mistaken, the current corridor rate is 2175, 2275. So your mid corridor is 22 and a quarter. When you add another 200 basis points to that, it'll be 24 and a quarter. So when borrowers come to borrow short-term, you're going to give them 1% or 2% above that. So they're looking to borrow at 25, 26 short-term. It's inflation targeting and I know. But the good thing is, with the base effect of inflation is going to start coming down. It's already started and will continue to come down. So my best guess is another 200 basis points. Was there another part to the question or no, this is it? No, the guidance. So the guidance for the key parameters. Oh, guidance, okay. For the key parameters. I think we're looking at loan growth, local currency loan growth of around 20%. We're looking at foreign currency loan growth, low single digits. The reason it's low single digits is we're still seeing a lot of payoffs on the dollar book, which is good because the dollar book primarily is tourism companies and hotels who had had a debt moratorium during COVID, now are having a very good year, so are paying and actually prepaying in some instances. And are only now starting to draw down some loans. So the net effect should be low single digit loan growth. On the deposit side, we're looking for 20%-25% local currency deposit growth, but more importantly, a minimum of 50%-55% of that to be in CASA. I think that's it. As a result of that, again, loan-to-deposit ratio, I don't think will rise much from where it is. That, again, is a strategy that we're running in the sense that given the very high yields we're seeing on Treasuries, we're basically trying to go out and get as much cheap deposits as we can, lend out whatever loan demand there is, and invest the excess in Treasuries, as long as we have a very high level of CASA, then even when rates come down in two, three years, we're still covered in that we don't have a maturity risk mismatch. Great. Again, CAR should stay around where it is unless we have massive changes. Return on equity, I think, will be above 40% for next year, comfortably. That's about it. Great. Thanks, Hussein Abaza. I think also within the same context of guidance, you mentioned the ROE of 40% because we have also a question about the guidance for net income for 2024. The 40% would imply net income of what figure? Around? 38 to 40. Around 40. Okay. Right? If it works backwards, Jenny, I guess it would. Let's put a net income of EGP 40 billion and work around that. Okay. During the year, yeah. Agreed. We will update you with guidance during the year, but I think, to be conservative, EGP 38 billion-EGP 40 billion, and I think is a fair enough number, bottom line, which should give us a bottom line growth of around 33%-34%, and an ROE in the comfortable 40s. Great. Next question on your views on Egypt's macro amid the geopolitical tension and whatever moves could happen in the FX. Okay. Right. On the geopolitical, I will be very blunt. What we are seeing is genocide. This is absolutely disgraceful. It is genocide. Again, I will not say anything but that. However, unfortunately or fortunately, Egypt is benefiting from this from a geopolitical stance. Because with what is happening today, and given all of the disturbance in the Middle East, it would not make global sense to have more instability in a country of 110 million people sharing a border with Rafah. That I think is why we have started seeing a difference in tone from the IMF. We started seeing more money come in terms of investments. In a sense, it is a fortunate side effect of a very unfortunate. Event event. I think we will see a resolution to the crisis, talking about the FX issue in Egypt. When, I am not sure. Things are looking more positive than they were before 7th of October last year, to be honest. How and when, I am not sure, because the amounts needed for a proper flotation are quite sizable. I am not sure when they will be available and ready. Thank you. We have a question from the line of Mohamed Bassiouny. Mohamed, your line is open. Thank you very much, and thank you, Hussein, for your valuable insights. I wanted just to ask about, you raised a problem, the highest risk for banks is liquidity. We always assess liquidity in Egypt, and we see the banks have sufficient liquidity in terms of foreign currency. You have healthy LCR and NSFR in foreign currency. But why do you think that there's still a liquidity crunch in the market, but the banks are very healthy in foreign currency? Is this due to the restrictions from the central bank not to use or utilize the foreign currency, restricting only to use it for example, creditors or obligors that have foreign currency revenues? Thank you. Thank you. I think we're talking now about the foreign currency liquidity, right? If I'm not mistaken. Yes, correct. Thank you. Let me explain how we look at it. The fact that the banks have a very high level of deposits on our balance sheets. We have to maintain these foreign, assume they're dollars, yeah, just for the ease of conversation. We have to maintain these dollar deposits in the form of dollar assets. Either we keep them as placings in other banks, or we lend them out in dollars. Okay? So there's no lack of liquidity in banks' balance sheets. Where the lack of liquidity is happening is what we call the interbank market. The interbank market is basically, most companies in Egypt need to import some of their raw materials or all of their raw materials, and they tend to sell all of their sales in local currency. So they constantly need to buy dollars. I cannot sell a deposit that you gave me to somebody who wants to import, because if I do that, I still owe you money in dollars, but I've already received that in Egyptian pounds. The day you want your dollars, I don't have them. That is what we call a short position. The shortage is not in liquidity. The shortage is basically people are not selling the dollars that they have. If you look at tourism revenues, for example, Cairo hotels, until very recently, had 97% occupancy rates and 95% occupancy rates. Room rates in the top hotels in Cairo are above $600 a night. These guys bring their dollars and place them at CIB. So we are seeing huge growth in dollar deposits, but these guys are not willing to sell their dollars to somebody who wants to import, on the other hand. This is where the lack of liquidity is happening. It's not a lack of liquidity in total. It's a dryness in the interbank market, which is people selling dollars. That is the issue. I hope I've explained it properly, unless I didn't understand the question. Yes. Thank you very much. Just on this point again, so you see that this liquidity crunch is not felt at all by the banks as they're only affected by the importers who want to import, and the shortage is only the importing side, not of course the exporting side and the companies who receive the foreign currency. Yep. Yeah. The importers don't find anybody willing to sell them dollars. The importers are there. They want. What used to happen previously is the hotels and people who had dollar revenues were selling a large part of these dollar revenues for several reasons. One, because they have Egyptian pound expenses they need to meet, whether they're paying salaries to the hotel staff or buying food in the restaurants. They were investing money. Today, if you're investing money in a T-bill at 27%, or you're placing a time deposit in dollars at 6%, there's a big differential. But the problem today is a lot of these companies are expecting a devaluation or do not think that this is the right rate to sell at. So it's more of a confidence issue than a liquidity issue. People are not happy with the rate, so they are not selling at this rate. That is why I think a devaluation is expected by everyone. Thank you very much, Hussein. Thank you. We have our next question from the line of Matt Dowsett. Matt, go ahead, please. Hi there. Can you guys hear me okay? Yes, we can hear you, Matt. Perfect. Just two questions from me. The first one is, Hussein, you mentioned earlier that on balance sheet position is short, but it doesn't take into account forwards that the bank has entered into. Maybe if you can elaborate on who the counterparties are over those forward positions. The second question is just a general one around, given the debt situation in Egypt, notwithstanding aid or IMF programs, is there a risk at all in a local currency debt restructuring like the one that we saw in Ghana? Is that kind of feeding into your asset allocation, investing predominantly in T-bills as opposed to Treasury bonds? Thanks. Let me start with that question. I honestly don't think there is a risk of a local currency haircut or non-payment, simply because of one thing. If you look at all the local currency sovereign paper, about 70% of it at least is held by the public sector banks. The sovereign paper is issued by the Ministry of Finance, and the public sector banks are 100% owned by the Ministry of Finance. Basically, it is not really money that has It can be rolled over indefinitely. What the Ministry of Finance needs to repay is about 30% of its headline number. It's not worth defaulting on that for the amount of negative publicity or all the problems you will get versus the real benefit, given that you're holding 70% of that paper anyway. That doesn't make sense. The reason we're investing in bills, not in bonds, is the Ministry of Finance is not issuing bonds. It's issuing bills. Even if they were issuing bonds, we're seeing yields are increasing week on week on week. Actually, we're trying to invest in as short-term as possible to take advantage of the rising yields. It's more of an ALCO decision, an asset liability decision in terms of how to maximize profits. In terms of the sorry, I think the first part of the question, I don't have the details of that. I'll check if I can get it to you or not. Okay, thanks. It's not with the central bank or anything like that, those- No. Okay. It's individual clients. There would be confidential issues. It would be foreign banks who might not be happy to- Okay, sure. divulge. It is not the central bank, stuff like that. No. Okay. Perfect. Thanks, Hussein. I appreciate the time today. Thank you. Thank you. Thank you. Our next question comes from the line of Lamia Tariq. Lamia, your line is open. Okay. We have also a couple of questions in the Q&A box. The first is with regards to the EGP 38 billion-EGP 40 billion net income guidance, is this before staff profit share? Yeah. It's equivalent to the 29.7 this year, apples to apples. Okay. Another question is regarding to the USD backlog for the bank. So what's the size of your USD backlog, and any estimate for the total backlog across the whole banking sector? I'm not sure about the estimate for the banking sector as a whole, to be honest. I don't think, yeah, this is not a number I'm going to give out on an earnings call. Okay. Thank you. I think we don't have further questions. As a reminder, if anyone has a question, please use the raise hand button or type your questions in the Q&A box. We have a question from Ahmed Kamel. Ahmed, your line is open. Hello. Thank you for the call. Mr. Hussein Abaza, I have a question. How probable, in your view, you believe the Central Bank might hike the required reserve ratio? If yes, what do you expect the impact on the bank will be in case of a 400 basis point, 500 basis point increase in the RRR? I'm not sure how likely. It happened two years ago. Not last September before, so a year and a half ago. It's one of the tools available to them. They haven't used it in a year and a half. Impact would simply be 4% more of our deposits we would not use. Basically, it would take off the impact of any increase in deposits. If we increase our deposits by 20%, then basically, we've really increased it only by 16%. It'll eat into our profitability growth, but there are other factors that are pushing up, which is, as I was saying, the T-bill yields and all that stuff. It will slow down profitability growth rather than reverse it. Any direct impact on the net interest margin? It will cause it to grow at a slower pace, but it will still grow given how much we've seen interest rates increase over the past period. Philip Malikin, two things are happening. Not only have interest rates increased, we're also moving from the CBE deposit auction to Treasuries. The difference is very big, but part of that is compensated in more taxes. The NIM impact looks huge. Net interest margin will grow at a lower rate than if you increase it by 400 basis points, but it will still grow. Okay, great. Thank you so much. Thank you. Our next question is coming from John Nipold. His question is, how are our companies, i.e., your clients, doing given the difficult environment. What is your prediction in terms of NPLs in 2024? Well, first of all, it is great to hear from you, John. It has been a very long time, and I am very happy to hear from you. Even though it is quite a tough question, but say, okay. What are we expecting? Again, if you look at the Definitely, it is a tougher environment. That is one of the reasons why we took management overlays in Q4. If you look at our Q4 provisioning, our average provisioning every quarter was maybe EGP 1.5 billion. In Q4, we took EGP 3.5 billion alone. This is in prep. I am not saying things are going to go bad, but it was a good time to prepare and take precautionary provisions. But again, the structure of our loan book is primarily corporates, and it is, as you know, the top 700, 800 corporates in the country. They are by and large, they have very low operating leverage, they have very low financial leverage, and most of the facilities that they take are in the form of working capital. Currently the main problem in the country is the availing of foreign currency to buy raw materials. As long as the raw materials are, sorry, the dollars are not available, they do not draw down the working capital loan in Egyptian pounds to start with. It is more a question of, the bigger risk is the challenge to grow the loan book rather than the performance. If you talk to most companies, once you get them the dollars and they import, because of the shortages around, they are able to sell and collect. But definitely it is a challenging environment. Borrowing at 24% is not easy for anyone. And that is why, given the provision coverage, I don't think we'll be seeing many problems, but we are following closely on all of our borrowers. We have the throughput come in, so we don't wait for financials. We know how much they're selling on a daily, weekly or monthly basis. Even with the large corporates, we're following up with them. Thank you, Hussein. Sorry, Monsef, I think there was something, there was one last bit I did ask, NPLs. Yeah. If we're looking to grow the book by 20%, I don't think we will be seeing NPLs growing by 20%, so I would hope our NPL ratio will go down slightly. Okay. As a reminder, please use the raise hand button or type questions in the dedicated Q&A box. Hussein, we don't have any questions in the queue for now. Okay. That was nice and easy. To be honest, it's a nice set of numbers. Yeah. I hope you don't have questions because you're happy, not because you're pissed off. Thank you very much, and hope to see you soon, yeah. Good luck everybody on the call. Inshallah. Thank you so much, Hussein. At the end of the call, I'd like to thank Hussein and Yasmine and everyone for attending the call. Have a nice day, everyone. Thank you. Thank you. Thank you, Monsef. Bye. Thank you, everyone.