Earnings Call: Q2 2023

Jul 25, 2023

Summary

H1 net income rose 81% YoY as higher NII and cost control drove 41%+ ROE. FY23 guidance was EGP 26bn net income, with record NIMs expected to hold and deposit growth capped at 30% or less.

Recording in progress 2Q 2023 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. Please use the built-in Q&A box to type any questions you may have throughout the duration of the call. During the Q&A session, participants will also have an opportunity to have their microphones enabled to speak directly with company management. I now give the floor to Yasmine Hemeda. Thank you, Amr. I am 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 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 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. We did not witness any further devaluations. We did not see any further policy rate changes. However, we were impacted by the policy rate changes that happened on the interest rate side, 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. They had a very positive impact on our numbers, as you can see. The good thing is it is a sustainable. Most of the growth that you can see on the performance is coming from where it really should be coming. It is coming from our NII, it is coming from control of expenses, it is coming from controlling cost of funds and a quality loan portfolio and impairments, again, coming under control. If you look at actual performances, I am sure some of you must have had the opportunity. We have actually seen net income growth of 81% year-on-year. We have seen revenues grow by 74%. The cost of income has dropped to 16%. Primarily, this is driven, as I said before, from NII. If you dig down into the numbers, not only did we see deposit growth at a time when there was very competitive deposit growth because the public sector banks were issuing long-term instruments at high yields, we not only matched that and we actually grew our deposit base by north of EGP 75 billion. During June and into July, we are now looking to focus back on the CASA. We have locked in the CDs, and we are now focusing more on CASA. We are still at the 53% CASA to total deposit, which is, I think, higher than the market average. If you look at our NIMs, we are looking today, I think, at record NIMs. Our local currency NIM is 920 basis points and growing. Our foreign currency NIM is 380 basis points, and the blended NIM is around 730 basis points. All of these are. We are still to see the benefit or the full benefit of reinvesting our T-bill portfolio into the higher yielding rates. It is not as if these are one-off items. In fact, there are 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 standalone basis was about 49%. I think all in all, it has been a pretty good quarter and a very good half. I think I will just stop here and focus on specific questions and leave it up to you guys. Okay. Thank you to CIB's management team. We will now open the floor to questions. As a reminder, you can type your questions in the dedicated Q&A box, or you can tap the raise hand button to have your microphone unmuted to speak directly with company management. To start off, we have a few hands raised. We will start with Walid. Walid, go ahead. Thank you much. Hi, Hussein. How are you? Hope you are well. Good. Thank you. Couple of questions, Anthes. Firstly, very strong set of results as you alluded to. Across all lines, no issues on the provision line, margins expanded, good growth on the balance sheet side. Your thoughts on the macro, what path do you see towards an FX adjustment, an interest rate adjustment? How does it solve itself? That is one. Number two, 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? Then, finally, your strategy in terms of now growing the balance sheet, how are you thinking about placements versus lending? We saw during the quarter, you had a pretty big increase in due from banks, as you used some of the liquidity on that front. How are you 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? Thank you. Sure. Let's take them one by one. Let's start with the macro. Everything will feed off of that. I think the macro, we've said before, and we continue to say this, I don't think necessarily a devaluation is the answer. 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 Cairo hotels are at occupancies north of 90%. The five-star hotels are charging $500 and $600 a night. 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. Suez Canal revenues and remittances are doing very well. On a supply and demand issue, I don't think there is the 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. That is what needs to be done. 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 and lying in a current account. It's not a supply and demand issue. Even if that devaluation goes from 30 to 40, we're still looking at a very similar situation. We still have a backlog. I think that's the elephant in the room. Once the backlog is cleared, once there is a functioning 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 periods. On the impairments, I don't think we're worried specifically about any sectors. If anything, I think the bank is 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 rating ones are fully secured. They are not even included in the impairment calculation. You do not take an impairment on a risk-rated one. These are companies that have loans that are fully covered by assigned cash or time deposits or guarantees from a first-class bank. 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. We are 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 800, 850 corporates in the country. We are pretty comfortable with the borrowers we have. In terms of strategy, as 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 CD deposit auction, as opposed to being lent out, it will be lent out as long as the demand is there. When you have a very short window, when you collect EGP 45 billion, EGP 50 billion, it's not logical to find that money leaving. 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 whatever is needed, and put the excess at the best possible gain based on tenure and stuff. That continues to be the strategy. So deposit-driven strategy. After the CDs and when we had to compete with the National Bank of Egypt, the Banque Misr, we are back to collecting CASA and maintaining that CASA, that high percentage of CASA, which makes our cost of funds much more manageable. I hope I answered the questions. That's perfect, Hussam. 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. I think we've basically weathered most of the storm. We're still at 19%. At the rate of capital generation, profit generation we're generating, yeah, we do feel comfortable. 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. That is basically, is where the rate of growth is being determined. All of the loan growth that you saw, the $17 billion-$18 billion in the first half of the year, is coming from local currency working capital. Nobody's looking at CapEx. We are seeing some foreign currency loans, but we're seeing a lot more foreign currency payoffs. This makes sense because if you remember during the 2 years of COVID, there was a debt moratorium, especially on the tourism sector. Now, the tourism sector is doing very well. 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. It does make sense to see some payoffs coming in. That's where we're seeing it, that tourism is doing well. They're doing some payoffs. They're also starting to borrow some money as well. But the net on the dollar exposure is negative, which is, we're not worrying about it. It's good to see. Yeah, CAR, we're comfortable with that at the moment. Thank you, Hussam. Always very helpful. Thank you. Thank you, Uneet. Okay, thank you for that. Going back to the Q&A box really quickly, we have a question from Rahul from Citi asking if you think this over 40% ROE, is this short-term or is this a new norm for the bank? I think it's difficult to say with any degree of certainty. There are so many moving parts. We have to admit, banks make more money with rising interest rates. How long we're going to see these super rates? I'm not sure. I'm not sure how long, because we are making a lot of money from 24% T-bills. But we're also paying a lot of money on our CDs. I think historically, if you look at over the last 7-8 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%-35% is where, with some degree of certainty on the medium term, as in for the next 2-3 years. Beyond that, it would be, I don't think you can put much credibility to anything anybody says, given what's happening over 2-3 years. But, yeah. 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. Okay, thank you for that. I see Hassan Faris has his hand raised, so I will enable your mic. Hassan, go ahead. Hi, Hassan. Thank you for the presentation. Could you shed some light on what drove this very strong deposit growth during the quarter, and how are you seeing deposit flow so far in July? My other question is, what is the reason for the 43% expansion, other provisions? It expanded to EGP 682 million. I know you shed some light on policy rate, but do you think another hike is possible this year? Sure. Let's take it one by one. Sorry, 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. 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, our CDs were actually higher yielding than the public sector banks for the first time in history. What we did was we put a minimum threshold of EGP 3 million per CD. The idea was you attract new to bank wealth customers. We actually managed to attract almost 2,000 wealth customers. Usually, in any given month, you would attract 15 to 20 wealth customers. 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 three years in a CD, he must have a lot more cash that you as a bank can start making money out of. That was the idea. 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, 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. Given the uncertainty, when you're modeling in things like what's the expected FX rate or what's the expected inflation rate. All of the current macroeconomic indicators are not very favorable. In addition, you also run three scenarios of macroeconomic indicators, one of which is a worst case. Given what we're 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. That is something we're working on and working to fix moving forward. But 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. This is a process where we need to talk to external auditors. We need to talk to the Central Bank of Egypt. It's not something that we can suddenly decide, instead of taking 10% impairment, we're going to make it 2.5% because we feel that's enough. It has to go through very, very rigorous back testing and checking. We are working on it, and we're working through it. In terms of rate hikes, I think most economists or most consensus seems to be within the coming six to nine months, no more than maybe 2%. That is, again, a consensus. We have heard it said by people at the Central Bank of Egypt. I think the last time the governor was speaking at 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. That's the sort of theme that we're starting to hear more and more, not just locally but globally. I think even if there are rate hikes, they're not going to be of the magnitude or severity anywhere near the 1,000 basis points we've seen. Our view is that we've pretty much reached close to the end of the rate hike cycle. All right, perfect. Just on deposit flows so far in July. The question? Sorry, Hussein, can you repeat the question? Yeah, just on deposit flows so far in July, if you could shed some light on that, please. We are back to the normal level of more than 50% of deposits coming in the form of CASA. It is back. July, usually summer months are slow, so comparing July to last July, it is still up. But now it is back to normal, and 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 are back to good flows and they are back to the right ratio of over 50% CASA. All right, perfect. Very clear. Thank you so much. Okay, thank you for your questions, Hussein. I see Randolph has his hand raised. Randolph, I just enabled your mic. Please go ahead. Good. Okay. Hi, Ayed. Good afternoon. I just wanted to ask two questions. The first one is the losses we see under other comprehensive income. Can you just guide what you expect that to be for the full year? I think full year to date, it is around EGP 10 billion. And then, other question, 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 you don't think it's going to happen, but let's say it did happen, just refresh or remind us what the impact would be. Thanks. Sure. 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. Basically, for the rest of the year, if there is a 1% or 2% interest rate hike, then we're looking at a minimal 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 one pound, let's put it this way, every three to four pounds will give us less than 1% difference on CAR. So, if there's a 10 pound or five pounds or three pounds, 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 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 the interest rate cycle reverses, then these losses reverse. And you suddenly find you guys were complaining like crazy when CAR was 32%. I think sort of a low 20s is the comfortable area to be in, and this is where we're sort of guiding it. So, that's on the deval. I don't know if I answered the question. And perhaps just on the deval, just a follow-up question. Sorry, yeah. The deval on the P&L, right? Yes. Now, as you know, we're perfectly matched in terms of assets and liabilities. We also had about 30%-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-$23 million, $24 million of net profit. That will revalue upwards. We also have a slightly long dollar position, very slight. So that will revalue. We make an FX gain on that. There's nothing negative. 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'll see a bit of a profit boost. 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. Super. Thanks a lot. Thank you. Okay. Thank you, Randolph, for your questions. One more hand raise, and then we'll get through the questions in the Q&A box. Naresh, please go ahead. Yes. Hi, Hussein. It's Naresh Bilandani from J.P. Morgan. Can you hear me clearly? Yes, of course. How are you? Hi, Hussein. How are you? Thank you very much for the presentation and time, Hussein. 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 income ratio is probably now the best in MENA banks. Despite the inflationary pressures, how are you managing this low level of OpEx? Do you reckon there is an element of under-investment 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 am 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. That is 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 AC amortized cost. I think the balance sheet is showing that probably has not really occurred, unless you can please correct me on that. I am keen to know if that is still on the plan and if at all, how can that help your capital position going forward? Thank you. Let us start with the bond portfolio. We need to go back to Central Bank. We need to go back to auditors. 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. It does not reverse. What reverses all of these losses is the actual bonds maturing or the interest rates reversing. Right. I think, as we were saying, we do not think there is much more hiking left in the cycle, regardless of the tenor. I am not sure when we are going to start seeing cuts, but I think we are more likely to see if there are incremental interest rate hikes, they are not going to be a lot, and we are pretty much near the end of the cycle unless we have all got it wrong. So, the impact of that is not going to be massive on CAR. It will just prevent volatility moving forward. That is quite clear. Yeah. Yes. I think our cost, if you look at our cost, they have actually gone up by 31%. If you take out the devaluation impact, which you could or you could not, because we do have costs in dollars. So no, we have not under-invested 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, our consulting, all the costs in dollars. So that is why there is an offset there which we managed to do. The other thing we do is if there is 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 our being sort of stingy and not paying people, if I may put it as bluntly as that. Thank you, Hussein. I am being glared at by everybody on the table, so I should wrap this up quickly before they beat me up here, Naresh. We can talk privately about this, okay? Indeed, Hussein. Thank you very much. That was quite clear. Thanks. Have a good one. Okay, thank you, Naresh, for your questions. We'll get through some of the questions in the Q&A box. Hani Amer 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 from a long, long time, we've always said we're 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. 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. Yes, we are absolutely. We've never made a secret of our intention to go into digital banking. Okay. Thank you for that. Isha Ben from Prime is asking, what are your thoughts on the new 7% and 9% US dollar three-year CDs issued by state-owned banks today? What kind of effect do you think it'll have on the market? 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. Remember, I was saying on the dollar book, we're actually seeing loan payoffs. Our loan-to-deposit ratio in dollars is 36%-37%. 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. 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. The decision, because to issue CDs, you need to go back to the Central Bank. The management team was preemptive. They got initial approval or in-principle approval. Should we want to, we can. It's just a matter of deciding to do it. Based on, we don't want to jump the gun and sort of do something irrationally. We'd like to see what's happening in the market first. Okay. Thank you very much. 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 that has been downgraded two notches from the day it's come into the bank, that becomes a Stage 2. 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. It looks like an alarming number, but it definitely isn't. Each of these loans has its own impairment against it. The bulk of them, as I repeat, are performing loans. Okay, thank you. Otherwise, we've seen more migration. This number hasn't changed a lot. Had they been Stage 2 and not performing, they would not be hanging around in Stage 2. They'd be moving into Stage 3. Thank you. We have a question from Colin Smith of All Africa Partners asking about your three-year CDs at the moment. Are they fixed rate or are they floating? They're fixed. Okay, thank you. A question from Ahmed Zweter 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? In the state banks? Okay, sure. I think from the large state banks, as you saw, there is a lot of disruption there. To be honest, we deal with the interest rate fluctuations. We deal with the FX moving. This is part of being a banker in Egypt. What really causes us a lot of concern, and I think I'm speaking on behalf of 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. 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 interests. That becomes. At the moment, I was going to say we haven't seen much activity until they issued these dollar CDs. I think on the dollar side, there's much less impact on balance sheets of the banks. 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 one of the primary drivers that allows us to have such high NIMs and consequently ROEs. Anything that disrupts that, we're always very careful, and it always takes the highest priority. Okay, thank you. I just forgot to mention that Ahmed was from Helios, but thank you for that. A question from Neder Oshra 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 the IFC. Because it is a Tier 2 loan, the way Tier 2 loans come in is you have five-year grace and then you start repaying. We were going to start repaying part of the IFC loan this year for the next five years. What we did was we prepaid the whole thing, and we took a $150 million loan to replace it. The net-net gross impact is $60 million. Then there is another $100 million, which is a pure loan for green financing and sustainable financing, which we are doing again with the IFC. That is the $250 million. Okay, thank you. 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 into 40. We thought that the economy would be much slower. We always start off very conservatively. As a matter of fact, if we are 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. We always prefer to be very conservative with you on everything we do, and then we guide upwards as we move along. We look at our budgets more of a sort of a worst-case scenario rather than a proper budget. Internally, we then have shifted to different numbers because otherwise we would lock up shop and go off to the North Coast for the rest of the year. In order to keep everybody motivated, we are doing a new forecast for numbers that we have to achieve. I think it is 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. Part of that is due to the model anyway, as I mentioned before. Okay, thank you. Speaking of guidance, we have a question from Mustafa from NI Capital asking if you can provide guidance for net profit, NIMs, loans, and deposits growth for 2023. Let's stick with net income, and then we can work it backwards. As I was saying, I think we're looking at something in the region of EGP 26 billion. We might adjust this upwards or downwards. We have plenty of calls later. Let's start off with the EGP 26 billion. NIMs, I would say let's keep them flat at an all-time high for the rest of the year. And deposit growth, I think we should be comfortably, we've gotten about 20% for the first half. Because we're going to be more picky in terms of our cost and in terms of our CASA, it's not going to be 40% for the year. Let's keep it at sort of like 30% or less than 30%, but more with a CASA higher percentage in the mix, which is more important. Quality rather than quantity has always been the way we looked at things. Loan growth, again, we would say we've done EGP 17 billion first half, something comparable in the second half. Again, the demand seems to be primarily for local currency loans, primarily for working capital loans, and we're happy to cater to whatever. I mean, we have the firepower. As long as our customers want the money, it's there. Okay, thank you. Back to Colin from All Africa. How is your Kenya investment going? Are there any lessons learned yet, especially on digital and mobile technology that could be applied to Egypt? That is a very good question. Actually, we are starting our digital initiative next year in Kenya because everything is up and ready and running. What is going to happen is we are going to split the two entities, the Kenyan entity into the current bricks and mortar entity, and then we will have a pure digital bank there. That digital bank will be under the remit of a completely different person who will be overseeing all of our digital expansion, whether Kenya, Egypt, or any other countries in Africa. Yes, definitely Kenya. The good thing about Kenya is it is already developed, and there is digital banking there on a much smaller scale than Egypt. Whatever we do and pilot in Kenya, when we come back to Egypt, when the market is ready, then you are not testing products, but you are sort of expanding products on a larger scale. Okay, thank you for that. Another question from Nader from Naeem asking, in the event of a downgrade in Egypt's credit rating below the current level, how would the balance sheet be impacted, especially key investments and CAR? There will definitely be a negative impact because once you have a lower rating, then you need to take a higher impairment. Again, when that higher impairment, if you look at the current impairment level we have, that will probably to a large degree offset a lot of the extra impairments we need. Other than that, there is not much. There will be a slightly negative drag on CAR, but because of the level of impairments, we should be covered. That is where the excess, if you want to call it excess, the conservative prudent provisioning stands. It is in good stead. Okay, thank you. We have a question from Waruna Kumaraj from Seaco Bank asking, what is your guidance? Well, I guess you had discussed your NIMs for 2023 and on non-funded income. If you could provide your guidance for 2023 on non-funded income. I think you'll see a very similar growth rate in the non-funded income, because in the first half of the year, there was less than EGP 1 billion of There's about EGP 700 million of FX gains, sorry, capital gains, which might not be replicated. Other than that, the rest is sustainable. Just sort of multiply it by two. Okay, thank you. Back to Colin from All Africa. Are you concerned about any increased regulations due to Silicon Valley Bank type risks? I don't think so. We're very transparent about our CAR and our share value, OCI, and all of these numbers. To have increased regulations, they need to go through Basel III, they need to then be approved by the Central Bank of Egypt here. So I don't think so. I think the world is If there was going to be any jerk reaction, we would have seen it. Okay, thank you. We have a question from Zied Said of AAIM asking: regarding the digital banking license, what gains do you aim to achieve from this step? What would your target customer segment be? Okay. On the digital bank, you are opening up a completely different entity. Today, our cost to serve in CIB is, it cannot go below a certain. It has gone down from EGP 1,000 a year per person to maybe EGP 600, EGP 500 a year. But there is still potential to be made where you can actually make profits from customers who are generating as little as EGP 100 a year. But this cannot be done with a bricks and mortar entity. The other thing is, if you want to expand in Africa, we are not going to go out and take licenses in bricks and mortar in six, seven different countries where possible. Basically, it opens up to a completely different market segment. Yes, the larger corporates always want to bank bricks and mortar. Some of the high-net-worth individuals will always want to bank bricks and mortar. But there is definitely, it is a completely different space, and we see it as a complementary business rather than a competitive business. It is something that adds to whatever bouquet you are offering. You are targeting a different market segment. You are targeting people with as little as EGP 200 to EGP 300 in their accounts and targeting them profitably, rather than just having 10 million customers. It is having 10 million profitable customers who would not be profitable under a bricks and mortar situation. With the advances in technology and regulations, it becomes easier and easier to make profits on lower and lower amounts. Okay, thank you. Question from Minette Doss from HC. I believe you were seeking subordinated loans of $500 million from the CDC and another $500 million from the African Development Bank. Should these materialize soon? Are there any concerns or causes for the delay? I don't think we were ever seeking that billion. I think that the $1 billion, let me clarify. When we went to our AGM, we went with a $1 billion, because in order to seek Tier 2 loans or whatever, you need to go to the AGM. So what we did was we went with a very large number, which is up to $1 billion, but it doesn't mean that we had $1 billion lined up anywhere. It was just to get that approval. Further approvals would be at the board level, at the Central Bank level, but I don't need to have an extraordinary general assembly. With CIB's shareholding structure, it becomes very difficult to get an AGM or an EGM. It takes two, three weeks, and then if you don't get the quorum, then you need to do it again in another two weeks. What we did was we went for a three-year, up to $1 billion, and then left all the flexibility of the details. But there was never a plan to get $1 billion, because $1 billion of loans today, just calculate the interest on them, is not worth whatever benefit we get on the CAR. What we have, we are in negotiation with the African Development Bank still, nowhere near $500 million. We already have $100 million from the CDC, or as they call it, British International Investment, the BII. We would look to increase that amount. But again, nothing in the region of both loans together would not increase to $250 million rather than the $1 billion. Just to clarify that billion number. It is not a delay, it is just we are in process. They have done their due diligence and we are waiting for them to go back to their boards for the approvals. Okay, thank you. Back to Zintle from Steyn Capital Management. On your bond portfolio, what is the remaining term in your bond portfolio, and what strategy are you taking going forward? It looks like you have been increasing T-bills and reducing bonds. Yeah, definitely. The strategy on the bond, whenever we. There are very, very few bonds available in the market to buy. Basically, the current bond portfolio, to a large extent, will be held to maturity. We do not see, even if it is classified as available for sale, it will be held to maturity for most of the. The current duration on the bond portfolio is around 2.5 years, so it is nothing dramatic. If you factor in the T-bills, then the duration becomes 1 year. But just on the bond portfolio is 2.5 years. We are focusing on the short end for several reasons. One, because we are looking at an inverted yield curve, so it makes sense. We were still in an inflationary environment where interest rates were going up, so it was pointless 6 months ago to lock in into a bond when I know that interest rates are going up, then I would lose the reinvestment. That is why you're seeing our net interest margin in local currencies increasing month-on-month on month because we're reinvesting in short-term and it's going up. Finally, the actual paper available. To be honest, if you were the Minister of Finance today, why would you issue at the all-time high of interest rates anything that locks in a cost to the government of 25%? We basically react to the market in a sense and try to maximize profit, which has been working nicely. Okay, thank you. Andy from Bellevue Asset Management, a few questions. Would you mind providing us with some color on the amount of US dollars you provide to your clients for imports? Has the situation improved compared to the first quarter of this year? Is there any high-level number you can share with us, whether at CIB or the banking sector in general regarding banks' USD lending for imports? I think there's a difference here. Let me clarify something. We don't lend foreign currency for imports, okay? That is a complete misconception. We will lend foreign currency to companies that have foreign currency revenues, okay? So a hotel or an exporter can borrow in foreign currency. If somebody is importing, usually most of these importers do not have foreign currency revenues, so they cannot borrow in foreign currency. What they do is they draw down a line of credit, a working capital line of credit in Egyptian pounds, and then we sell them dollars. That's why even if we have massive deposits on the balance sheet, I cannot sell these deposits to our customers. Otherwise, I would create a short position. So where do I get the dollars to sell? Companies like hotels and exporters will sell us a certain amount of dollars on a daily basis, what we call the interbank market. We then turn around and sell these dollars to somebody who wants to import. But we will lend them in Egyptian pounds, just to clarify. To answer the question, yes, we have seen growth from Q1 to Q2, definitely. You can see this in the non-interest income, because a large part of non-interest income is the fees and commissions we charge, not on the FX, but on opening letters of credit for import. If we do not sell them the dollars, they will not be able to open the letters of credit for import. We've been charging 1.25% roughly. The fee itself hasn't changed. What has changed from Q1 to Q2 is the volume of letters of credit we have been able to open. These letters of credit we open because we are able to sell them dollars for them to open these letters of credit. Generally, we seem to be about 10% of the—our market share is about 10% on the interbank. These are the numbers that I can share with you. Okay, thank you. Andy's second question. In your view, what conditions should be met before foreign investors which have their EGP blocked in the FX repatriation queue see this money cleared? I do not think CIB should be—I have no idea. I am not the one who answers this question. Okay, fair enough. Thank you. A question from Hibo Munir from HC. Has the bank started repaying the previously obtained $300 million facility in 2017? Yeah. Remember I was saying the IFC loan? We would have started paying it, but we prepaid the whole thing, and it is a five-year loan. It has a 10-year loan with a five-year grace period. Yes, we are going to start repaying the other two because there were three loans. One was from the IFC. Each is $100 million. IFC, EBRD, and the CDC. The IFC, we will no longer repay because we prepaid and drew down 150 million, so now we have another five-year grace. But the other two are going according to the repayment schedule. Unless we do exactly the same thing, because we are talking to the EBRD, and we are talking to the CDC again. If we, once we reach an agreement, we will probably do the same thing. We will prepay, draw down, have another five-year grace. Okay, thank you. Last question in the Q&A box before the two hands that are raised. Ahmed from Helios. If you believe that we are close to the rate cycle peak in Egypt, how are you expecting to adjust the maturity profile of your bond portfolio in the coming quarter? I believe you may have actually covered this question already. Again, it is completely based on what the government is issuing, and they are not issuing a lot of bonds at the moment. Part of it is available. I think you may have hit the mute button by accident. Sorry. I don't know where I was cut off. What I was saying is it's based on the supply in the market rather than anything else. We're not seeing a lot of, as you mentioned, that I did mention before, we're not seeing a lot of bonds available in the market. As Ahmed is asking, we're at the peak of the cycle. If I can get my hands on bonds that are yielding 26%, 27% for five years, I'd love to. Unfortunately, it's just not there. So we react to what's available in the market. Okay, thank you. I see Ibek has his hand raised. Ibek, please go ahead. Yeah. Sorry. Thank you for the conference call and very detailed answers to the questions. Very helpful, Hussein. Thank you. A couple of questions I had. First one is, to what extent do you think the high inflation is actually helping the asset quality? I guess it's making the loan repayments much easier, right? It does look like you have big provision write-backs in the corporate segment, correct me if I'm wrong. Given that inflation is going to stay high in the near term, what kind of trends do you expect to see in bad asset charges and cost of risk in the second half of this year? I think most importantly, if inflation is persistent, if you think inflation is persistent, it's going to be around 28%, 30%, would you still be cautious on asset quality going into 2024? That's my first question. Secondly, can you remind us what are the Central Bank cash reserve ratios on local currency, foreign currency deposits? What are the chances that Central Bank of Egypt may actually raise cash reserve ratios in order to control liquidity, in particular in local currency? Do you think that's a possible scenario? Okay. Let me start with the second question. Yeah. The reserve requirement on local currency is 18%, on foreign currency is 10%. What are the chances that they would raise? I really think we're looking more at an easing cycle rather than a tightening cycle moving forward. As I said, it's not demand-driven inflation. All of the stuff that we've seen, not just Egypt, a lot of other countries, and this was mentioned at the IMF meetings back in October, when a lot of the economists were taking the stage and saying, "Why are we raising interest rates when this is not demand-driven inflation?" And the other economists were answering, saying, "If there is inflation, then you have to kill it with high interest rates." But it seems as if now tightening is no longer flavor of the month. That doesn't mean that the Central Bank of Egypt cannot hit us with another 2% or 3%, but at the moment, I don't think we're too worried about it at the moment. As I said, 18% local currency, 10% foreign currency. In terms of inflation, we're still seeing, again, maybe because the largest 800 corporates, as I keep mentioning, are banking with CIB, the market leaders. Their cost-passing ability, their EBITDAs, and their very low leverage, I think are allowing them to, on the one hand, they don't need to pass on all of the inflationary costs. They have enough profit margin to absorb. They have a low enough cost structure that even if sales drop, they are still able to service debts. I'm not just We are running, because in every loan that gets approved, they not only have to come up with projections, they also have to come up with a break-even analysis as to at how much will sales drop or costs increase, and they can still continue to service debt. In all of our customers, we've seen very generous buffers. So are we worried in terms of more impairments? I don't think so. If anything, we're working to get our impairments down to a more realistic level that matches the actual asset deteriorations. Because I think, forget about what happened in the past. I think moving forward, it's very important that we have something that matches. It doesn't make sense that we have 18% coverage on a loan book that has less than 4% NPLs or 5% NPLs. So I don't think on that sense we're worried. Okay. Thank you. Okay. Thank you for your questions. Muammar, you also have your hand raised. Please go ahead. Yep, thank you. Thank you very much, Hussein, for the call. Just wanted to ask, just bouncing off your last answer, is there a possibility of the Central Bank of Egypt increasing the cash reserve ratio on the foreign currency deposits, just to sort of beef up its own reserve base? That is my first question. The second question is on your effective tax rate. Last year was 32%, the year before that was 30%, and that difference actually makes a substantial difference to your guided ROE. I know we are halfway through the year, but is it possible to give us some guidance on what you expect the full-year effective tax rate to be? The last question is on your interbank loans or what you classify as due from banks. It seems like it is at a multi-year high. I just wanted to ask whether you foresee any counterparty risk here, and maybe if you can just share what the interest being charged on those loans currently is. Thanks. Sure. Let's start with the first question. The reserve requirement. Even though I'm starting with it, I have no clue. That's a purely, Central Bank, they could do that, absolutely. We will smile and give them whatever money they want. Whether they will or not, I honestly, I'm not fudging. I don't know. I wouldn't want to answer a question that I have no clue and no control over. Your second question regarding the tax. The tax is a function of where we place our assets. When we invest in T-bills, there is a 20% withholding tax taken off the top of the yield. A 20% T-bill actually yields us 16%. That 20% is factored into our NIM. We calculate the 20% as if we got it, but the 4% goes straight into our taxes. Depending on, and sometimes it is more lucrative to buy a T-bill than a CBE deposit auction, depending, because they do not move in tandem. There's always an arbitrage, and this is what our treasury does, looks at the best way to do it. But general rule of thumb, the more we invest in T-bills, you'll find a higher NIM, but a higher tax rate. The more we lend and put money in CBE deposits, you'll find a lower NIM, because that 20% withholding tax is not there, but a lower tax rate. But sometimes you go with the higher tax rate because it is more profitable. We do realize these implications. But we always look at where you're comparing a 24% T-bill, where you take 4.8% out, to a 19% CBE deposit auction, but that money is still taxed at the end of it. It's not as simple as that. There are a lot of moving parts. We always move money to take advantage of the arbitrage there. That's why you'll find the tax rate, yes, the 2% makes a big difference on ROE, but that is the most efficient way to do it based on the givens in the market then. The due from banks, definitely. Remember I was saying at the beginning of the call, we've seen payoffs on the foreign currency loan book. At the same time, we've seen Tier 2 capital come in dollars. We're generating dollar income, and we're getting CDs and we're getting, sorry, more deposits in dollars. This has to be placed somewhere. This is not loans, but rather placings at various banks, and they are coming in at very, very decent rates. The proof of that is if you look at our NIM in foreign currency, it's gone up in the last 24 months from 99 basis points to 380 basis points. Okay. Thank you very much. I just had one last question. I know you have been asked this question a couple of times. At the beginning of the year, your initial guidance on the cost of risk charge was 2.5%. Given how robust asset quality performance has been, are you willing to revise that downwards slightly? Yes, definitely. But the problem with that is it is a function of the IFRS 9 model. For us to revise it downwards, remember, we have to go back to our. This is something, actually, if you were to ask me one of the top three things we are focusing on as a management team, this is one of the top three things. In any one day, it could be number one, two, or three, depending on what other crisis we have. But this is a constant thorn in our sides, where basically we are looking at this. We brought in our expert. We are talking to the external auditors and then the CBE. But this is something that definitely has to. If it is not done in Q3, then hopefully we will do it before the end of Q4 and sort things out there. It is something that is very, very important. Okay. Thank you very much. Okay, thank you for that. Our last question from Ahmed, again, from Helios. What is the share of total equity issued shares outstanding that is now represented by GDRs versus local shares? How has this shifted in the last 12 months? It is 27%. Let me check with the team how it is. About the same. I do not think there has been a major shift. Everybody seems to say it has been anything between 26 and 28 on average. So there has not been, even though we have seen people using the GDR to access dollars by buying local shares, converting to GDR, selling and getting dollars, there seems to be a negative reverse. So it has been at the 27 for a long, long time. Okay, thank you. We also had a question from Farah from EFG, but you had answered it in your answer to the previous questions. I think this means that all of our questions have been answered. Would you like to make any concluding remarks before we end today's call? No. Thank you very much for joining the call, and thank you for the questions. You know that we are available for any further breakdowns, whatever, myself, Yasmin, Nelly, Omar, Mona, everything. Actually, we have our CFO and our treasurer were sitting on the call. Any questions you guys have, please send over. You have our emails, you have our mobile numbers. We hope to see you, for those of you who are not in Cairo, we hope to see you in Cairo soon. Inshallah. Brilliant. Thank you to CIB's management team, and thank you all for dialing in today to CIB's 2Q23 results conference call hosted by CI Capital. A recording of this call will be made available shortly. Please get in touch with your contact person at either CI Capital or CIB for access to the recording. Have a nice day, everybody. Goodbye.