Since there is no risk of interest rates going down in the medium term or at least over the next three to six months, margins are expected to stabilize or hold ground at least for 2022. NIM will also be supported by the local currency liquidity in the market which supports the lower cost of funds and accordingly profitability and margins.
CBE waving all the fees eats up around EGP 350-400 million from the bottom line (3% of 2021e bottom line of EGP 13 billion).
Reasons for non-interest income to operating income no longer touching the 30% as achieved historically include 1) interest rates were much lower, yields were below 10% at the time, and 2) Balance sheet structure at the time was inclined towards lending (higher LDRs) versus now where a lot more money is invested in assets that do not yield fees and commissions.
However, non-interest income this year should grow by about 10-12%, whereas recurring fees and commissions should grow by north of 25% to match the growth in loans.
There are no surprises in Opex, it should remain within historical figures. Same three core pillars: 1) staff costs are matching inflation figures, mid-single digits; 2) Branch expansions should remain at historical rates of opening 5-8 branches a year; 3) IT won’t witness any massive spending.
Management always manages the cost to be at a percentage growth less than income growth.
Loan growth was healthy during the first three quarters of 2021 as management had expected, driven by a combination of WC financing as capacity utilization of factories seemed to be increasing coupled with syndicated loans for government projects, but CAPEX financing is yet to kick in.
CIB witnessed strong LC loan growth north of 25% over 2021. FC ended the year on a positive note reversing the payoff wave that was witnessed at the beginning of the year. Management considers 2021 as one of the strongest loan growth over 6 or 7 years. The retail portfolio has always been very steady and contributes to the growth of the total loan portfolio, primarily supported by payroll accounts that have very good quality.
Typically, banks are supposed to run with a Loans to Deposit ratio of around 60-70%, which holds true for FC currency because FC portfolio is loss-making if deposits are not lent out. On the other hand, LC average cost of funds is around 4-6% so whatever is not lent out will be placed in treasury investments at 10.4% (after-tax) so it nets a pure 4% spread, at zero risk and zero provisions. Thus, the Loan to Deposit ratio is unimportant in LC. The only risk is that T-bill rates come down, if they do, then banks can drop the cost of deposits to get rid of excess funding. The structure of the economy, where you have a risk-free rate that is higher than the lending rates supports the accumulation of LC deposits.
Asset Quality & CoR
CIB asset quality proved to be very robust. This year CIB is planning to book EGP1.5-2.0 billion in provisions for the full year, versus last year where they booked EGP7 billion. Since provisions reversal comes with higher taxes since they were tax-exempt when booked, it's wiser to not make any reversals but instead take zero provisions and wait on the loan book to grow.
With regards to the SME financing target of 25% by the end of 2022, CIB is above 15%. The challenge persists in lending the small enterprises where banks have to reach 10% of the total loan portfolio and currently CIB stands around 3.0-3.5% (this is about EGP10 billion of growth there). As for the medium enterprises, the situation is comfortable even though the target is higher at 15%.
However, if for any reason, banks do not make the target, they will place the amount they’re short of at the CBE until they hit the target.
Foreign currency liquidity is healthy, and there is no shortage and this is seen through: 1) last year CIB offloaded and paid off some FC emergency lines that were taken in 2020 during Covid; 2) Volumes on the interbank are quite healthy not a single client has had to wait a day in order to open letter of credit; 3) Individuals are still queuing to sell USD, which shows that there is no black market around that is offering better rates.
There has been no competition, the public sector banks have been dominant. Over the last two years, at least 70-80% of the loan growth has gone to the public sector banks because most of the lending was going to the mega projects which could be explained by the Covid situation. Private sector banks, with the exception of CIB, have lost market share. CIB managed to grow LC loans by more than 25% to slightly gain market share.
However, going forward it's expected to see more private sector growth in terms of working capital and CAPEX financing. In 2021, a lot of private sector banks have been included in many syndications (half of CIB’s loan growth in 2021).
GCC banks are still quite small so loan growth is a function of the equity but definitely, all of them have the appetite to grow.
Capital Utilisation and Dividends
The bank is very well capitalized with a very high capital adequacy ratio due to faster growth in equity than earnings. Part of this was due to the move to IFRS9 which has a few things that came in and inflated equity. One was excess provisions versus previous accounting regulations (IS39). The other was the unrealized gains on the bond portfolio that were bought when they were yielding 20-22%. The profit that should be realized at maturity, for the held to maturity or available for sale bonds, is calculated and booked in equity. So effectively it's as if you've sold that bond for a profit and retained all the profit.
CIB targets capital adequacy of 20% rather than 30% which should make RoE go up to 30% rather than 20%. Strategy is:
1) To have more aggressive payout ratios of around 25%.
2) As more loan growth materializes, risk-weighted assets will increase gradually.
3) Inorganic growth, the bank is looking at potential acquisitions in sectors.
Management thinks buying another bank in Egypt is not an option on the table. They might consider increasing their geographical expansion in Kenya or venture into another business or both. CIB also applied for a digital banking license, which should earmark part of their huge capital (EGP 19 billion). The bank might also expand in non-commercial banking financial services.
10-15% deposit growth, but at local currency, but at least 50 to 55% of that to be in CASA.
On the loan side, the bank is pushing for north of 20% LC loan growth, 8-10% FC loan growth to give a blended rate of around 15% or more, assuming capex financing is still weak.Any capex financing will be incremental to the aforementioned figures, which should bring up LDRs slightly in both currencies.
The bottom line of 15-17% higher than 2021 ( that should be around EGP15-15.4 billion).
Expected dividends in the range of EGP5-6 billion, at about 25% of this year (EGP 13 billion), and last year's profits (EGP10 billion). This is subject to the board and the CBE's approvals.Moving forward, the bank is targeting a more aggressive dividend payout plan (25% for the next few years, up from 15%).