CI affirms Commercial International Bankâ€™s ratings with a stable outlook
Capital Intelligence Ratings (CI), has affirmed Commercial International Bank’s (CIB) Long- and Short-Term Foreign Currency Ratings at ‘B-’ and ‘B’, respectively, with a stable outlook.
These ratings, which are constrained by the ratings assigned to Egypt’s sovereign ('B-'/'B'/'Stable'), denote significant credit risk as CIB’s capacity for timely fulfilment of financial obligations is vulnerable to adverse changes in internal or external circumstances.
The Bank’s Financial Strength Rating (FSR) is maintained at ‘BBB-’ supported by strong profitability at both the operating and net levels, as well as ample liquidity, and a strong customer deposit base. Also supporting the FSR is the satisfactory capital adequacy ratio (CAR), the Bank’s established business franchise, sound business strategy, and good management.
The FSR is constrained by high sovereign credit risk (notwithstanding the moderate improvement), considerable asset concentrations, and the increase in non-performing loans (NPLs)—although these remain fully provisioned. The still weak economic conditions and the challenging operating environment are also constraining factors. The Outlook for the FSR remains ‘Stable’. The Support Rating of ‘3’ (also affirmed) reflects a high likelihood of support in case of need from the Central Bank of Egypt (CBE).
Egypt succeeded in meeting the IMF’s preconditions to qualify for much needed financial assistance to support economic reforms and ease pressure on foreign exchange reserves and foreign currency liquidity in the local market. Although the programme should provide some respite for the government by stabilising the country’s foreign exchange reserves and alleviating foreign currency shortages, CI Ratings considers implementation risk to be high given the depth and socially-sensitive nature of many of the planned reforms.
The flotation of the Egyptian Pound (EGP) in November 2016 (one of the conditions imposed by the IMF) has increased foreign currency inflows into the Egyptian banking system. Egypt has now scrapped the last major control on capital transfers by lifting a $100,000 monthly limit on individual bank transactions. Egypt put in place strict controls on the movement of foreign currency after the 2011 political uprising in an effort to limit the flight of capital.
CIB continues to command an important position in the Egyptian market as one of the largest and most successful private sector banks. The Bank’s corporate banking business is well-entrenched, while its growing consumer banking operation continues to bring diversification to risk assets and revenue streams. Despite the strength bestowed by the business franchise, CIB’s risk profile remains vulnerable in the context of ongoing high sovereign risk, as well as elevated credit risk, particularly in the corporate sector. In this regard, the Bank’s solid track record and effective risk management bode well in the face of difficult operating conditions.
Although the EGP devaluation itself has so far had a minor impact on CIB, the credit risk of corporate borrowers reliant on imported materials and equipment facing higher import costs could rise. This in turn may push up NPLs and/or restructured loans. While the NPL accretion rate accelerated in 2016 due to the devaluation—which saw USD denominated legacy NPLs increase in EGP terms—and partly due to ongoing credit stress, loan-loss reserves continued to provide more than full coverage of impaired loans, including an effective buffer for latent credit risk.
CIB’s capitalization is maintained at a satisfactory level, although this is partly a reflection of the low risk weight applied to government securities. Having seen capital adequacy fall in 2016 due to an increase in credit risk-weighted assets—related to significantly higher EGP values of foreign currency loans after the exchange rate flotation—the CAR was restored to a satisfactory level in Q1 2017.
Capital buffers remain adequate driven by a good internal capital generation rate coupled with a moderate dividend pay-out ratio. However, the ratio of total capital to total assets retreated further in 2016 denoting increased leverage. If necessary, dividend policy can continue to be adapted to ensure sufficient capital growth to maintain and/or increase CAR.
Profitability remains CIB’s major area of strength reflecting robust gross income generation capability and excellent operating efficiency. Earnings continue to be driven by exceptional levels of net interest income from high yielding government securities. Indeed, the ROAA of all Egyptian banks as a group has reached record levels in recent periods benefiting from investment in domestic sovereign paper post 2011.
CIB’s profitability metrics at almost all levels were close to the best in the market. Crucially, boosted by ongoing high net interest income and non-interest income (NII), the Bank’s operating profitability remains strong and capable of withstanding considerably higher risk charges. NII benefits from multiple revenue streams especially fees and commissions and, to a lesser extent, gains from trading government securities as well as forex gains.
Notwithstanding the beneficial impact of the flotation of the exchange rate and the latest favourable assessment by the IMF of the country’s economic adjustment programme, the liquidity of CIB and all other Egyptian banks remains vulnerable to systemic risks in the event of an adverse sovereign or political risk event. This is particularly the case with respect to foreign currency liquidity. Nonetheless, the Bank’s sound overall liquidity was largely stable with key ratios among the best relative to peers, mainly due to the lower share of loans in total assets and, conversely, the moderately higher (though reducing) proportion of government securities. While the liquidity of government bonds has reduced over the years due to heightened political and economic risk factors, treasury bills remain liquid instruments in the marketplace and may be repurchased by the CBE.
As the largest private sector bank in Egypt, CIB holds significant market shares of loans and deposits. In its origins the Bank was primarily a corporate bank but has gradually transformed its business model over the years by growing its retail franchise as the Egyptian retail banking market has developed. Apart from a representative office in Dubai, CIB’s balance sheet is overwhelmingly domestic in nature. The Bank’s shares are the most actively traded among blue chip companies in Cairo and its ownership is widely held. As at end Q1 2017, the Bank’s total assets were EGP 273 billion ($15 billion) and total capital was EGP 22 billion ($1.22 billion).