Hashim on CIB and a New Egypt: “The Worst is Very Much Behind Us”

Euromoney, August 2015 

Behind Hashim Ezz Al-Arab’s desk at the Commercial International Bank headquarters in Giza, among the usual paraphernalia of flags and family photos and portentous front pages of Time, is an unusual picture. It’s a man with his back to the lens holding an axe across his shoulders, beneath the title: PREPARATION. Beneath it is a message. “If you have a day to chop down a tree, spend half a day sharpening the axe.”

Al-Arab, chairman and managing director of Egypt’s biggest private sector bank since 2002, likes the image because it’s somewhat unegyptian. Lately, in particular, preparation hasn’t really been the watchword in Egypt, so much as action, sometimes without fully thinking through the consequences. Since uprisings began against President Hosni Mubarak in January 2011, the country has undergone two separate revolutions, the trials and imprisonment of two successive premiers – one with a death penalty – and waves of differing approaches to policy, reform and religion.

Yet Egypt today looks, with some reservations, to be pointing in the right direction, with rating agencies revising upwards rather than downwards, a government apparently committed to fiscal reform, and something approaching political stability. CIB, always very much a proxy for Egypt itself, has enjoyed a stellar 12 months as its own numbers have improved with the country’s.

For the first time in years there is a sense of people being able to pause and take stock. Al-Arab addressed it in his chairman’s note to the bank’s latest annual report. “Having now passed through the crucible, it is inarguable that those who have lived and worked here… in the period 2011-2015 are exceptionally lucky,” he wrote. “Those fortunate enough to have worked in Egypt in the past four years have gained experience and had both their skills and their world views tested in a way that harkens back to the builders of the modern Egyptian nation. History will one day record this as the Greatest Generation in the Arab world.”

If that’s true, then does he feel lucky to have been a bank chief executive through this period of upheaval? “Yes. Definitely,” he says. “Living through it is tough, but afterwards, looking back, it’s like watching a movie. It’s exciting and scary when you’re in the middle of it, with high blood pressure, but when it’s over everyone is smiling and laughing and thinking of buying ice cream.”

And is it over? “The worst,” he says firmly, “is very much behind us.”

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CIB’s numbers support this view. First quarter results, released in May, showed 38% year-on-year growth in net income, 47% in revenues, with 8% loan growth in the quarter and 11% in deposits. It boasts 32.1% return on average equity, has tier 1 capital worth 16.5% of risk-weighted assets, and is growing everywhere from retail banking to trade services.

It’s fair to say that Egypt didn’t look like this a few years ago, when concerns were not about eking out a few more basis points in the efficiency ratio, but rather working out whether the banking system could function at all.

When Al-Arab looks back to the days around the revolution, he talks about “ground zero”: his term for the day when the bank reopened after several days of being shut down. It was a confusing and eerie time: mobile phones and internet were not working, and the immediate priority was security. Indeed, before ever even getting into the bank, he recalls being called by a neighbour on his house’s intercom and enlisted into the neighbourhood watch. “I found myself responsible for the whole southern part of Zamalek,” he says, referring to the island in the Nile that sits between Cairo and Giza. “I remember thinking: how are we going to do it? But surprisingly, less than two hours after sunset, it was all organised.” He found himself on the street with a rifle that had been intended for recreational duck shooting, though he only had cause to fire a few warning shots.

Local concerns about security were mirrored with the bank branches. “On ground zero when we reopened, when we were expecting people to walk into the branches to withdraw or deposit money, or to deal with paying salaries for corporate customers, we had to make sure that we secured all the ATMs and branches. And our staff who were living next to branches with no police: we had to arrange security for them too.”

Then, gradually, normal processes returned. “It was quite an interesting process, from ground zero all the way up to deciding how you’re going to deal with clients who are affecting by the shutdown in the country without forfeiting the right standards for doing business. Are we going to stand by tourism, the hotels? How are we going to reschedule debts without breaching credit standards? What’s the best way to go about it? We came up with structures, found equity partners who were wiling to reduce debt. And everyone who did that, they are perfectly all right now, because things have changed.”

Total provisions went from EGP9 million in financial 2009 and EGP6 million in 2010 to EGP321 million in 2011, EGP610 million in 2012 and EGP916 million in 2013. “Our stock price went down by something like 50%,” he says. “I’m an investor, because a large part of my pay comes in stocks. Most of my managers and employees are aligned with shareholders in this way, and we were all sitting and watching. Some people recommended: let’s do a stock buyback. Well, doing a buyback is like saying I have no better use for your cash. I’m not a cash cow.”

Instead, CIB started putting money back into the business early on after the revolution. In March 2011 the board got together and tried to look ahead. “We knew the political changes would take three to five years,” he says. “Let’s let the market settle down, absorb the shocks and see how things will develop.” A decision was made to invest in people. “By December 2011, people were looking at us and saying: are those guys coming from a different galaxy? I started to get questions. Why are you hiring? Why are you buying branches?”

“Some shrewd investors say you should invest when there is blood on the streets. But it’s not the case here. We invest because we have nowhere else to go. Either we make it or break it. If you want to invest when things go back to normal, you will miss the boat. Better to invest early and when things get back to normal you are ready.”

He believes that CIB “created the momentum at that time,” and believes others followed their lead by buying and setting up branches through 2012. And, while the broader political environment has hardly been seamless since, with a second revolution following in 2013, Egypt’s fundamentals do look much better now. Indeed, if anything, it is surprising to see bank-wide NPL ratios at below 9%, and at CIB, below 4%.

Partly this is a function of writeoffs. “You keep writing off,” he says. “Each of the banks have a policy. Either you collect  – and when you collect you do so in cash or in kind, and if in  kind, you have to revalue; or you have to write off. Writing off is part of keeping the numbers where they are.”

But there is more to it than that. Egypt turned out to be unusually well equipped to survive a shock to its economy. “Corporate Egypt, even before January 2011, was underleveraged,” Al Arab says. “And that’s what helped it to sail through that time.” This, in turn, dated back to banking sector reforms from 2004, which in turn passed through to customers. “So banks went into the financial crisis in 2008 and political turbulence in 2011 on reasonably solid ground.” A credit bureau, launched in 2008, also helped with delinquency.

There’s also the fact that no economic data about Egypt tells the full story anyway. “The grey economy is quite large in this country, which you don’t see in the DGP numbers,” he says. “It’s not like Greece, where you have problems with an inflated number; here, the numbers are underestimated. Our assessment is that the grey economy is as big, if not larger, than the real economy.” The term does not have negative connotations in Egypt in the same way it might elsewhere. “Grey is not black,” he says. “It’s dentists who get paid in cash. The small grocery shops, the guy who irons your shirts.” This grey economy barely missed a bit through either the financial crisis or the revolutions; it carried on regardless, and consequently kept a lot of people afloat who the numbers would suggest might go under.

It’s for reasons like this that Al Arab considers the consumer one of the two great opportunities in Egyptian banking today, the other being infrastructure. Today, institutional banking is 70% of the business and retail only 30, but it is likely that could change, particularly if the government succeeds in bringing some of that grey economy into the mainstream. This is part of the reason for a drive towards electronic payments at a government level. “You will reach a point where the government doesn’t deal with cash,” he says. “You want to deal with the government? You go electronic, so you have to come through a bank.” Earlier this year CIB bought a retail card business from Citi, partly in recognition of this trend. Al-Arab sees particular potential in mortgages, both at the bank and for Egypt generally. “Home ownership is very important for social responsibility.”

If investors and rating agencies have a concern about banking, and about CIB, it is about the proportion of funds the bank invest in government securities. In December 2014, the bank’s investments in government securities accounted for 45% of assets and close to seven times their equity. “This high concentration is a key risk which links the banks’ solvency with the sovereign’s credit risk profile,” says Melina Skouridou, analyst at Moody’s. That’s not necessarily a good thing: although Moody’s did upgrade Egypt earlier this year, to B3, the first upward notch after six downward ones in previous years, the economy still faces clear risks, not least around security.

Consequently, while Skouridou calls CIB “one of the highest rated banks in Egypt in terms of standalone strength” and “one of the most financially sophisticated banks in Egypt”, it, too, is rated B3.

It’s easy to see why this path has been taken. Government securities offer a very high yield. “Banks are doing the easiest job in the world in this country,” says Ahmed Abou El-Saad, chairman of Rasmala Egypt Asset Management, half-joking. “Lend to the government at 13 or 14%. It’s a safe haven.” It’s largely thanks to these investments that first quarter revenues grew by 47% to EGP2.6 billion, and net income grew 38% to EGP1.1 billion.

But some don’t think it’s the best way to run a bank, and certainly not the best way to serve a country. “It’s a lazy way of banking, just lending to the government,” says one analyst in Cairo. “That money could be doing a lot more for Egypt.” He thinks that the approach makes this and other private sector lenders reminiscent of state banks, in that they follow instruction from the central bank to lend to them.

Asked if he sees a problem, Al-Arab gives a resounding “No!” “I told the guys from the rating agencies I have two options,” he says. “If you come in and put down your deposit, but she [he points to communications officer Nadine Assaad] doesn’t want to borrow, I have a mismatch. So with that leftover money, I can leave it in the vault, or go and lend it to the government and buy government securities. Are shareholders happy with that? They are happy, we are happy, but the rating agencies are not. Well, they don’t pay my salary.”

It’s not as if he’s buying foreign currency debt and creating a vulnerable exposure, he says. But rating agencies feel that this artificially inflates the capital buffers that Egyptian banks report; they would like to see greater diversification, while others would like to see the money lent out to the private sector instead.

Over his years at the top of CIB, the competitive environment around it has changed. French banks have pulled out, Qataris and Emiratis moved in. In fact, CIB has always had an international element to it: it was initially established as a joint venture between National Bank of Egypt and Chase Manhattan, and over the years has had foreign private equity involvement from Ripplewood and Actis; today, one of its major shareholders is the Canadian Fairfax group. Al-Arab himself has worked at both Deutsche Bank and JP Morgan. “At the time of its establishment, the bank benefited substantially in terms of governance, credit culture, procedures and human capital from Chase Manhattan,” says Skouridou, “a legacy that remains with the bank.” Al-Arab describes it as “a unique culture, part of the DNA of the institution. We are the multinational of the local market.”

It’s also unusual for the scale of its free float, over 90%, which makes it truly vital to a stock market that is one of the oldest in the world and was once of the largest, but today is a shadow of its former self following delistings. He would like to see more look like CIB. “That’s the problem for us. I don’t like to be the single stock. I would love to see the government listing companies rather than privatising. At least take banks and list them so there is not just one bank listed on the stock exchange with a big free float. Make it like the old days, when there used to be Egyptian American Bank, CIB, Suez Canal Bank. Those that are listed need to increase their free float. Their core investors have to let go. Don’t throw the entire burden on CIB.”

Reflecting on what he learned from the crisis era, he says: “Not everything shining is gold. There were a lot of things that I thought were one thing and later on realized were different. But there were very interesting lessons, both personal and business.”

And, while not everyone is convinced that Egypt’s stability is here to stay – the Islamist party that was ousted in 2013 had been democratically elected and is unlikely to be cowed forever – Al-Arab is looking forward under the existing administration and planning ahead. “One bank I respect, and would like CIB to be like, is Garanti in Turkey,” he says. “We studied it.”

“I remember our discussions in 2011,” he concludes. “We told the staff: there is going to be a roller coaster ride. If you want to enjoy it, fasten your seatbelt, there are going to be three to five years of ups and downs. Don’t get too pessimistic on the way down, don’t get too optimistic on the way up.”