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Change at the CIB in Egypt: Reassuring fundamentals

Jitters on the stock exchange after the resignation of the chairman of the Commercial International Bank will not affect its strong market position

Sherine Abdel-Razek , Wednesday 28 Oct 2020
CIB: Reassuring fundamentals
photo: Reuters
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Shares in Egypt’s largest private-sector bank, the Commercial International Bank (CIB), ended in the red on Monday for the second consecutive day. But the decline was limited in relation to the fuss caused by the resignation of long-time Chairman Hisham Ezz Al-Arab in the business arena.

The CIB is Egypt’s largest private commercial bank with regard to the value of assets. As a stock-market bellwether, it has a major weight on the Egyptian Stock Exchange’s EGX30 Index, representing around 43 per cent of an Index that is considered the market’s main gauge.

The bank also has substantial foreign holdings, and its shares are traded as global depository receipts (GDRs) on the London Stock Exchange. GDRs in London fell by 17 per cent on Thursday, but then rebounded on Friday after plunging more than 40 per cent on the morning of the same day. 

“Everyone in the financial arena was taken by surprise. Bankers were shocked that an internationally known colleague with a success story in managing a bank like the CIB should end his career in such an abrupt and humiliating way,” said one investment banker who asked not to be named.

Those working in the stock market have concerns about not only the effect the move might have on CIB shares and GDRs, but also on the market as a whole as the CIB is one of the main EGX30 constituents, the banker said.

The CIB received a letter from the Central Bank of Egypt (CBE) on 22 October firing Ezz Al-Arab in accordance with Article 144 of the CBE and banking law.

The letter cited “serious violations” of Egypt’s recently-enacted banking law and the CBE’s rules and regulations. It also referred to a “severe deficiency” in the bank’s internal audit environment, which had resulted in “huge financial losses” that could be described as “financial crimes”.

Ezz Al-Arab stepped down from his responsibilities as chairman and managing director of the CIB immediately. The bank’s board of directors convened later on the same day for an emergency meeting where they decided to appoint Sherif Sami to replace Ezz Al-Arab.

Ezz Al-Arab’s duties as managing director will be taken on by the current CEO Hussein Abaza, while his tasks as chairman will be taken over by Sami, the current non-executive chairman of the bank and a former head of Egypt’s Financial Regulatory Authority.

On Friday, the CBE released a statement saying that the CIB remains financially sound and that depositors’ money is secure. The CIB board was committed to formulating a “corrective plan”, the statement said.

Bank top executive Hussein Abaza fielded a conference call on Friday that was followed by 500 analysts, shareholders, and bankers. Abaza said he did not know the reasons for the move, but assured investors that the “CIB is not facing any potential credit risk or any risk observable by the CBE” and that “there’s nothing to worry about regarding our financial position.”

He added that key corporate clients of the bank had been contacted and stressed that Ezz Al-Arab had not committed any kind of financial misconduct. Ezz Al-Arab has been chairman of the bank since 2002 and is a well-known banker in the Middle East and North Africa (MENA) region.

The nature of the “financial crimes” the CBE referred to is thus not known, and in the conference call the bank’s management said there had been no crimes or fraud or significant financial losses, since had this been the case the bank’s CEO, board, and management team would also have been in the firing line.

Egypt’s new banking law gives the CBE the right to dismiss one or several board members of private banks, and it can oblige them to increase deposits with the CBE beyond the current 14 per cent or impose financial penalties.

According to Prime Securities, a brokerage, over the last three or four months, some two or three bank chairmen have been removed. “It is not an isolated incident. But it had the most impact because other banks had no foreign investments and nor were they listed so they went unnoticed,” it said.

Regarding the impact of the move on the bank’s performance, the anonymous investment banker said that its balance sheets and key performance indicators were very reassuring. “Although Ezz Al-Arab was a great banker, the CIB’s management is not a one-man show, and all the top executives are still in their positions. So, no drastic changes are expected,” he said.

No investment bank has so far downgraded its recommendation or target price for CIB shares. However, until the financial impact of the move, if any, is known and made public, there remains a risk that the CIB could be subject to other sanctions, depending on the findings of the CBE’s investigations, according to brokers Pharos Holdings.

Asking the CIB to increase its interest-free deposits with the CBE is the kind of demand that might end up in less utilisation of CIB funds, which could dent profitability in the near term. Prime Securities cut its estimates for the bank’s 2020 net profit by 17 per cent from LE11.2 billion to LE9.3 billion in view of potentially higher provisions of LE4.8 billion, versus LE2.7 billion previously, in line with CIB management guidance.

The CIB has so far put aside more than LE3 billion in provisions this year, and it is planning on finishing the year with LE4-5 billion in provisions on expected profits of LE8-9 billion.

During the conference call, Abaza said that the bank had worked on what the CBE had previously referred to as “compliance issues” since it started its audit process in late 2019. It had changed its head of compliance and added an international anti-money laundering and anti-terrorism unit.

“While there might still be weaknesses, these are by no means disastrous,” he said.

 

*A version of this article appears in print in the 29 October, 2020 edition of Al-Ahram Weekly

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