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Commercial International Bank ratings affirmed; outlook revised to stable from negative

August 20, 2014

Capital Intelligence (CI) has announced that Commercial International Bank (CIB)'s Financial Strength Rating (FSR) is maintained at 'BBB-', notwithstanding ongoing economic pressures and the high sovereign risk related to a balance of payments and/or currency crisis.

"The FSR is supported by CIB's still sound loan asset quality (despite signs of stress), strong and rising profitability at both operating and net levels, high liquidity and good capital adequacy. Although Egypt's operating environment remains challenging, CIB has maintained sound risk metrics thanks to adept balance sheet management and its capacity to absorb unexpected losses has increased.  Accordingly, the Outlook for the FSR is revised to 'Stable' from 'Negative'.  The Bank's Long and Short-Term Foreign Currency Ratings (FCR) are maintained at 'B-' and 'B', respectively, constrained by Egypt's Sovereign FCR ('B-'/'B'/'Stable').  The FCR denote significant credit risk, as the Bank's capacity for timely fulfillment of financial obligations is vulnerable to adverse changes in the operating environment and economy. The Support Level of '3' (affirmed) reflects a high likelihood of support from the Central Bank of Egypt (CBE) in case of need.

"Economic and political risk factors in Egypt continue to weigh negatively on the operating environment and all Egyptian banks as a group.  Although the political climate appears to be stabilising and the violent unrest has somewhat abated following the recent presidential election, the sovereign risk related to a balance of payments and/or currency crisis remains high. The operating environment is expected to remain difficult and credit risks significant notwithstanding the financial support received from Gulf Cooperation Council (GCC) countries. That said, the government's recent announcement of much-needed economic reform is a step in the right direction following years of inaction.

"CIB's demonstrated track record and effective risk management bode well in the face of a difficult economic and credit environment. The Bank has a commanding position in the Egyptian market as one of the largest and most successful private sector banks. Its corporate banking business is well entrenched, while its growing consumer banking operation has brought diversification to risk assets and earnings. Notwithstanding the strength bestowed by the business franchise CIB's sound credit metrics remain vulnerable in the context of heightened credit risk, particularly in the corporate sector.  Non-performing loans (NPLs) rose further in 2013, albeit at a reduced pace compared with a year earlier, and renegotiated loans remained elevated. These trends point to ongoing stress in the credit portfolio and the strong likelihood that impaired loans may rise further over the near term.  The NPL ratio however remains at an acceptable level while loan-loss reserves continued to yield more than full coverage of NPLs.  Moreover, the Bank's risk absorption capacity has strengthened markedly in recent years and could withstand higher risk charges if necessary.

"The balance sheet remains well capitalised, reflecting high internal capital generation coupled with a moderate dividend payout ratio. CIB's capital buffers remain more than adequate. Despite decreasing, the ratio of total capital to total assets is sound. The Bank's solid earnings profile combined with consistently strong internal capital generation has provided the resources to grow risk weighted assets over the years. Operating profit advanced significantly in 2013, as did net profit notwithstanding the sharp rise in loan provisions, boosted by a marked rise in net interest income from an expanded T-bill portfolio and higher non-interest income.

"The local market is characterised by a shortage of foreign currency reflecting the significant depletion of the country's international reserves. Although payments of letters of credit are permitted once the commercial transaction has been verified, there are restrictions on the transfer and withdrawal of foreign currency deposits by individuals and corporates. Clearly, there are systemic risks to liquidity in the event of an adverse sovereign and political event. This is particularly the case with respect to foreign currency liquidity as net official foreign currency reserves would be depleted, at the same time that the conversion of deposits from local currency into foreign currency, as well as cash withdrawals, would also be expected to rise.

"Driven by sustained growth in customer deposits, CIB has redeployed surplus funds from treasury bills into higher yielding longer dated Egyptian treasury bonds. While liquidity ratios remained good, the marketability of government bonds has somewhat reduced amid rising political tension and weakened sovereign risk metrics. Given that government bonds are held as available for sale CIB's holdings of sovereign debt are susceptible to valuation losses."

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Source: CPI Financial

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