Fitch confirms that Commercial International Bank is “B+”; Stable outlook

Fitch Ratings confirmed International Commercial Bank (Egypt) SAE. (CIB) long-term issuer default rating (IDR) at “B+” with stable outlook and viability rating (VR) at “b+”.

A full list of rating actions is below.

Fitch has removed CIB’s support rating and support rating floor as they are no longer relevant to the agency’s coverage following the publication of its updated bank rating criteria on November 12, 2021. In accordance with the updated criteria, we have assigned CIB a Government Support Rating (GSR) of “b”.

Main rating factors

CIB’s IDRs are determined by its standalone creditworthiness, as expressed by its RV. The RV is constrained by the bank’s significant exposure to the Egyptian sovereign through the holding of sovereign securities (40.5% of total assets at the end of 2021), loans to public sector companies (7.5%) and sales at Central Bank of Egypt (EPC; 7.5%). CIB’s total sovereign exposure, including the CBE, was 5x the bank’s equity at the end of 2021.

The RV also reflects CIB’s strong franchise, resilient asset quality, strong profitability, adequate capitalization, stable funding and FX liquidity (CF) pressures. The stable outlook reflects Fitch’s view that pressures on the domestic banking environment are manageable, mitigating risks to Egyptian banks’ financial metrics.

Strong franchise: CIB is the third largest (private) bank in Egypt with a 5.6% share in banking system assets at the end of 1Q22. CIB has a strong revenue-generating franchise, primarily focused on business, but also has a strong retail segment serving 1.7 million customers.

High concentration and exposure to market risk: CIB net lending averaged 30% of total assets in 2018-1Q22 (sector average: 35%); however, the concentration of a single obligor is high, with its 20 largest loans accounting for 55% of total loans at end-2021.

Market risk exposure is high with around 90% of the securities portfolio being carried at fair value through other comprehensive income (FVOCI), making the bank sensitive to rising interest rates which led to significant losses charged to the bank’s equity (-6% of equity in 1Q22; -5% in 2021).

Resilient asset quality: CIB’s Stage 3 (impaired) loan ratio was 5.0% at the end of 1Q22 (5.1% at the end of 2021), below the average for private banks rated by the Fitch of 7.1% at the end of 1Q22 (5.2% at the end of -2021). The ratio increased by 4.3% at the end of 2020, mainly due to the effects of the pandemic on the tourism and trade sectors.

A large reserve coverage of Stage 3 loans (217% at the end of 2021) provides solid protection against the potential generation of problem loans. A high share of non-loan assets with sovereign credit risk underpins our assessment of the bank’s asset quality. Fitch expects asset quality to remain CIB’s rating strength in the near term.

Strong profitability: CIB’s profitability has been resilient throughout the cycle. Its operating profit/risk-weighted assets (RWA) of 8.1% in 2021 (7.6% in 2020) is significantly above the Fitch-rated peer average of 4.6%. High net interest income and margins, with a stable low cost/income ratio and moderate loan impairment charges support CIB’s profitability.

Adequate capitalization: CIB’s common equity Tier 1 (CET1) ratio decreased slightly to 23.1% at the end of 2021 (23.7% at the end of 2020) but remains well above the sector average of 13.4%. The decline was driven by 17% RWA growth in 2021, while capital generation was dampened by market value losses on the bank’s FVOCI equity portfolio (-5% of total equity in 2021). We believe that CIB’s capital ratios are adequate, but the bank’s significant concentrations and high exposures to sovereign and market risk pose threats to capital.

good funding base; Liquidity pressures FC: CIB has a favorable funding mix with retail deposits amounting to 54% of the total at the end of 1Q22. Like its domestic peers, CIB is exposed to the deterioration of egypt external liquidity position, as 28% of its deposits were in foreign currency (CF) at the end of 1Q22. Net liquid assets in CF (cash and net interbank assets in CF) covered 47% of CF deposits at the end of 1Q22, increasing the reliance on the performance of the bank’s CF loans. Its liquidity coverage and net stable funding ratios (LCR and NSFR) in CF were comfortable at 271% and 171%, respectively, at the end of 1Q22.

Rating sensitivities

Factors that could, individually or collectively, lead to a negative rating action/downgrade:

CIB’s ratings would be downgraded in the event of a sharp deterioration in operating conditions affecting asset quality and, therefore, profitability and capitalization, or in the event of intensified pressures on FC liquidity. A downgrade of egypt sovereign rating would also lead to a downgrade of the bank’s ratings.

Factors that could, individually or collectively, lead to positive rating action/improvement:

An upgrade in CIB’s ratings would require an upgrade of egypt sovereign rating and a marked improvement in the operating environment.

OTHER DEBT AND ISSUER RATINGS: KEY RATING FACTORS

CIB’s national ratings reflect the bank’s creditworthiness relative to that of other issuers Egypt and are motivated by autonomous solvency. Ratings benefit from consistently strong financial metrics throughout the economic cycle and are at the high end of Fitch’s national scale.

The IPC GSR of “b” reflects a limited likelihood of support from the Egyptian authorities. We believe that the Egyptian authorities have a strong propensity to support domestic banks due to the sector’s importance to the country’s economy and development plans, but the support capacity is weak.

Fitch considers CIB to be a national systemically important bank (D-SIB) and its GSR is therefore in country D-SIB GSR of “b”. This reflects the systemic importance of CIB as a egypt leading private sector bank with approximately 6% market share of banking system assets and deposits.

OTHER DEBTS AND ISSUER RATINGS: RATING SENSITIVITIES

CIB’s GSR is sensitive to changes in the ability or willingness of Egyptian authorities to provide support.

VR ADJUSTMENTS

The business profile score of ‘b+’ is lower than the implied category score of ‘bb’, due to the following adjustment reason: business model (negative).

The capital and leverage score of ‘b+’ is lower than the implied score of the ‘bb’ category, due to the following adjustment reason: calculation of leverage and risk weight ( negative) and risk profile and business model (negative).

The funding and liquidity score of “b+” is lower than the implied score of the “bb” category, due to the following adjustment reason: liquidity FC (negative).

Best/Worst Case Evaluation Scenario

Global credit ratings of financial institutions and covered bond issuers have a best-case scenario for a rating upgrade (defined as the 99th percentile of rating transitions, measured in the positive direction) of three notches out of a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured negatively) of four notches over three years. The full range of best-case and worst-case credit ratings for all rating categories ranges from ‘AAA‘ to ‘D’. Worst case and worst case credit ratings are based on historical performance. For more information on the methodology used to determine sector-specific best and worst-case credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR A MOSTLY MATERIAL SOURCE CITED AS A KEY SCORING FACTOR

The main sources of information used in the analysis are described in the applicable criteria.

Public ratings with credit link to other ratings

CIB’s GSR of ‘b’ is derived from the sovereign rating and is linked to the creditworthiness of the sovereign.

ESG considerations

Unless otherwise specified in this section, the highest level of ESG Credit materiality is a score of “3”. This means that ESG issues are credit neutral or have minimal credit impact on CIB, either due to their nature or the way they are managed by CIB. For more information on Fitch’s ESG materiality scores, visit www.fitchratings.com/esg.

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