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Edited Transcript of COMI.C earnings conference call or presentation 5-Nov-19 2:00pm GMT

Q3 2019 Commercial International Bank Egypt SAE Earnings Call

Giza Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Commercial International Bank Egypt SAE earnings conference call or presentation Tuesday, November 5, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hussein Abaza

Commercial International Bank -Egypt S.A.E - CEO & Director

* Yasmine Hemeda

Commercial International Bank -Egypt S.A.E - Head of IR

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Conference Call Participants

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* Aya Abdellah

CI Capital Research - Junior Analyst

* Aybek Islamov

HSBC, Research Division - Analyst

* Louis Chetty;STANLIB;Portfolio Manager

* Monsef Morsy

CI Capital Research - Sector Head of Financials

* Moon Surana

Harding Loevner LP - Analyst and Portfolio Manager

* Naresh N. Bilandani

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to CIB's Third Quarter 2019 Earnings Call. I will now hand over to your host, Monsef Morsy. Please go ahead.

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Monsef Morsy, CI Capital Research - Sector Head of Financials [2]

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Thank you, Alia. Good morning, and good afternoon, everyone. This is Monsef Morsy. On behalf of CI Capital, I would like to say that we are pleased to be hosting CIB's earnings call this quarter, and thank everyone, for joining us today.

With us online is Mr. Hussein Abaza, CEO and Board Member; Mr. Sherif Khalil, Chief Communications Officer; and Ms. Yasmine Hemeda, the Head of Investor Relations; and Ms. Nelly El Zeneiny, Investor Relations Officer.

Without further delay, I pass on the call to management. Yasmine, please go ahead.

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Yasmine Hemeda, Commercial International Bank -Egypt S.A.E - Head of IR [3]

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Good morning, and good afternoon, everyone. This is our customary disclosure statement. This call is intended for investors and analysts only. As such if any media representatives has gained access to this call, kindly hang up now.

Certain information disclosed during this conference call consists of forward-looking statements reflecting the current view of the bank with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the actual results, performance or achievements of the bank to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including worldwide economic trends, the economic and political climates of Egypt, the Middle East and changes in business strategy and various other factors. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may materially vary from those described in such forward-looking statements. The bank undertakes no obligation to republish, revise forward-looking statements to reflect changed events or circumstances. And that ends the disclaimer statement.

I'll now hand it over to Mr. Hussein Abaza to give a brief presentation of the Q3 results.

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [4]

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Good morning and good afternoon, everybody. Thank you very much for dialing in. I think Q3 was pretty much a continuation of the year. The high points really were the 2 interest rate cuts that happened in August and in September. So we're now to 350 basis points for the year. This is the third interest rate cut. And I think the significance of the cuts is not just the magnitude, but rather that we had 2 consecutive interest rate cuts in 2 consecutive months and 3 for the year. So it does show continuity and it shows consistency on the part of the Central Bank. So I think we're well underway to what we will hope will be a very good year for CapEx next year. I think most expectations is maybe for another cut this year, and a fifth cut the first quarter of next year.

Other than that, we've also seen very healthy dollar inflows into the economy, both from tourism; remittances; the Zohr gas field is still producing as expected; Suez Canal revenues are high; and we are still seeing carry trade funds coming into Egypt. So on the one hand, reserve numbers are looking good. And we're also seeing the Egyptian pound strengthening slightly against the U.S. dollar.

Finally, in terms of the bank, as we've been telling you for a long time, we have been expecting these interest rates cuts, we've been hoping for them. And as they finally happened, we have been positioning the balance sheet to take advantage of them because for a bank like CIB where a lot of our income has been coming from sovereign paper, the tricky part or the tricky phase for us is when sovereign rates or sovereign yields start falling, but they haven't yet fallen to the stage where corporates are picking up the stack. So this is the period we're currently in. And this is the period where you would expect to see net interest margins of these banks falling. However, what we did, as most of you who know us would know, we have been lengthening duration on our sovereign paper, both in the form of bonds and buying longer-term bills, while shortening the duration of liabilities. So every time there's an interest rate cut, the following months, we would see liabilities. Most of our liabilities repricing because they're quite short term, while our assets being bonds and longer-term bills, hence, steady. So the first interest rate cut that happened in February, we had NIM expansion immediately afterwards in March. The same thing happened August. We had an expansion in September. And I happen to see the October numbers, they also show an expansion following the September rate cut.

So all in all, I think, we're in a very good position in terms of positioning the balance sheet. However, I think now the future is the CapEx lending and the corporate lending taking off as interest rates continue to come down. And so basically, it's back to, really, core banking. I think this is -- for those of you who've been meeting with this, this is probably the first time I've said this, it really is back to core banking for a long, long time.

Just a quick round-up of results. We -- our local currency loans grew by 14% for the 9 months. Our foreign currency loans in dollar terms are absolutely flat. However, because of the devaluation, they dropped but our blended -- had we not had the devaluation, we would have had a blended loan growth of around 7%. Today, our guidance is for about 20% local currency loan growth because this is where the profitability is made and this is where everything is big. It's not 20% blended loan growth. It's 20% local currency loan growth. Our deposit growth on the local currency side was 18%, again -- and this has been our main strategy and the main strategy moving forward, is to bring in cheap local currency deposits, lend out what we can, invest in sovereigns and using the maturities to sort of make the profits.

Our bottom line profits are EGP 8.5 billion. And I think we're bang on track to meet our target of EGP 11.4 billion for the full year. I think with that, as I said, our net interest margin, our blended is 6.3% for the 9 months. For the last quarter, stand-alone, which is 6.4%, and this is the blended one, the Egyptian pound, net interest margin is north of 8% in both -- it's about 8.54% for the full year.

I think definitely it's better if I open it up for Q&A, and we take it from there. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Moon Surana, Harding Loevner.

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Moon Surana, Harding Loevner LP - Analyst and Portfolio Manager [2]

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I had a question on business banking, has seen a strong growth year-to-date. On the other hand, institution has been flat. So I'm trying to understand the diversions here.

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [3]

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Yes. I think -- okay, I think, on the local currency side, we've seen big growth in both. The institutional looks flat because all of the dollar exposure is in institutional, and it's actually gone down because of the devaluation. But on an actual currency to currency, a lot of the growth is coming in institutional banking. But it's because business banking is -- it's only in local currency so it's not -- and it's off a small base, that you can see the difference. So the primary driver is institutional bank -- corporate banking. It's just the currency and the lack of breakdowns and then the devaluation effects are giving it a slightly -- on a gross number, it doesn't look accurate.

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Moon Surana, Harding Loevner LP - Analyst and Portfolio Manager [4]

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I had another question on asset quality. There was some increase in NPLs during the quarter. Could you provide some color on that, please?

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [5]

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Yes. There were 4 companies that had been on the watch list for longer than 9 months. And they are -- they've been downgraded to NPLs. However, we're still in the stage where we're getting -- so remember, there are 2 things that would cause the company to become an NPL. According to the Basel II and Basel III, more than 90-day delinquency, then it becomes a risk-weighted [8]. In addition, you can have the company that is meeting financial obligations, but has problems that are -- there could be managerial problems, that could be -- they have -- there are certain risks in the industry or in that particular company. And if these continue to be there for longer than nine months, then that company has to also be considered as a nonperforming company.

So these 3 or 4 companies are in a specific industry. They have their own set of problems. And they are meeting their financial obligations, and we are in the process of restructuring them. So that's basically what's happening there.

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Operator [6]

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Your next question comes from Naresh Bilandani from JPMorgan Dubai.

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Naresh N. Bilandani, JP Morgan Chase & Co, Research Division - Research Analyst [7]

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It's Naresh Bilandani from JPMorgan. Just 3 questions, please. So you guide for EGP 11.4 billion for the full year. But clearly, the Q3 momentum across the P&L looks quite strong. And I think given the fact that you are highlighting, we could see some further improvement in the NIMs from you here going into Q4. The first look could imply that you've been conservative on the delivery, so should we kind of expect some extra impairments as you have historically taken going into the fourth quarter? That would be my first question. Second is, how much further rate cuts do you foresee in Q4 and Q1? And where -- do you think we'll reach a tipping point in the first quarter to kick start the CapEx-related loan growth? And if you had to sort of think of where the volume growth levels could be into the next year, if you can share some thoughts on that, that would be super helpful? And finally, the third question is on the deposits. Could you just share some thoughts on the depositor behavior underlying the shift in the deposit mix? I mean, are depositors here trying to lock in the last good interest rates that are still available around? Is that what has led to the shift in the deposit mix? Any thoughts that you could share on that, that would be great.

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [8]

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Sure. I'm very sorry. Yes. So let me them take one by one. For the guidance, I think that we always like to be a little bit conservative, give ourselves a bit of breathing room. And we always like to take healthy provisions. Now again, for those of you who know us well, you know the reasons behind it. It is not tax management, it is because we are the only private sector bank in Egypt that does not have a parent bank behind us, who can, if things go wrong, come in and support. So we always like to be very conservatively provisioned and very conservatively capitalized.

For those of you who remember back in 2016 when we had the devaluation, our loans in foreign currency doubled, but our equity base stayed in Egyptian pounds, and our capital adequacy dropped to about 10% at the time. So we were barely on the border. So we never want to be in that sort of position. We always want to have some extra capital to spare. And it's always good to -- until we actually see the CapEx revival come in, and we see good solid growth, then we will then start taking impairments that are slightly less conservative. So yes, I don't foresee it coming in and showing EGP 12 billion bottom line profit, to be honest.

Secondly, regarding the rate cuts, I probably think -- again, I'm talking about more the consensus from most economists rather than the house view where basically, I think we're expecting maybe another 100 basis point cut this year and maybe 100 to 150 next year depending on how inflation behaves and how the dollar flows into the country, whether through tourism revenues and stuff or through carry trade money continue to come in. So I think that would be then the inflection point at which we will start seeing a lot of CapEx come in, and a lot of it's starting from the multinationals. And it starts basically with replacement CapEx rather than brand-new factories being built. It's more that the CapEx cycle starts with -- there's a certain machine on the line that if I replace either because it's worn out or because of new technology, it will sort of add 40%, suddenly to the line. And that's the lightest form of CapEx, but usually, that's how CapEx cycles start, then companies that have physical space in the factory to put in the production line. And then maybe 1, 1.5 years from the beginning of the cycle and then you have -- let's go out somewhere and build a brand-new factory. And that's when you get genuine FDIs coming into the country. So that's why that CapEx cycle tends to sort of give banks good momentum for 2, 3 and 4 years.

Having said that, I think we're expecting loan growth on the local currency side to exceed 30%. And on the blended to be between 15% and 20%, because, again, we're assuming a flat dollar rate and maybe single-digit loan growth in dollars.

I'm trying to remember your third question --

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Naresh N. Bilandani, JP Morgan Chase & Co, Research Division - Research Analyst [9]

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It was a shift in the deposit mix. I'm sorry, yes, after all the questions.

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [10]

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I should have written it down. On the deposit mix. Again, we're -- definitely, most -- a lot of depositors would want to lock in the rates, however, most banks now are issuing floating rate CDs. So banks are always trying to make sure that they -- nobody wants to be caught out with issuing a 15% 5-year CD today. So it'll probably be linked to some sort of rate that will come down. However, definitely, the behavior of most of the customers is that they don't come in for just one plus of liability. So for example, if somebody gives you EBP 60,000, EBP 70,000, a certain percentage of that will be left in CASA, a certain percentage in [TB] and a certain percentage in CDs. That's the average client. Yes, certain classes will come in and only lock in the CD. But then you're talking about more the sort of elderly who are relying on a certain income to bring them in, so it is very important to keep getting new-to-bank because that's when you keep getting new CASA. And that has been the strategy, will continue to be the strategy moving forward.

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Naresh N. Bilandani, JP Morgan Chase & Co, Research Division - Research Analyst [11]

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Great. And that was very clear. I have a few more questions, but I'll put myself at the later end of the line.

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Operator [12]

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The next question comes from Louis Chetty from STANLIB.

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Louis Chetty;STANLIB;Portfolio Manager, [13]

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I appreciate the time. 3 questions from me. And the third one that probably relates to the first 2 -- just on your pipeline, I guess, in your pipeline or on the lending side more than anything. Can you give us some color on the evolution of the pipeline of new deals? And what sectors you're seeing or expecting to see this coming from? And then the second question is on your watch list. You mentioned it earlier on, there are a few of the -- or that's been driving some of your NPLs. Can you give me -- or give us some color on the evolution of the watch list as well, over and above that, as to whether you're seeing an improvement or deterioration? And then the third question, I guess, linked in to the first 2 is the -- and being from South Africa, we see the news headlines around the social unrest that happened earlier this year. If you could give us some color as to whether that's had a tangible impact on your business and us.

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [14]

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Sure, absolutely. Let's start with the first one, loan growth in the sectors. As I said, look, most of the CapEx loan growth we're expecting to see coming from multinational companies in various sectors. So we're seeing it coming from the consumer companies, the consumer and durables, as I said, some of the construction companies. And the reason behind this is -- a lot of the profitability of these -- of the multinational model is built on the sale of raw materials from the mother company to the Egyptian subsidiary. So a new machine coming in immediately starts paying for itself. And these raw materials are purchased from the mother company in foreign currency on a weekly basis through (inaudible)of credit. So rather than waiting to the year-end and trying to buy dollars and sending off your dividend, this is the much more efficient way. So that the model is inherently built in. Plus when the mother company sells to a subsidiary, there's no SG&A involved, that is a captive customer. So usually, you would expect to see the Coca-Colas, the P&Gs, Nestle's, all these guys are lined up, and they're actually to various degrees and various amounts. But it is -- this is where we've seen the first push coming from the multinationals.

Secondly, regarding our watch list, I would imagine, once we start seeing the loan growth pushing through, I think, you'll -- they'll always have watch list companies. It's the nature of the beast. If you're running 850 companies, corporates, and they increase their borrowing needs, you'll always have 3 or 4 companies, it will always be an issue, but that is the nature of running the business.

On the other hand, our provision coverage is 190%. So that's why we always take these extra provisions because the provisions are related to the NPLs. The extra -- so if I have 100% coverage on my NPL, the extra 90% is there to cover the watch list and the performing loans. So we feel very, very comfortable that we have coverage on the -- about 5% of the performing book, which I think is very comfortable. It's more than the needs, given the nature of the company, is it the fact that they are multinationals, they're the largest corporates in Egypt. So we're comfortable there. We should also be seeing a couple of recoveries in the tourism sector, where we had loans that were risk-weighted and 100% provided against. And now we're seeing a different borrower coming in, wanting to buy the asset, wanting to buy the hotel, but it would then change and move to a successful group, so it would be better managed and better run. And at the same time, we would start -- we would move the loan. We'll keep the loan on the asset, but it will be serviced by a different company, and then we'll start addressing the provision gradually. So there, you'll see some improvements there in the provision accounts in the next -- I mean, these deals have been done, but it's just a matter of the accounting for them is yet to happen. So it's quite a sizable amount. It's pretty good.

Finally, regarding the protests. I think it took us by surprise, more than the current and actual impact. In a sense, I don't think anybody expected the first weekend that there would be anything, even though the numbers were -- we had maybe 5,000, maybe 10,000 people in the country, about 100 million people in 5 to 10 different cities. So looking at it in terms of numbers, it was very small, but I think a lot of us weren't expecting -- so 2 days before, had you called me and said, what were you expecting? I was expecting absolutely nothing. It wasn't absolutely nothing, but it's fizzled out into nothing in the end. The week after when everybody was on heightened security and heightened alert, absolutely nothing happened, and since then, even the guy who's been making these videos and stuff is no longer calling for protests. I think he sort of gave up on that one.

So I think in terms of unrest, I don't think we're going to see anything. And with the trickle down effect of economic improvement, I think, sooner or later, you see less and less reason for it. I mean, in a country of 100 million people, you'll always have unhappy people, regardless. There are people protesting in the U.K., I'd love to go and live there, but some people are not happy there anyway. But yes, you always want things better. But I don't think we're going to see serious protests or there's nothing now that's prompting it. So we're pretty comfortable. It didn't affect business because it only, as I said, took us by surprise, one week. The second week, everybody was ready. And then, called off. It's over and done with, I guess, at the moment.

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Louis Chetty;STANLIB;Portfolio Manager, [15]

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Just one point of clarity. So your pipeline that you spoke to, are you busy writing these deals? I mean, drawing up term sheets and that kind of thing? Or is that still to happen going forward?

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [16]

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That's a very good question. I forgot to mention, this is something that we've started doing recently. What we're doing now is we're talking to companies. Because a year ago, if you're talking to companies about CapEx, they were saying, yes, we do, but we have no idea how much or when, and it would sort of go away. Now we're so close to the cycle that companies that know exactly what they want to import as a machine, how much it's going to cost them and what the impact will be on their sales volumes and costs. So now, we are actually able to run our projections. And get -- because the problems comes at CIB and our approval process, where basically, you have the customer relationship guys go talk to the clients, then the credit guys come in to run the numbers, then they go to the risk and get the feedback, probably go back to the client a couple more times. Then it comes to a committee to be approved, which may or may not have a couple of more things that it wants. And then we go back -- it goes back to the client. And depending on how efficiently the documents go between us and the sort of requirements that we ask, it can take a couple of months. And this, I think, is because we're a little bit conservative, it might be an area where I've been working to sort out that turnaround time and strengthening it and not to ask for ridiculous things because credit entails risks. So you can never -- if you ask for everything, another bank would step in and say, forget about that, I'll give you the money with less requirements. So what we've done with these guys is we've gotten what their needs are, we've actually run the projections, we've gotten soft, tentative approvals that if the actual numbers come in, with the deviation be less than 10%, then this is a soft approval, it's approved. And we've informed the clients that this is there. We only started this recently, and we have noted EGP 9 million to EGP 15 million there as approved.

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Operator [17]

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The next question comes from (inaudible).

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Unidentified Analyst, [18]

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Congrats on a good set of results. You've said historically that the CapEx cycle, I think, I've asked what the average sort of borrowing rate was before things went bad in Egypt from a corporate point of view. And I think, if I remember correctly, around 13%, you said. How far are we from that now? So basically, what are corporate loans in EGP and also in dollars right now? And do you think we -- do you still stick by that 13%? Or do you think this cycle can kick off a little bit before that, given that growth is quite strong in the economy?

And then the second question is about tourism. Just obviously, you lend to the sector and you keep a keen eye on it. What are vacancies looking like across the country? What's job creation looking like? And what's your view on lending there as a sector over and above the specific deal you just you just spoke about?

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [19]

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Sure. Let me start with the second half of the question, the tourism. Tourism in Egypt over the last 3 or 4 years has changed in the nature of the tourist arrivals. What used to happen back in -- before 2010, and since 2015, was -- it was -- the Red Sea and Sharm specifically were the hotspots, but we were getting -- the resorts were quite cheap, and it was all these all-in package holidays, and they were catering to 3-star tours. And it was keeping the resorts full, nice and everything, but the spend was primarily coming -- somebody from Eastern Europe would pay the money there. They would come in, they would wear their little band on their wrist, and they would drink free local alcohol until they go blind or the week is over and they go back to their country. So a lot of spend is happening inside the resorts, nothing else.

At the end of 2015, we had -- unfortunately, the Russian airliner was blown up over Sharm and tourism dropped off the cliff, but this coincided with -- we were lucky enough that we started seeing -- because of political relations getting better with the Arab countries, we started seeing an influx of Gulf tours coming primarily into Cairo. So why in Sharm, occupancy rates dropped off into single digits? They're now back into the 30% and 40%. But on the other hand, Cairo occupancy is north of 90%. And it's being felt by these 5-star tourists -- the families coming in from the Gulf, and their behavior is very nontouristy in the sense that you won't see them going to museums. You won't see them going to -- doing the pyramids, but you see them going to restaurants, you see them shopping. So the spend goes directly into various sectors of the economy.

To give you some numbers. A year ago, tourism -- tourist arrivals rose by 41%, but tourism revenues rose by 77%. So that's the difference in spend. Tourism revenues today are north of $12.5 billion. The peak was $14.5 billion before the revolution.

So I would say it's changed, and now we're starting to see -- a lot of the hotel chains are starting to say, since we're starting from scratch in Sharm, let's aim for the 4- and 5-star tours. Let's do some refurbishments, raise our prices, we're starting from -- occupancy was down to 3%, it can't get much worse. Let's get rid of this 3%, and I'll hold out for the people who are really going to pay because the problem with the 2- and 3-star tourists is, you get into this vicious cycle. Their pockets are very slim, and you don't have money to refurbish. So you're stuck with the 2- or 3-star tourists again and again and again. And it needs a break. So now a lot of -- because a lot of these hotel chains are owned across the country. And now they're seeing the resurgence in Cairo. They're getting cash flows into the Cairo hotels. So it's giving them a bit of confidence to go out and do some refurbishing. The Four Seasons is refurbishing the Sharm property. But the Four Seasons never was catering to the 2- and 3-star anyway. But that's just an example of what a lot of them are doing.

Your first question, I think, if I remember correctly, you were talking about, at what rate would the corporates stop borrowing. I would think, given that a lot of them have different appetites, but now we're starting to see most of these corporates operating at about 90% operating rate. And the multinational model, as I said, is built on the sale of raw materials. So I would say another 100 basis points would probably kick start it, plus the timing. Nobody likes to do CapEx in November and December of the year.

So with the new capital cycle, most of them have budgeted in CapEx for 2020, so I would imagine the first quarter of 2020 we will start seeing, even with 100 basis points now. Because they're going to start with the lightest CapEx with just the replacement CapEx. So for them, it's the -- do we wait until we see another 150 basis points? Or do we put in the machine and make the money, especially if it's a floating rate loan anyway? So they will get the benefit. So I would imagine if we see another interest rate cut, it's not because of seeing the cut, it's just to make sure it will sort of consolidate on the consistency of the government towards keeping it low interest rates. So I would imagine very soon, beginning of the year.

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Operator [20]

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(Operator Instructions) Your next question comes from Aya Abdellah from CI Capital.

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Aya Abdellah, CI Capital Research - Junior Analyst [21]

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I have 2 questions, please. The first pertains to the asset repositioning, which took place during the quarter. We've seen interbank balances dropped primarily through CBE deposits. And this was channeled mostly into treasury investments. So would you please throw some color on this reallocation in light of the now under implementation and contact amendments? And the fact that the whole sector or maybe private banks will aim to reduce their treasury exposure? And my other question is on the EBP 1.8 billion under IFRS 9 revaluation surplus. This was booked in 1Q '19 following the implementation, and we're trying to gauge how is this balance going to move going forward, given it remains stable since the first quarter of 2019. And that's all from me.

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [22]

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Great. Let me start with the first question, the liquidity. I think at any one time, how we move our liquidity is more a function of what T-Bills are maturing when. And the difference in rates between the CBE discounts and the T-Bills. And as you said, because of the taxes. So there are 3 or 4 moving parts in the sense that -- T-Bills, you run this double taxation thing where you're tax [exempt] on the gross. And then the rest of the revenue is also taxed and it's added on. So it's all a matter of whatever the most efficient way of investing the money in. Initially, the strategy is very simple. We go out and get the local currency deposits. If we can lend them out we do, but usually or recently, we have been taking in more deposits than we have been able to lend out. So there's always extra liquidity. And then the other challenge is, as T-Bills mature, do we roll them over into T-Bills and at what maturity? Or do we put them in the CD discount? It's all a matter of -- we have a couple of geniuses sitting downstairs and telling us the tax impact of everything. So it's more a matter of what's best for the bank, and that's what we're doing at any one time.

Regarding your first question, I think, Yasmine will take over this one.

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Yasmine Hemeda, Commercial International Bank -Egypt S.A.E - Head of IR [23]

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Great. It's more like, as Hussein said, it's a onetime thing that we did because of the first time implementation of IFRS 9 where we have to, mainly on the back of the reclassification and measurement of the financial instruments and the differences of both under IS 39 and IFRS 9, we needed to reverse back almost EBP 1.8 billion into the equity. But this is a onetime thing, and it's not a recurring item.

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Aya Abdellah, CI Capital Research - Junior Analyst [24]

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Okay. So how do we expect this number to move going forward? I mean, is it going to remain stable as part of the...

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Yasmine Hemeda, Commercial International Bank -Egypt S.A.E - Head of IR [25]

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It's going to remain stable. Yes, I mean, it will remain -- it's because of the implementation. First time implementation cycle.

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Operator [26]

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The next question comes from (inaudible).

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Unidentified Analyst, [27]

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My question is just 2 follow-ups on earlier questions actually, the first relating to the securities book. I'd also noticed that fairly meaningful increase in Q3 in treasuries. So what can you tell us about the maturity and the yields of what you would do in this quarter, given you talked earlier about the need for flexibility as loan demand comes through? And my second question was coming back to Naresh's earlier questioning. What --I didn't catch the answer. What have the state banks done in terms of the CDs now? What sort of yields are they offering on those -- what used to be very high-return CDs?

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [28]

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Okay. Let's start with this one. The states banks are offering 14% on their CDs, between 14% and 15%, which is pretty high. I'm not sure if their float -- they’re fixed rate, fixed not floating, which is pretty suicidal. But then, yes, the state banks always have -- there is a social agenda there.

If you have people who are retired, people who would live on the interest and stuff, and I think it's -- they have a role to play that is very important in the economy. As far as we're concerned, we wouldn't compete on 15% CDs, to be honest, especially -- and we wouldn't lock in the rates, especially as interest rates are coming down.

Regarding your first question, yes, I think basically, as I said before, our T-Bills are primarily mix liquidity management. We have enormous amounts of T-Bills maturing practically every day because you have the 3- and 9-month T-Bills auctions done once a week and the 6- and 12-month is done. So twice a week, we have enormous amounts of money. So there's never a risk of sort of a deal that we can't get into because we don't have liquidity maturing. It's rather, we manage it based on -- we have the expectation that interest rates are coming down. So we would tend to buy 9- and 12-month T-Bills as much as we can rather than the 3 and 6, simply because we feel within the next 9 to 12 months, there will be interest rate cuts. So whatever I can lock in, I'd like to lock in today.

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Unidentified Analyst, [29]

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So have the 9-month yields come down in line with interest rates in the last 3 months?

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [30]

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I think they're pretty much all within 400 basis points of each other, if I'm not mistaken, between the 3 and 12. They won't come down, but they're all sort of within 4 to 5 -- 40 to 50 basis points range. So they're in between 15.9, 15.5, all for (inaudible). So in which case, it makes better sense to go for the 9 and 12 and just stick with it.

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Unidentified Analyst, [31]

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Okay. So we will see -- the yield on your securities book will inevitably come off as we see into the next few quarters, but it should be made up for with just the volumes on the loan book and the fees that come with that. That's the expectation?

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [32]

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Yes. But NIMs will come down and that's something we've been guiding for. Our NIMs, in Egyptian pounds, today are -- our last NIM, actually, the last month on a stand-alone was roughly 850, 860 basis points. That's not a realistic NIM. It's at a very nice NIM, but it's not realistic. So we will see NIMs coming down to more realistic numbers, but we will see fees and commissions pick up and pick up the slack and that's back to commercial lending as fees and commissions come in, especially on the CapEx.

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Unidentified Analyst, [33]

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And more realistic Egyptian pounds, NIMs, 2, 3 years from now would be sort of more like 400 or 500 basis points? Or...

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [34]

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No, I would say, because all 500 basis points was in the days when our funding was all corporate which was a lot more expensive. And that is back in 2010. If you look at our funding base today, it's 70% or more retail, which gives you the ability to go out and source CASA and do this and that. Because a good corporate treasurer will move EGP 1 billion on 10 BPS whereas usually, retail, they're more interested in convenience, in knowing the staff, if you get some good service. 10 BPS or 50 BPS of that might not make a difference. And that's why you can see differences between us and other banks, and it's been consistent for years and years on our pricing, and we're still managing to grow our deposits by 20%. There are ways of getting cheap funds to look for a lot of different things.

So I think to come to your question, I would say, between 650 to 750 BPS would be our NIM over the next 2, 3 years coming down gradually.

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Operator [35]

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The next question comes from [Ajay Bari] from [Jared].

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Unidentified Analyst, [36]

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I just wanted to know on the foreign currency deposits, the utilization rate is around 55%. You would want it to be much higher, but why are the deposits not growing at all? Or is it intentional on your part?

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [37]

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Yes, that's exactly it. Remember, I was saying, on the local currency side, the deposits are the main driver of growth, whatever we can lend out to (inaudible), whatever we can't, we'll buy people's work. On dollars, we don't have this luxury. If I take in a lot of deposits, and I cannot lend them out, then basically, the portion that is not lent out is -- it's making me 0. So it's the opposite strategy, where if I have loans coming in, I'll go out and get deposits for them. So our strategy is built -- it's a loan-driven rather than a deposit-driven strategy on the dollar side. And 55% is low. I would like to see my loan-to-deposit ratio in foreign currency to exceed 60%, 62%. That's when it starts becoming profitable. And by profitable, you're talking about a NIM of 250 to 270 basis points. So the NIM on foreign currency is always going to be very fine, and that's why the growth in the balance sheet is going to be continually driven by local currency because it's inherently more profitable. And more of the economy deals in local currencies. So you're matching the economy.

So yes, it has been a conscious effort on our part not to get expensive deposits. If somebody gives us dollars to put in the current account at 0 cost, I'll take them happily. But other than that, we're careful not to take money or pay for money if we don't need it.

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Unidentified Analyst, [38]

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Yes, makes sense. Just to take it a step forward, but there is no dearth of foreign currency deposits with the foreign currency, so much of foreign currency coming into Egypt. There's no dearth. So whenever there's a need for you in the coming year or 2. It will be easy to take?

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [39]

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Yes, I think so. I think so. We've never had a problem so far, and there's always the ability. And then if you really have a large pipeline coming in, you can go out on the wholesale market and sort of take in a big loan, if you want. And if you need that for the tenant as long as you have it locked in on the other side and you have the yields coming in. So I wouldn't worry about not being able to source foreign currency.

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Operator [40]

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The next question comes from Aybek Islamov from HSBC.

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Aybek Islamov, HSBC, Research Division - Analyst [41]

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I have a couple of questions here. The first one, I'm curious on your comments about the FX loan growth, you were saying the guidance is about low single digits in 2020. Now it's obviously, it's a big part of the loan book. It's about 40% of your loans, which are FX. So as loan growth and FX continues to be weak, what do you think will be implications for the asset quality, in particular, NPL formation and (inaudible) loans, in this chance, to be on a dollar good in the first quarter -- in the third quarter, which was just reported? So that's my first question. My second question is about the overall government deficit being lower, what does it mean for the growth in your securities portfolio and not just you, but also banking sector going forward? The fact that fiscal deficit is now structurally lower, I guess, it means securities growth, the ability to grow assets via securities will be lower, too. Is this correct or no? How would you compare this sort of future forward-looking growth in securities compared to the past history? And I think, thirdly, I would like to know that -- on securities, it looks like in the third quarter, it was a tactical positioning into falling rates that changed your asset structure. And you bought more T-Bills and securities. If you maintain the similar location of your assets towards securities in 2020, what will be the implications for your tax rate? And these are 3 questions. That's it.

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [42]

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Okay. Let's start with the first one. I'll answer it as best as I can. Yes, I agree with you. We are growing the local currency part of the balance sheet more and more. By and large, we're trying to grow -- if you look at most of the companies we're growing with, they are more in the lower risk rating, i.e., less risky companies. Their risk ratings, 4 and 5. So I'm not expecting to see deterioration of asset quality, massively. And I don't know if I'm answering your question correctly. But as I said, there's not -- as a single-digit FX growth and sort of 30% growth, but primarily 30% local currency CapEx lending growth primarily to the multinationals. So I'm not worried about it. Not much in terms of new to bank, you're talking about companies that have been with the bank years and years, they already have outstanding working capital loans and now they're going out and taking on CapEx [stones].

Secondly, with our security -- yes. With the deficit, the government deficit improving so there will be less need for securities on a sort of macro level. And I think this is perfect because our projections in our budget is that our loan growth for the first time in a long time, exceeds our deposit growth. So you will actually be less reliant on securities for our income. We are going to be more reliant, and we start moving the loan-to-deposit ratio slowly upwards. And we will start taking money from our T-Bills and bonds and start lending it out. And this ties in with our capital adequacy position because today, our capital adequacy is around 26%, 27%, which is about 10% more than it really should be even with a buffer. So that allows us -- as you move money from 0 risk-weighted T-Bills and bonds to 100% risk-weighted loans without -- that in and of itself, will cause capital adequacy to come down. So I think that's great. As there are less peoples around, and we are not as reliant on peoples, that's perfect timing from where we stand. Finally, the tax -- we're looking at the tax -- if our budget goes according to plan, around 30%, anything between 29% to 30%, 30.5%, that sort of range. A lot of moving parts because as T-Bill rates come down, the taxes on them go down. And loans and cost of funds, there are so many moving parts. The best effort, best estimate is around 30%, I would say.

I don't think it will cost the 30%, we run a lot of scenarios. So I'm comfortable in saying between 29% and 30%.

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Aybek Islamov, HSBC, Research Division - Analyst [43]

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Okay. And if I just add one clarification. With regards to loan quality this quarter, the increase in positive on NPLs. Is it coming from the FX on portfolio? Or is it coming from the local currency book?

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [44]

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Local currency, local currency.

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Aybek Islamov, HSBC, Research Division - Analyst [45]

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Local currency.

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [46]

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And by the way, when it comes to -- anything that comes from the FX, the provision taken is in FX. So our provisions are always in the same currency as the loan. But in this case, it was local currency, and we took the provision in local currency.

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Operator [47]

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(Operator Instructions) The next question comes from Naresh Bilandani from JPMorgan Dubai.

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Naresh N. Bilandani, JP Morgan Chase & Co, Research Division - Research Analyst [48]

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It's Naresh from JPMorgan again. And just -- I think you kindly answered the question on CAR. My question was actually, it's looking quite high. And I understand the normalized level for the medium-term out would be about 10 percentage points lower from here. So kind of thinking high teens, about 17% to 18%. Is that the level -- beg your pardon?

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [49]

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Maybe even 16%. Maybe even 16%. Because I think the sort of -- the regulatory would be like 12.5% and you have your ICAP and you have this and that. So we would probably, with a buffer, want to be at around 16%. And again, with CAR, we always need to have a little bit more, just in case something happens, you never want to be caught short. So 16%, 16.5% would be where I'd like to see it, ideally. So 27% is way too high. But the point is, if I want to bring the loan-to-deposit ratio from 40% to 60%, it won't happen unless I'm already overcapitalized or moving from 0 risk weighting to 100% risk weighting will, in and of itself, drag down my CAR.

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Naresh N. Bilandani, JP Morgan Chase & Co, Research Division - Research Analyst [50]

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Understood. That's very clear. Final question from my side. Just -- could you kindly share the progress that you had on the African expansion, I think in Kenya that you've been talking about in the past. But is there any update that you could kindly share on this quarter?

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [51]

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Well, I can tell you that I'm on my way to the airport in an hour so it's going well. We're at a stage where our Board has approved the transaction, but it has yet to be ratified by both central banks. So we have reached an agreement, and I am going tomorrow [to Shalimar] to sign pending regulatory approvals on both sides.

Unfortunately, because of that, I can't shed any more light on that. But we have -- I've taken all my inoculations and vaccines and this is like the 20th time this year so -- it's not so far. It's really good in Kenya. So as soon as we get Central Bank approval from Egypt and from Kenya, then we'll be -- we'll come out with the full, full details.

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Operator [52]

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(Operator Instructions) Ladies and gentlemen, there are no further questions in the conference call. I now give back the floor to Mr. Monsef Morsy. Please go ahead.

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Monsef Morsy, CI Capital Research - Sector Head of Financials [53]

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Thank you. So I think if there are no further questions, we can conclude the call. Hussein?

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [54]

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Sure. Of course.

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Yasmine Hemeda, Commercial International Bank -Egypt S.A.E - Head of IR [55]

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Thank you, Monsef. Thank you very much. Thank you, everyone.

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Hussein Abaza, Commercial International Bank -Egypt S.A.E - CEO & Director [56]

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Thank you very much.

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Monsef Morsy, CI Capital Research - Sector Head of Financials [57]

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Thank you.

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Operator [58]

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Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines. Thank you.