The Commercial International Bank – Egypt (CIB) is currently awaiting the Central Bank of Egypt (CBE) audit report on the bank, which is set to be completed on Wednesday afternoon.
The CIB management stated that it is willing to share all findings outlined in the report, when it is received, subject to the CBE’s approval. The detailed audit report, prepared upon CIB’s new Chairperson Sherif Sami’s request, comes in the wake of the sudden stepping down of the bank’s outgoing Chairperson, Hisham Ezz Al-Arab, on allegations of violations.
The bank has already worked on what the CBE has previously referred to as compliance issues, since the latter started its audit process on the CIB in November and December 2019. Some of this work saw changes to the bank’s head of compliance, and the department’s structure, as well as the addition of its international anti-money laundering and anti-terrorism units. While there might still be weaknesses at the bank, they are by no means disastrous.
Pharos Research said that, on the back of Ezz Al-Arab’s resignation, the bank may well put into effect a plan to increase investments in the bank’s audit, compliance, and internal control teams. This may take place either because it is needed, or because it is part of negotiations with the CBE.
These areas also require constant investment as they are always constantly changing with new money laundering regulations and IT system security methods.
Pharos Research views the plan as two pronged, with the first part entailing a market reassurance that CIB will continue the work that outgoing Chairperson has set the ground for. This would be on the basis that the bank is an institution, rather than a one-man show, and most of its management has not changed.
Secondly, the CIB management promises to quickly get to work on the recommendations of the audit report, once received, and see what priority work really needs to be done and what will have the most impact.
Two audit firms will investigate the report as soon as it is received, and look into any possible allegations of financial fraud. If the points highlighted in the report are about compliance and regulatory issues, then they will be treated in different ways. Although the bank is keen to undertake a share buy-back, it is illegal for banks to do so in Egypt.
Pharos Research also noted that over the last three or four months, at least two chairpersons at banks working in the Egyptian market have been removed from their roles. This entails that Ezz Al-Arab’s stepping down is not an isolated incident – it only had the most impact because other banks had no foreign investments nor were they listed so they went unnoticed.
Pharos Research has pointed out that CIB’s Non-Executive Chairperson Sherif Samy has previously worked in regulatory affairs. With previous experience as the head of Egypt’s Financial Regulatory Authority (FRA), Samy is a great addition to the bank and adds another dimension. This is due to the fact that the Chairperson role not only means heading the Board of Governors, but also means heading the audit, compliance, legal, and risk committees.
The bank’s CEO, Hussein Abaza, has given assurances that there are no major issues in the bank that will result in financial losses, nor are there any gaps in the balance sheet that would warrant a revisit or a redraw of the balance sheet. Following a statement issued on Friday that highlighted the financial soundness of CIB, the CBE findings are rather a normal audit report.
He added that the bank is now looking to add non-executive members to its Board of Governors, rather than executives. The CIB Board of Governors has a maximum size of 11, of which only seven positions are currently occupied, with only the CEO as an executive member. Any board member has to be approved by the CBE. Abaza expects that the number of board members will be increased, with none leaving.
The bank has, so far this year, taken more than EGP 3.3bn in provisions, and is set to reap a further tidy amount in provisions this year, amounting to EGP 4bn-EGP 5bn. It is also projected to earn EGP 8bn or EGP 9bn in profits.
CIB also does not face any risk of fines or sanctions as a result of recent events. A meeting between the bank’s governor and non-executives board members on the matter has put this to rest, now that the chairman has stepped down.
Abaza also does not expect any material financial risk in regards to the bank’s profit and loss (P&L) account. Any risks are more than provided for, with the bank already undertaking massive provisions above and beyond what they need.
Since deposits are largely retail, accounting for about 70% of the total, the CIB management team hopes the latest CBE statement would limit any risks of deposit run-off. The management team also now has tripled the amount of cash in vaults, along with several credit lines from which they can draw down in case of need.
HSBC Global Research believes that the CBE’s regulatory audit on CIB may lead to higher compliance and internal control costs in the medium term. The latest investor conference call with senior management suggested an absence of financial fraud and financial irregularities, which has been a key market concern over the past couple of days.
The CIB’s management team has yet to receive a detailed audit report and propose a corrective action plan to the regulator. The market will remain rightly focused on the remediation plan, as well as the financial impacts of the recent upheaval. The new Non-Executive Chairperson’s strategy has also become a hot topic for discussion, as well as any potential changes in the Board of Directors’ composition following his arrival.