Fitch Ratings has affirmed Commercial International Bank (Egypt) S.A.E. (CIB) 's 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Fitch has withdrawn CIB's Support Rating and Support Rating Floor as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating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 12 November 2021. In line with the updated criteria, we have assigned CIB a Government Support Rating (GSR) of 'b'.

Key Rating Drivers

CIB's IDRs are driven by its standalone creditworthiness, as expressed by its VR. The VR is constrained by the bank's significant exposure to the Egyptian sovereign through holdings of sovereign securities (40.5% of total assets at end-2021), lending to public-sector companies (7.5%) and balances at the Central Bank of Egypt (CBE; 7.5%). CIB's total exposure to the sovereign, including the CBE, was 5x the bank's equity at end-2021.

The VR also reflects CIB's solid franchise, resilient asset quality, strong profitability, adequate capitalisation, stable funding and foreign-currency (FC) liquidity pressures. The Stable Outlook reflects Fitch's view that pressures on the domestic banking operating environment are manageable, moderating risks to Egyptian banks' financial metrics.

Solid Franchise: CIB is the third-largest (largest private) bank in Egypt with a 5.6% share of banking system's assets at end-1Q22. CIB has a strong revenue-generating franchise, mainly corporate-focused, but also has a solid retail segment serving 1.7 million customers.

High Concentration and Market Risk Exposure: CIB's net loans represented on average 30% of total assets in 2018-1Q22, (sector average: 35%); however, single-obligor concentration is high with its 20-largest loans representing 55% of total loans at end-2021.

Market risk exposure is high, as around 90% of the securities portfolio is reported at fair value through other comprehensive income (FVOCI), making the bank sensitive to rising interest rates that led to sizable losses charged to the bank's equity (-6% of total equity in 1Q22; -5% in 2021).

Resilient Asset Quality: CIB's Stage 3 (impaired) loans ratio was 5.0% at end-1Q22 (5.1% at end-2021), lower than the Fitch-rated private banks' average of 7.1% at end-1Q22 (5.2% at end-2021). The ratio increased from 4.3% at end-2020 mainly due to pandemic effects on the tourism and commerce sectors.

Ample reserve coverage of Stage 3 loans (217% at end-2021) provides solid cushion against potential problem loan generation. A high share of non-lending 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 proved resilient through the cycle. Its operating profit/risk-weighted assets (RWAs) of 8.1% in 2021 (7.6% in 2020) is considerably higher than the Fitch-rated peers average of 4.6%. High net interest income and margins, with a stable low cost-to-income ratio and moderate loan impairment charges support CIB's profitability.

Adequate Capitalisation: CIB's common equity Tier 1 (CET1) ratio declined slightly to 23.1% at end-2021 (23.7% at end-2020) but remains significantly above the sector average of 13.4%. The decline was driven by 17% RWA growth in 2021, while capital generation was held back by mark-to-market losses on the bank's FVOCI securities portfolio (-5% of total equity in 2021). We believe CIB's capital ratios are adequate but the bank's significant concentrations and high exposures to the sovereign and to market risks are threats to capital.

Good Funding Base; FC Liquidity Pressures: CIB has a favourable funding mix with retail deposits amounting to 54% of total at end-1Q22. Like its domestic peers, CIB is exposed to deterioration in Egypt's external liquidity position, as 28% of its deposits were in foreign currencies (FC) at end-1Q22. Net FC liquid assets (cash and net interbank assets in FC) covered 47% of FC deposits at end-1Q22, increasing reliance on the performance of the bank's FC loans. Its liquidity coverage and net stable funding ratios (LCR & NSFR) in FC were comfortable at 271% and 171%, respectively, at end-1Q22.

Rating Sensitivities

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

CIB's ratings would be downgraded on sharp deterioration in operating conditions affecting asset quality and, consequently, profitability and capitalisation, or intensification of pressures on FC liquidity. A downgrade of Egypt's sovereign rating would also lead to a downgrade of the bank's ratings.

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

An upgrade of CIB's ratings would require an upgrade of Egypt's sovereign rating and a marked improvement of the operating environment.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

CIB's National Ratings reflect the bank's creditworthiness relative to that of other issuers in Egypt and are driven by standalone creditworthiness. The ratings benefit from consistently strong financial metrics through the economic cycle and are at the higher end of Fitch's National scale.

CIB's GSR of 'b' reflects a limited probability of support from the Egyptian authorities. We believe the Egyptian authorities have a strong propensity to support domestic banks because of the sector's importance to the economy and to the country's development plans, but the ability to support is weak.

Fitch views CIB as a domestic systemically important bank (D-SIB) and its GSR is therefore at the country D-SIB GSR of 'b'. This reflects CIB's systemic importance as Egypt's leading private-sector bank with about a 6% market share of banking-system assets and deposits.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

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

VR ADJUSTMENTS

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

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

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

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

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

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on CIB, either due to their nature or the way in which they are being managed by CIB. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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