Coffee with Banque du Caire Chairman and CEO Tarek Fayed
Coffee with Banque du Caire Chairman and CEO Tarek Fayed: If there’s one transaction in the reborn state privatization program to which market watchers are looking forward, it is the initial public offering of the (rebranded this week) Banque du Caire. BdC is led by Tarek Fayed as chairman and CEO, who recently sat down with us for the latest instalment in our Coffee With… series. The most recent on that transaction: It will likely happen this year and see the bank offer 20-30% of its equity for sale, CBE Governor Tarek Amer said earlier this week.
Who is Tarek Fayed? Prior to joining Banque du Caire in January 2018, Fayed held posts in Egypt and abroad with Citibank, the Egyptian American Bank, and Samba, where he worked in areas including corporate and investment banking, risk management and audit. Fayed also had a distinguished career in public service, having served as sub-governor of the Central Bank of Egypt, where he oversaw the development of a number of regulatory guidelines and mechanisms. He also represented the CBE on the boards of banks including the Agriculture Bank, United Bank, and Arab International Bank.
BdC has embarked on an ambitious turnaround, reporting a 207% jump in net profit after tax to EGP 2.5 bn in 2018, up from EGP 808 mn a year earlier, while undertaking an expansion in the region and services.
Key takeaways from our conversation:
- Fayed’s turnaround strategy rested on building staff capabilities, technology infrastructure, and adopting a customer-centric approach;
- The bank’s corporate banking portfolio grew 80% y-o-y on the back of a restructured department, while total customer loans grew 50% y-o-y;
- Financial inclusion has become a major focus at the bank through SME and microfinance lending;
- The bank is looking to expand regionally in East Africa and the GCC through offices and subsidiaries in Uganda and the UAE;
- BdC is internally ready for the IPO and is awaiting a decision by stakeholders and regulators;
- The market is awaiting single digit inflation before CAPEX comes back.
Enterprise: Let’s start with the bank’s performance based on the recent release of your financial results. How did this unfold?
Tarek Fayed: We first had to formulate a very clear strategy for the bank and a strong growth map to achieve our objectives. We strongly believe that the two pillars that we needed to work on were people and infrastructure, including restructuring within existing departments across the bank. We hired a very strong caliber of people to fill in the gaps and our focus on the rest of the employees was to set clear objectives and focus on training and capacity building.
We rebuilt our corporate banking division and we’ve added new departments including the wholesale banking side’s global transaction banking department, which takes care of our product offering for corporates, financial institutions and non-banking financial institutions — services ranging from cash management solutions and trade finance to customized business solutions. We also restructured our corporate finance and investment banking department by bringing in a high-caliber team. And we’ve totally revamped our retail banking business and added new talent across the board, with a focus on introducing products and services tailored to a wide spectrum of retail customers and focusing on ancillary business and cross-selling opportunities.
We’re not there yet, we have lots of plans in terms of capacity building. We have more than 7,500 employees, and we have to work hard at developing their skills. That’s why we significantly increased our training budget in 2018 and increased the number of training hours for employees. Our main objective is to keep our people updated with the best international banking practice worldwide.
On the technology front, we want to be at the forefront of digital banking, and we have taken the time to build infrastructure and our core banking system, including signing last year with Temenos — one of the top global core banking system providers — to roll out their T24 system within 24-36 months. But we’re not waiting until we finish our core banking system upgrade to introduce digital banking solutions.
Mobile and internet banking to be rolled out over coming weeks: Internet banking for retail customers has gone live this week. This is a full-fledged service, encompassing inquiry and transactions. We’re introducing it to our corporate banking clients sometime in 3Q2019. We’ve also totally revamped our mobile wallet and we’ve applied for a license from the CBE to be a digital acquirer bank through QR code because we have lots of ambitions in terms of financial inclusion.
The right balance between sovereign debt and lending: We have a strong belief that we as a bank have to play a role in terms of financial intermediation when we think about where our profit comes from. The main catalyst of growth in the banking sector is deposit growth. It’s very obvious to us (and it’s been happening for years in Egypt) that if you have a solid growth in your deposits, you can easily contribute to your bottom line by investing this surplus in sovereign debt. But this is not the role of a financial institution of our size and scope, so as part of our five-year business strategy, we want to create a balance between what we invest in with sovereign debt instruments and what we lend to the market. We’re looking for a balanced, diversified loan portfolio.
Our retail franchise was impacted by prudent measures outlined by the central bank after the float of the EGP, so we’ve had to diversify. Our size and presence in the market has led us to grow our focus on being a universal bank with lines of business including corporate banking, SMEs, microfinance, retail, in addition to having a strong branch network and a solid plan for digital activities.
E: So how will this pivot unfold in 2019?
TF: We grew our loan book by around 50% last year by targeting corporations in industries including real estate, oil and gas, construction, and export driven activities. That allowed us to grow our corporate banking portfolio by around 80% year on year, and it remains a focus for 2019, particularly as we have started to take a leading role in arranging syndicated loans, including two last year in the oil and gas sectors.
Diversifying into non-banking financial services: In order to complement these activities, we opted to establish our non-banking financial institution arm whose primary activity is leasing. It’s a good product to cross-sell to our clients, and our leasing startup closed the year with a net profit of EGP 9 mn. It was really a remarkable achievement for one year.
Aiming to grow our share of remittance market in five years: We see a significant opportunity to cover the GCC out of the United Arab Emirates. BdC is already one of the leading banks in worker remittances with a market share of close to 10%. Our goal is to grow this in the next five years. The UAE office will also allow us to grow our trade finance business and to be a conduit for inbound investment.
Uganda as a hub for expansion into East Africa: We hold a majority stake in Cairo International Bank in Kampala and are staffing it with a view to using Uganda as a hub to potentially cover East Africa. Our corporate clientele has a proven interest in that region, and we see opportunity in 2-3 years’ time to consider expansion of our operations by opening rep offices or branches in these countries for the wholesale banking side.
Rebranding the bank — and the branch network: One of our big priorities for 2019 is to improve our customer service and experience. We’ve just unveiled a full-fledged rebranding of the bank, including a restructuring and revamp of our branch network to enhance the customer experience and service line. Part of that is to serve more cost-efficiently our traditional client base through initiatives including nearly doubling our base of installed ATMs to 1,100 by the end of 2019.
And a new wealth offering: In parallel, we have also established a new wealth management unit focused on high-net-worth (HNW) individuals. We have a strong clientele in this area, but they were underserved. The perception of BdC in the past was that we serviced ‘B’ or ‘C’ customer segments, but the reality is that the HNW clients are there — we needed only to design the product to cater to them as well as capture new customers in this segment.
E: BdC has talked a lot in the past about microfinance.
TF: We started the microfinance portfolio in 2002, so we have a very strong legacy. The team is doing a tremendous job, and our results in the past year have given us appetite for more. Average growth of our microfinance portfolio pre-2018 was between 20-30% y-o-y. In 2019, we doubled the size of the portfolio to EGP 4.4 bn. And that’s with non-performing loans of 0.7%.
Microfinance is booming outside of Cairo: We brought around 100k new microfinance customers to the bank in 2018, and 50% of the portfolio was in Upper Egypt. Some 35% of the portfolio was loans to women, while 25% were made up of youth in their early 20’s.
We’re working right now to digitize our microfinance lending procedures and decision-making. We want to do ‘instant lending’ and we want to see repayment not only through the branch network but at ATMs and our mobile wallet and through the bill aggregators we contracted in 2018. So full automation of the process from origination to credit decisions, underwriting and repayment. We’re using it as a pilot and hope to do the same with SME and retail lending activities.
E: What about SME lending specifically? There’s a lot of discussion in government, in the community and in the House of Representatives on this front.
TF: We grew our SME portfolio 100% last year, and if 2018 was about building the right infrastructure, 2019 has seen us change our business model for SMEs. We’re going to create scalable SME business hubs offering all types of financial and non-financial advisory services that can take care of credit origination and underwriting. You’re going to see trained people from the business and risk control units at these hubs so small business owners can get every single thing done at the branch level. Additionally, specific credit programs were introduced to capture different SME segments to facilitate the credit origination and the underwriting process. We’re launching 36 SME hubs, 22 to be rolled out in 2019 and an additional 14 in 2020.
E: How worried should the banking industry be about non-banking financial services? Whether that’s fintech-enabled such as peer-to-peer lending or more traditional NBFIs.
TF: I’m not worried, but we have to prepare ourselves. You have to be very conscious where the competition comes from, whether they come from within the sector or not. The banking sector in Egypt accounts for more than 85% of the financial system in the country, so it is well positioned to take on non-banking financial services. But we have to keep our eyes open on what’s happening in the market. If you as a bank ignore the competition, at some point, you’ll find others ahead of you.
E: What was the hardest part of the past year?
TF: Time, to be frank. When you have a very clear vision and you know what you want to achieve, it’s not difficult. The challenging element is time, which was counterbalanced by our team. Everyone knew their stuff. I worked for 10 years in the CBE in crisis management, starting with the global financial crisis in 2008, then on to two revolutions and then the EGP float. We’ve seen it all.
E: What’s the latest on the bank’s IPO?
TF: Internally, we are ready for it. The go or no-go decision is with the CBE, the Finance Ministry and other stakeholders. It’s all about market timing. I believe that once markets start to improve, none of us will want to see it put on hold again.
E: Let’s shift gears: At what interest rate does significant corporate appetite for CAPEX come back?
TF: Once we reach a single digit inflation rate, or maybe just before that, CAPEX will start coming back. It’s very typical that once interest rates start to decline, there’ll be more appetite from companies for more business. But growth in the loan book of Egypt’s banking sector, even during the downside of the cycle, was really very big. Yes, they were mainly focusing on working capital in the short term, but I believe that long-term borrowing is coming.
Lending in the banking sector grew this year by around 20% while deposits grew by 15%. In a high interest rate environment, this is still acceptable. The ability to pass costs on to the consumer is a very important factor to consider in Egypt, as it indicates that our internal demand is very strong. We see all of our customers’ books, and I can tell you: business is doing well. Their financial performance is really very strong.
E: What will the new tax treatment on bank profits from treasuries mean for the industry?
TF: The new treatment is expected to increase the effective tax rate and force banks to rethink the structure of their balance sheets. A number of banks have increased their investments in treasuries in the period prior to the adjustment of the tax law to mitigate the impact on their profitability. Changes in external factors will continue to occur and banks have to be prepared to work around them.
Furthermore, we’ve been trying to preempt this since the beginning of the year by pre-buying T-bills to balance it out. We have the flexibility of managing the balance sheet and minimizing negative impact. The positive thing is that our effective tax rate dropped from 65% in 2017 to 36% in 2018. And we’re on track to reduce that further, so we have that normal momentum upside that’ll balance.
E: Tell us what you do in your spare time?
TF: I message my staff (only half kidding). I also play sports and do CrossFit. After a long workday, you need to take care of your health. It’s a long-term investment. I also enjoy reading and traveling.
E: What’s on your playlist right now?
TF: I listen to all kinds of music. Even Adawaya.
E: What’s the best book you’ve read recently?
TF: The Only Game in Town by Mohamed El Erian.