CIB Profitability

MADE BY: DINA AHMED FAWZY ALFAWAL

Under the supervision of: DR. Menan Etab
Introduction
Performance measurement:
It has been agreed that banks play a vital role in enhancing a country’s
economic growth through providing instruments and financial assets to
diversify the risk and enhance the liquidity. Moreover, the banking sector
performs a pivotal economic function of financial intermediation and economic
acceleration through transforming deposits into productive investments
(Menicucci and Paolucci, 2016). Therefore, previous research conducted in the
last two decades shows that the development of a country’s financial system
compromising its stock markets and banks is an important factor for its
economic well-being (Growe, DeBruine, Lee and Tudón Maldonado, 2014).

Regarding performance measurement, various measures have been used to

examine a bank’s efficiency and performance. Those methods are classified into
traditional accounting based performance measures which focuses on
maximizing the wealth for shareholders and other new multidimensional
performance measures (Hussain and Gunasekaran, 2002). The traditional
accounting performance measures include bank profitability such as return on
equity, return on assets, and return on investments, in addition, other operational
ratios are measured such as monetary output per staff member, and total
operating expenses per unit of output, however, various recent studies have
shown that these performance measures are inappropriate in today’s uncertain,
complex and competitive economic environment and hence other non-financial
dimensions and factors should be taken into consideration while measuring the
bank’s performance (Wei‐Shong and Albert Kuo‐Chung, 2006).

Moving on to the multidimensional performance measures which focuses on

different dimensions such as nonfinancial and financial performance measures,
external and internal measures, these multidimensional measures include
standard costing and variance analysis which is linked to the non-price elements
of competition, such as differentiating the bank by superior service quality
offered to its clients. Three methods for multi-dimensional performance
measures were identified in previous studies which are: the budget constrained,
profit conscious and non-accounting. The most used method is the profit
conscious that related to the manager’s ability to enhance the effectiveness of
his unit’s operation in relation to the long-term goals of the bank which may be
non-financial goals (Hussain and Gunasekaran, 2002).

Another performance measure that has been adopted by banks in the 1990s is
the Data envelopment analysis (DEA) which is aimed at assessing the bank’s
efficiency. DEA is mainly a linear-programming method to measure the
comparative performance of homogenous organizations. Banks have been
increasingly using DEA in order to assess, monitor and improve performance.
The main goal behind the DEA is to build efficiency targets for inputs and
outputs where costs are minimized (Wei‐Shong and Albert Kuo‐Chung, 2006).

Importance of profitability:
An efficient banking system means increasing volume of funds flowing from
savers to borrowers and enhanced quality service for customers which means
consequently profitability improvements for the banking system (Menicucci and
Paolucci, 2016). Previous research indicates that profitability is a critical
attribute as it helps banks bounce back from economic shocks. Retained profits
constitute a significant source of bank’s equity which acts as a shield against
losses and bankruptcy when the bank has extraordinary losses. Consequently, a
profitable banking sector is important at the macro level for the economy as a
whole as it contributes to the stability of the financial system (Growe et al,
2014, Menicucci and Paolucci, 2016).

On the other hand, profitability is important on the micro level due to the
increased competition faced by banks in the recent decades, therefore, profit is a
prerequisite of a competitive banking institution. The survival, growth and
existence of the banks is mostly dependent upon the profits which it is able to
earn, therefore, the basic aim of a bank’s management is to realize profits
(Menicucci and Paolucci, 2016).

Literature review:
The issue of the determinants of bank profitability has received considerable
attention in academic literature and has been widely investigated theoretically
and empirically. This section is aimed to provide an overview of studies related
to the determinants of bank profitability.

One study has been conducted by Menicucci and Paolucci in (2016) to

investigate the relationship between bank-specific characteristics and
profitability in European banking sector in order to examine the role of internal
factors in realizing high profits. Regarding the sample used in this study a
regression analysis was built on panel data set including 175 observations of 35
top banks in Europe over the period from 2009-2013. Regarding the
independent variables, five banks specific variables were taken into
consideration which are as follows: total assets of a bank representing bank’s
size, ratio of equity to total assets representing capital strength, loans to total
assets, total deposits to total assets and asset quality expressed as the ratio of
loan loss provisions over total loans. Regarding the dependent variable of the
study, the profitability was used and measured by ROA, ROE and net interest
margin. The dependant variable was bank’s profitability measured by ROE and
ROA.
Moving on to the findings of this study all the determinant variables included
were proved to have a significant relationship with European bank’s
profitability. It was indicated that there is a significant positive relationship
between the size, capital ratio and bank profitability, whereas a negative
relationship was found between the loan loss provisions and the profitability
levels. Moreover, it was found that the deposits and loans ratio has a positive
insignificant relationship with the bank’s profitability.

Another study has been conducted by Growe et al in (2014) to examine the

effect of bank and industry specific determinants and the macroeconomic
characteristics on profitability and performance measurement of USA regional
banks using a sample of 452 banks during the period 1994 through 2011, this
study is original as it takes into consideration the effect of industry specific
determinants in addition to the macro-economic characteristics. The
Macroeconomic characteristics include consumer price index, GDP and yield
curve. The industry specific characteristics include the bank assets to GDP and
stock market capitalization to bank assets. The bank specific characteristics
include: efficiency ratio, equity to assets, provision for credit losses, non-
performing assets...etc.

The results of this study showed that profitability is negatively significantly

related with noninterest expenses, provisions for credit losses, measures of asset
quality and the amount of non-performing assets. Whereas a positive significant
relationship was found between profitability, non-interest spending and growth
in asset size. A non-significant relationship was found between the macro-
economic factors and the profitability.

Recently a study has been conducted by Derbali in (2021), his article aims at
determining and analyzing the different determinants that influence bank
profitability and to identify the impact of these determinants on the profitability
of Moroccan banks which is a developing country. The sample upon which the
study was performed consists of six Moroccan banks during the period from
1997 to 2018. The profitability factors examined in this study are classified into
three categories: bank factors, factors of the banking system and
macroeconomic factors. The independent variables in this study are the size of
the bank, the capitalization ratio, liquidity, fund allocation ratio, the average
cost/income ratio, the size of the banking sector, the interbank rate, banking
concentration, GDP economic growth and inflation.

Results have shown that profitability is negatively related to the size of the
bank whereas, banking concentration and interbank rate is positively related to
profitability. A non-significant relationship was found between the
macroeconomic factors and the bank profitability.
Another recent study that has been published in (2021) conducted by Saif-
Alyousfi and Saha in order to examine the effect of bank-specific, financial
structure and macroeconomic factors on the risk-taking behavior, stability and
profitability of banks in the gulf cooperation council (GCC) economies. The
sample consists of 70 banks from six GCC countries such as Bahrain, Kuwait,
Oman, Qatar, Saudi Arabia and UAE during the period from 1998 to 2017.
Regarding the model of the study: the independent variables is classified into
three categories the bank-specific characteristics such as cost-income-ratio, non-
interest revenue, opportunity cost, liquidity risk, demand deposits, market risk ,
non-performing loans, capital adequacy ratio, loans to total assets, loan growth,
bank size, off balance sheet and the macroeconomic indicators such as GDP
growth, inflation rate, real interest rate and the last category is the financial
structure indicators such as the Herfindahl index (HHI), stock market
capitalization and credit to private sector.

The results of this study were indicated as follows: non-traditional activities

increase the risk and decrease the stability and profitability of banks that are
highly capitalized, highly liquid and large, Higher concentration increases the
risk and decreases the stability and profitability of banks that are less
capitalized, less liquid and small, Banks with a higher share of non- traditional
activities are riskier and less stable and less profitable before the financial crisis,
banks with relatively higher capitalization and high lending growth rates are
riskier, profitable and less stable during the crisis, Larger commercial banks are
less risky and more stable and profitable than smaller banks before the global
financial crisis and Islamic banks performed better in terms of fee income,
capitalization, liquidity, asset quality and have higher market concentration than
conventional banks.

Furthermore, another study was conducted by Saif-Alyousfi in (2020) in order

to examine the effect of bank-specific, financial structure and macroeconomic
factors on the profitability of the banking sector in Asian economies during the
period of 1995-2017. The sample examined in the study consists of 2,446 banks
across 47 Asian countries. The independent variables used in this study falls
under 3 categories: the banks specific characteristics which are internal factors
related to the bank itself such as the cost-income ratio, the non-interest revenue,
opportunity cost, liquidity risk, demand deposits, market risk, non-performing
loans, loan loss provision, capital adequacy ratio, loan to total assets, loan
growth, bank size and off-balance sheet. The second category is macroeconomic
indicators such as the GDP growth, inflation rate, real interest rate. The third
category is financial structure indicators which contains: Herfindahl index,
Stock market capitalization, Credit to private sector and financial crisis.
The results of this study have indicated a significant relationship between the
cost-income ratio and the bank’s profitability, it has also been found that non-
traditional bank activities such as the non-interest revenue and off-balance sheet
activities have a significant positive relationship with profitability as banks
depending on those non-traditional activities are more profitable. A positive
significant relationship was found between the opportunity cost, liquidity risk,
demand deposits, market risk and profitability of the bank. However, a negative
significant relationship between the non-performing loans and loan loss
provision with the profitability. Moreover, a positive significant relationship
was found between capital adequacy ratio, loan growth and the profitability.
Regarding the macroeconomic factors, the study has shown that higher GDP
growth, higher inflation rate and high real interest rates lead to a higher bank
profitability. Moving on to the financial structure factors, there is a positive
significant relationship between market concentration, stock market
capitalization and bank’s profitability, whereas a negative significant
relationship has been found between credit to private sector, financial crisis and
profitability.
CIB profitability analysis:
Equity
year ROE ROA NPM TATO
multiplier

2018 27.98% 2.79% 23.417% 0.119169177 10.02790298

2019 22.79% 3.05% 25.631% 0.119092431 7.465209218

2020 17.34% 2.42% 22.826% 0.105889197 7.173596716

CIB has been chosen as it is one of the best performing banks recently, it
constitutes more than 30 % of Egypt’s key index EGX30. Moreover, it is one of
the biggest and best managed five banks in Egypt. CIB has also expansion plans
outside the borders of Egypt through acquiring a bank in Kenya.

ROE analysis:
Starting with ROE as an important profitability indicator, it is calculated as the
net profit over the shareholder’s equity. This ratio provides investors in CIB
stocks insights into how efficiently the bank’s management team is handling the
money that shareholders have invested in the bank. In other words, it measures
the bank’s efficiency at generating income and growth from its equity financing.

According to the ROE figures, it can be concluded that CIB has been
experiencing a declining ROE over the years from 2018 to 2020 as it started
with 28% in 2018 and started to decrease gradually to reach 23% in 2019 falling
to 17% in 2020.

According to the banking industry average CIB’s ROE is considered normal or

even high as it has been indicated by the world bank that the average ROE of
Egyptian banks is 20.93% in 2017.

This decrease in ROE can be justified due to the increase in CIB’s total equity
as in 2018 the equity was 34,147,068 thousand EGP, in 2019 the equity
increased as it reached 51,799,842 thousand EGP and finally in 2020 the equity
reached 59,404,626 thousand EGP which justifies the declining ROE. Despite
the fact that the net income generated increased across the years from 2018 to
2020, which means that the net income increases at a lower rate than the rate by
which equity increase. In other words, it is apparent that the increase in total
equity outweighs the increase in net income which interprets the declining ROE.

DuPont analysis:
Since a single ratio is not sufficient; the ROE analysis is usually combined with
other ratios. One of the most common and widely used approaches is the
DuPont system of analysis, where the ROE is expressed as a multiplication of
net profit margin, total asset turnover and the equity multiplier. This analysis
helps trace which factor has the greatest effect on the ROE as it helps
decompose the different derivers of ROE. This decomposition of ROE allows
the investors to evaluate the key indicators of financial performance
individually to identify strength and weaknesses.

The first component of the DuPont identity is the net profit margin which is
calculated by dividing the net income by the total operating revenues which are
the sum of the interest income and fee and commission income. Regarding the
profit margin for the CIB it is evident that it started at 23.14% then increased in
the year 2019 to 25.6% and suddenly dropped again to 22.862% in 2020. The
increase that happened in 2019 can be justified by the increase in the net income
from 9,555,755,000 EGP in 2018 to 11,803,555,000 EGP in 2019 accompanied
with an increase in the operating revenues from EGP40,806,325,000 in 2018 to
EGP46,052,645,000 in 2019, the increase in the operating revenues is probably
attained due to increase loans and credit cards through better marketing plans or
maybe due to favorable economic conditions and favorable trend of interest
rates. The increase in the profit margin can also be justified through better cost
controls, which shows the management’s efficiency in controlling the expenses.

However, in the year 2020 the net profit margin is reduced to 22.26% as the net
income dropped to 10,299,822,000 EGP whereas the operating revenues
dropped to 45,124,134,000, this was probably caused due to the negative effects
that Corona virus had on the economy which definitely could have affected the
revenues of CIB and consequently its net profit margin. This can also be
justified through non-favorable cost controls which resulted in a declining net
profit margin. Another point to be taken into consideration is that the net profit
margin is not easily influenced by the movements of operating profits due to the
low operating leverage that banks has as most of the costs are variable costs and
the fixed expenses constitute a small portion of the costs. The low operating
leverage justifies the low control over the portion of operating revenues that is
transformed into net income.

The second component is the total asset turnover or referred to as asset

utilization ratio. The total asset turnover ratio is calculated by dividing the total
operating revenues by the value of the bank’s assets. The asset turnover usually
measures the efficiency of the bank in utilizing its assets to generate revenues.
Regarding the asset turnover of CIB, it is somehow constant but decreases at a
low rate as it started by 0.1191 in 2018 to 0.11909 in 2019 then dropped to
0.105 in 2020. This can be justified as the value of total assets is increasing at a
rate higher that the rate by which the operating revenues increase which results
in decrease in the value of the asset utilization ratio which means that CIB is
investing in more assets however, its efficiency to utilize these assets is
declining as it doesn’t increase the operating revenues by the same rate. The
drop of the asset utilization ratio in 2020 from 0.119 to 0.105 is mainly due to
the decrease in the operating revenues from EGP46,052,645,000 in 2019 to
EGP45,124,134,000 in 2020 which is justified due to the negative economic
effects of the outbreak of the corona virus which lead to the decrease in
operating revenues despite the fact that more assets are being invested in and
another reason is that the growth of the non-interest revenue which is the fees
and commissions was not as estimated. Another reason, is the decline in the
asset quality of the bank portfolio due to excessive SME financing (Pharos
holding, 2019).

The third component that influences the value of ROE is the equity multiplier.
The equity multiplier is used to reflect the bank’s risk as it measures the portion
of the bank’s assets that is financed by stockholder’s equity rather than debt. It
is calculated through dividing a bank’s total assets value by its total
shareholder’s equity. Banks are usually characterized by a high financial
leverage ratio as they depend on deposit and non-deposit borrowings as sources
of funds. In 2018, CIB had a financial leverage ratio equal to 10.02 then a sharp
decline occurred in 2019 to reach 7.4 followed by a slight decline in 2020 to
reach 7.17. the main justification for the phenomenon of the decline that
occurred in 2019 is the increase in the value of the stockholder’s equity which
means that CIB has reduced its dependence on debt and borrowing depending
more on equity which lead to the sharp decrease of the leverage ratio.

This means that CIB has become less risky as it reduced its dependence on debt
to rely on equity. This was evident as the total Equity has an increasing trend
from 34,147,068,000 EGP in 2018 to 51,799,842,000 in 2019 to 59,404,626,000
in 2020. On the other hand, the total assets increased as well but apparently,
they increased at a lower rate that the rate of increase in equity which resulted in
a declining financial leverage ratio. The declining leverage ratio is less risky but
on the other hand it has a drawback as it indicates that CIB has less growth
prospects in the years 2019 and 2020.

Based on these three components of DuPont: profitability, operating efficiency

and leverage, it is possible to determine which component drives the ROE
(Kharatyan, Nunes and Lopes, 2018). It can be concluded that the declining
value of ROE is mainly due to the decline in the financial leverage in CIB. As
in the year 2018, the ROE scored its highest value at 27.98% and the equity
multiplier was at its highest in this year as well, as it was 10.02. Therefore, it
can be deduced that the high value of ROE in 2018 was due to the high financial
leverage and not due to high operating efficiency nor asset use efficiency which
means that in 2018 investment in CIB stocks was riskier than in 2019 and 2020.

However, in 2019 ROE declined in value to reach 22.79% this was mainly due
to the sharp decrease in the financial leverage ratio from 10.027 to 7.4 despite
the fact that the NPM increased by 2% however, the effect of the financial
leverage ratio was stronger on the ROE ratio and resulted in its declining. In the
year 2020, the ROE even declined more than in 2019 due to the decrease in
financial leverage accompanied by a decline in the profit margin percentage and
the asset utilization ratio as a result the ROE reached its lowest value in 2020
which is 17.34%. Therefore, it can be deduced that the most important factor
that influences the ROE in CIB is the financial leverage ratio as a remarkable
decline of ROE was noticed with the decline of the financial leverage ratio.

ROA analysis:
Moving on to the other profitability indicator which is the return on asset
(ROA) which gives an idea about how efficient a bank’s management is at
using its assets to generate earnings. It also acts as an indicator of how capable
management has been in converting assets into net earnings. According to the
figures the ROA in 2018 was 2.79% followed by a slight increase as it reached
3.05% in 2019 then it declined again to reach 2.42%. This can be explained as
in 2019 the total assets increased from 342,423,485,000 EGP to
386,696,658,000 EGP whereas the net income increases at a higher rate from
9,555,755,000 EGP to 11,803,555,000 EGP which lead to an increase in the
ROA as it is equal to the net income divided by the total assets. Therefore, the
increase in the net income outweighs the increase in the total assets.

On the other hand, in the year 2020 the assets increased as well from
386,696,658,000 EGP in 2019 to 426,144,830,000 EGP in 2020 whereas the net
income decreased from 11,803,555,000 EGP in 2019 to 10,299,882,000 EGP in
2020 which had a negative effect on the ROA and led to its declining from
3.05% to 2.42%. Moreover, the ROA can be decomposed into two ratios the net
profit margin and the asset utilization ratio. The asset utilization ratio is almost
constant so the change in the ROA is mainly derived by the change in the net
profit margin as the net profit margin increase from 23.4 in 2018 to 25.6 in 2019
which was reflected in the ROA as higher operating efficiency is translated into
a higher return on assets, whereas, in 2020 the NPM declined from 25.63% to
22.8% which had a negative effect on the ROA leading to its decline from
3.05% to 2.42%. This can be justified through the unexpected margin
compression (Pharos holding, 2019).

Conclusion:
This paper has started by giving a brief explanation about the most recent
performance measures for banks such as the multi-dimensional performance
measures and the Data Envelopment analysis (DEA). Then a brief about the
importance of bank profitability to banks internally and externally for the
economic wellbeing in general was provided. Then, a summary of the previous
literature concerning the profitability analysis and the effect of profitability
determinants whether they are internal bank-specific characteristics, industry
factors or macroeconomic factors. This was followed by a profitability analysis
for the CIB across the period from 2018 to 2020 using the most used
profitability ratios such as ROA, ROE and the DuPont analysis of ROE.

To conclude, the profitability indicators started at a higher rate in 2018 and then
began to decline in 2019 and 2020 probably due to the negative effects of the
corona virus or other internal bank specific or financial structure characteristics
or even macroeconomic factors. However, the CIB continues to be the perfect
proxy for the macro transformation story in Egypt and a solid banking sector. It
is evident that the bank is well capitalized and delivers a high return of equity
relative to the industry average and according to the analysis the declining
return on equity was mainly due to the decrease in the financial leverage ratio
which is the main driver of the CIB’s return on equity which indicates that the
operational efficiency and the asset use efficiency are of the same level.

The declining profitability can also be justified by the margin compression that
is higher than projections, the growth rate of non-interest income is slower than
estimated, the decline in the asset quality of the bank portfolio due to excessive
SME financing, slower economic recovery which hinders the lending potential
for both corporate and retail sectors and the strict Central bank regulations on
the Egyptian banking sector that led to a pressure on profitability (Pharos
holding, 2019).
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Wei‐Shong, L. and Albert Kuo‐Chung, M., 2006. The internal performance measures of bank lending:
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Derbali, A., 2021. Determinants of the performance of Moroccan banks. Journal of Business and
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