The road to an IPO with BdC’s Hussein Abaza

Hussein Abaza: Yes, digital I think will help us to make better decisions quicker. And it will make the visit to the bank less painful. It's never pleasant.

Patrick FitzPatrick: Yeah. Nobody wants to wait in line. 

Hussein Abaza: It's like a root canal, 

Patrick FitzPatrick: That bad?

Hussein Abaza: When have you ever willingly gone to a bank?

Patrick FitzPatrick: No, never.

Hussein Abaza: There you go.

—

Patrick FitzPatrick: Hey everyone. Today on Making It, I’m talking to Hussein Abaza, the CEO of Banque du Caire — and, frankly, one of my favourite people. Hussein is the former CEO of CIB and someone international institutional investors have known from years and years of conversations about Egyptian business. He’s won the Extel Middle East award for best investor relations by a CEO. And for you non- finance nerds out there, that’s kind of like the Oscar or Emmy for IR. He spent years teaching bankers how to lend — and how to think about the businesses they’re lending to. Now, he’s taking Banque du Caire public in a landmark IPO. The plan is to offer 30% of the bank. Banque Misr is selling the shares and they are going to get all of the proceeds, and the state is going to remain the controlling shareholder.

BdC’s IPO is huge for the market: As we’re recording this, MNT-Halan’s shares just started trading on the EGX as it closed an offering worth more than USD 126 mn. Investor appetite was through the roof. Banque du Caire’s offering, well that’s going to be three times bigger, maybe a bit more — and it just locked in four huge cornerstone investors, all of them foreign institutions. I really don’t want to jinx it, but it kind of feels like the long nuclear winter for Egyptian IPOs is finally coming to an end. And if that’s the case, what are investors buying if they put in an order for BdC shares? I want to know what Hussein thinks makes this bank different. I want to know where the growth comes from after the IPO. And I want to know what changes when suddenly a state-owned bank has public shareholders to answer to.

This picks up a conversation we recently had with MNT-Halan’s Mounir Nakhla — We know now that foreign investors are coming back to Egypt. The question today is: What will keep them here. Hussein has been having those conversations for a long time. I want to know what he’s hearing now. But I also want to talk about the job. He moved from CIB to Banque du Caire two years ago. What did he find? What did he change? How much freedom does he really have to run the bank? Then there’s the changing business of lending, after the kerfuffle on the airwaves this summer: Banks like BdC and non-bank lenders like MNT are going head to head on lots of things, but it’s not a zero-sum game. You see, non-bank lenders need funding, and banks are a really important source of it. So a company competing with a bank for customers can also be one of its clients. Hussein, who has lots of branches, is also a digital newcomer. Does he see people like Thndr and MNT Halan as friends — or as foes?

Now, look, before we get into this episode, I need to demystify some things, so bear with me. Hussein is a banker’s banker, and that means he speaks High Banker. So, you’re going to hear terms like “NIM.” That’s banker-speak for net interest margin, and it’s about how banks make money. Fundamentally, you give a bank cash — that can be your paycheque, it could be your company’s float, and that’s what they call cheap deposits. On the other side, the bank lends your money to other people — those are expensive loans. And the NIM, this net interest margin, it’s effectively the gross profit the bank makes. It’s the difference between what the bank pays you to take in your money in — and what borrowers pay to use it. NIMs are important and come up frequently during our chat because a NIM is one of the key ways investors judge how well the bank is doing, before they factor in operating costs, bad-loan charges and taxes.

We also remember the late Mark Mobius. He was one of the pioneers of emerging-markets investing, and he’s the reason any of us investing in or writing about emerging markets have a job. Hussein and I both really admired him.

Okay — Hussein Abaza, CEO of Banque du Caire. Here we go. 

—

Patrick FitzPatrick: Hussein. Welcome to Making It.

Hussein Abaza: Thank you. Thank you so much, Patrick.

Patrick FitzPatrick: Let's start with a person thinking about buying a share of BdC. I could invest in a number of other banks that are already publicly traded in the market right now. Why should I put in an order for a share of Banque Du Caire stock?

Hussein Abaza: You started off with a very, very intense question. So let's start with this one. Let's talk about the bank's best comparative advantage. It's not the size of the branch network. It's the distribution of the branch network. Banque Du Caire has 243 branches, which is the largest private sector network. We consider ourselves a private sector bank in everything but ownership. My predecessor came in several years ago, and he changed the face of the bank. He hired the right people. All of our top and senior management have a lot of private sector experience, plus the policies, the procedures. So when we compare ourselves, we like to compare ourselves to a much higher yardstick, or a much higher benchmark, which is the private sector banks. 243 branches is not really much bigger than our nearest competitors, but the distribution of the branch network is key.

Patrick FitzPatrick: How so?

Hussein Abaza: Of the 243 branches, 114 of them are in rural areas and they tick four very important boxes for us. Number one, there's very little private sector competition there. Number two, you have a population of 40 to 45 million people.

Patrick FitzPatrick: Mid-sized European country.

Hussein Abaza: Absolutely. Number three, banking penetration of below 20% versus the national average of 43%. And most importantly, 40% of GDP at least comes from there. So it's not as if it's impoverished areas. So you tick the right boxes. You've got affluence, a lack of competition, a lack of banking penetration. Add to this that all of these branches are manned by local staff. In rural areas, this counts for everything. Everything is based on this, whether it's in deposit gathering or it's on the loan side because banks are very simple. Banks are based on two things: asset quality and liquidity. All of the digitization, all of the fancy stuff, is making these two as efficient as possible. Everything else is icing on the cake. So we rely on these branches and they are our competitive advantage, both in gathering cheap deposits and in lending out to the right people in areas where we don't have competition.

Patrick FitzPatrick: Where you know that you can find interesting clients who are able to pay back.

Hussein Abaza: Exactly. And the branch managers know them personally.

Patrick FitzPatrick: What do you think people most misunderstand about the bank?

Hussein Abaza: I think it's what I misunderstood about the bank when I wasn't there. I joined the bank only two years ago. My idea of Banque Du Caire was it was a quasi-public sector bank. But my first or second day at the office, just looking at the numbers, it felt like home. It felt great. This is a bank. It's a very, very well-run bank. Again, liquidity is there, asset quality is there. It has all the components of a brilliant bank.

Patrick FitzPatrick: Why is now the right time to bring it to market?

Hussein Abaza: I think it's a combination of several things. The bank was coming to market several times. The last time was during Covid, but even then it was coming to the market as a transformation story that was going to happen. Today, we're actually bringing it to the market as a successful transformation story that actually happened. And actually all the very aggressive numbers that were promised six years ago have been overachieved now. When you look at ROE, we were looking at ROEs today of high 20s.

Patrick FitzPatrick: That's a return on equity.

Hussein Abaza: That's a return on equity. We're looking at capital adequacy, which is very important for banks, of around 22% versus 14 and 15. We're looking at NIM. NIM is basically equivalent to the net operating margin of companies. It's crucial. It shows the profitability between the interest you pay and the interest you receive. That has gone up from below 3% to a blended NIM of seven and a half and an Egyptian pound NIM of almost 10%. The other very impressive thing is last year, when we had 825 basis point cuts on interest rates, generally, banks' NIMs will compress. Our NIMs actually grew.

Patrick FitzPatrick: How did you manage that?

Hussein Abaza: It's a combination of two things. On the cost side, we focused very much on gathering cheap deposits. Cheap deposits for banks are the current and saving accounts, what we call CASA. Our CASA growth in local currency last year — if you look at our total deposit growth, it looked quite anemic. It was 14%. But our focus was Egyptian pounds that grew by 28%. And the focus on CASA, which is the cheapest form, that grew by 44%. And going back to the 114 branches, the CASA there grew by north of 53%. 

Patrick FitzPatrick: Wow. 

Hussein Abaza: So it's not just a theory or a strategy. It actually worked. This year we grew our deposits by 9% for the first six months. 86% of that came from CASA, and more than 55% of that came from the branches outside Cairo. Today, our CASA as a percentage of deposits has gone up from 30% five years ago to 57.5%. That is key. That's the biggest single cost any bank can have. If you have 300 billion of deposits, a 1% is 3 billion straight to your bottom line.

Patrick FitzPatrick: How much of it was market conditions?

Hussein Abaza: Part of it is market conditions, but it's more about building the balance sheet in expectation of future market conditions. Nobody in banks wants to see 825 basis point cuts. The economy loves it. We're like undertakers. We love the  plague. 

Patrick FitzPatrick: Yeah. You love the plague.

Hussein Abaza: We love the plague. 

Patrick FitzPatrick: 100%. 

Hussein Abaza: So, as the economy got much stronger, we had to cope.

Patrick FitzPatrick: Yeah.

Hussein Abaza: When you have CASA deposits, you can reprice as opposed to CDs. The other thing is, if you look at the loan portfolio, on the other hand, most of our competitors have a much larger corporate portfolio. Conversely, we have 34% of our book is in retail. Now retail has several [advantages]... First of all, it has higher yields where you're lending at 21 to 23%. Secondly, they're usually 3 to 5 years in duration and fixed rates. So as interest rates go down you're locking in the assets. It's the opposite of a CD when you're locking in the liability. That had a huge benefit. We're also very big on microfinance; we're the single largest bank lender of microfinance. And yields there are very high. We retooled the product itself. We brought our NPLs down from 10% a year and a half ago to below 3% today.

Patrick FitzPatrick: And NPLs are non-performing, non-performing bad loans.

Hussein Abaza: Exactly. Because the biggest problem in microfinance is it's very lucrative, but there are very high loss rates. So if you can control the high loss rates, then basically all of the loss rates come out of your profit margin.

Patrick FitzPatrick: You guys are going for an IPO, despite what we understand and what we've reported over a decade now, that there have been consistent approaches from strategics who are interested in buying some or all of the bank from the state. And you've gone down the IPO route. Why is an IPO the right thing for Banque Du Caire, and why is it right for the economy?

Hussein Abaza: I think it's right because you can just look at examples like CIB. CIB at a certain point was half owned by National Bank of Egypt and half owned by Chase. Chase then sold their half to National Bank of Egypt. And I think when National Bank of Egypt started selling off stakes of CIB, it was a very, very successful model. And I think this is a very similar case because even though we're owned by Banque Misr, Banque Misr has nothing to do in terms of running the bank. The fact that it's sold on the stock exchange, I think, is better, because once you've established a price with your initial public offering, then the next tranche, as it's sold, you do not have to mark it. It will be sold at market price. The market will establish how good or bad the bank is.

Patrick FitzPatrick: So if you want to privatize an additional stake down the road.

Hussein Abaza: The market will have said what the price is, and then you can time it at the best possible timing.

Patrick FitzPatrick: You're trying to raise more than $450 million at the same time as Mounir Nakhla is in the market, with MNT- Halan looking for north of 120. It's a lot of paper hitting after a drought. What are the bankers telling you about demand? Do you have any concerns about there being enough liquidity to cover this at home and abroad?

Hussein Abaza: The way I see it is more the appetite we're getting in investor meetings.

Patrick FitzPatrick: Because you've been on the road a bunch.

Hussein Abaza: We;ve been on the road and we're doing now our virtual part. We're seeing massive demand, at least in the meetings. And because I've done a lot of investor meetings, you can gauge the interest from the way the meeting is being conducted. So we are seeing interest from South Africa. We're seeing interest from the States. We're seeing interest from the UK. We're seeing interest from the GCC and from Saudi. And it's not just taking the meeting. There are follow-up meetings and questions during the meeting, and they're asking very specific questions. So these are not people coming in just to take a meeting. So from my reading of the interest from the meetings, I think it looks very positive.

Patrick FitzPatrick: Mounir told us that he thinks the “Egypt discount” on listed equities is no longer justifiable. And for a decade or more, 15 years now, you had to go out and defend macro. You had to go out and defend policy decisions. Are the meetings now about Egypt first and then BdC, or is it jumping straight into BdC? Where is that sentence?

Hussein Abaza: It's a little combination of both. I think the question is not what's happening. It's how did Egypt come out unscathed? They need to understand why, and the reasons are very obvious. Because they're fixated, or the most important thing is the FX regime. But I think a lot of them are not looking at the most important thing, because it's not about the rate. The rate can move. It's about the availability, and it's not about the availability of FX to the foreign investors leaving. It's about when the foreign investors leave, can the companies in Egypt still access the interbank in order to continue importing? Because that is the main thing. You can have a rate, but if you do not have access to buy, that is when the economy stops. And this time it was different because the rate moved from 46 all the way up to 55, 56, but at every price point there were dollars available for local importers. And that is the backbone of the economy. They're either importing raw materials, importing packaging material; in the cases of CapEx, they need to import. So if that tap is turned off, that is when the problem starts. And this never happened. And it didn't happen on the way down. That again gave rise to a lot more confidence because remittances come in in dollars, but people convert them to Egyptian pounds. If there is a hint of suspicion that this is not the right rate, they will just take the dollars and sell them somewhere else. So the conversion rate in good times is 60%, and that continued all the way.

Patrick FitzPatrick: Throughout. 

Hussein Abaza: The other indicator, which is very unofficial and informal, is the walk-in retail customers who sell very small amounts of dollars. Because I come back from a business trip with $200 in my pocket, if I'm not happy with the rate, I'll find a friend of mine who's traveling who'll buy it at whatever rate. We continue to see the volume of retail selling in branches at the same levels. That was the easiest proof that it's working. Not that the rate moved because you can move the rate but not have availability; then it's not the rate.

Patrick FitzPatrick: You want to see volatility in the rate that matches up with logic, right? We see a negative adverse external event. We see the currency act as a shock absorber. We see good economic performance. We see it strengthen. What you don't want to see is someone putting their thumb on the scale.

Hussein Abaza: Exactly. And at the same time, despite the fact that we saw a lot of volatility in carry trade leaving and coming back, central bank reserves went up. Net foreign assets of banks went up. So effectively remittances are continuing to come in at a very healthy flow. Suez Canal revenues, even though they're less, they're still coming in. Tourism, we saw some cancellations in April, but they picked up again May, June, July. And we're seeing tourism both from the GCC and from the West, because they're very different in their behaviors.

Patrick FitzPatrick: Very much so. 

Hussein Abaza: Their spend per visit, what they do and where they go. In general, if you look at the economy, it's in a much healthier state than it's been in a long, long time.

Patrick FitzPatrick: What's the toughest question that an international investor has asked you about BdC?

Hussein Abaza: It's not about BdC. It's more about what do you think is going to happen in the Gulf. And I think the question is, the trouble is coming from your side for a change.

Patrick FitzPatrick: It's not coming from us.

Hussein Abaza: We're not the guilty parties.

Patrick FitzPatrick: We're not the guilty parties. And we are the bastion of stability.

Hussein Abaza: Absolutely. We're the bastion of stability.

Patrick FitzPatrick: What does a successful IPO look like 12 months down the road, other than share price? What says to you about this transaction, "This was a success"?

Hussein Abaza: Continuing interaction with shareholders. As long as there's interaction, there’s interest. Share price can come and go. When we look at what we can do, we can manage our P&L, our profit and loss statement. We can manage our business. We have no control over the share price. But as long as we continue to interact with investors — as you pointed out, during 2011, everybody was ducking investors. We went out on the road. I think we went to the States 15 times. We went to the UK the same number of times. You have to be there in bad times, more than good times. And I remember we had several bad times, and you actually came with your laptop and sat with me in the office and we went out. And you have to speak to investors. That is a successful relationship.

Patrick FitzPatrick: You don't duck the phone calls. You take the hard questions.

Hussein Abaza: You have to take the hard phone calls.

Patrick FitzPatrick: All right. When we come back, how Banque Du Caire makes money and where Hussein is taking the bank after the IPO.

———

Patrick FitzPatrick: You've gotten into quite a bit of this already, but break down for us the ways in which the bank makes money from the top.

Hussein Abaza: Banking is one of the most simple businesses in the world. When my kids started growing up, they were asking me what I did. I explained it in two minutes and I lost all respect.

Patrick FitzPatrick: That's all you do, Dad.

Hussein Abaza: That's all you do. So basically, banks try and take money as cheaply as possible and lend it out as expensively as possible and hopefully get it back. So basically the focus on profitability comes from both sides of the balance sheet. As I said, we're working on the CASA, the current and saving accounts, the cheaper funds, especially since we're expecting the interest rate easing cycle to continue. We've taken a small break now because of what's happening in the Gulf, but most economists are expecting sometime beginning of next year we start seeing interest rates come down. So effectively, you need to have flexible rate deposits that you can bring down as interest rates come down. On the asset side, it's a combination of buying the sovereigns with your excess liquidity because it's a very good opportunity. We've seen a decoupling between the sovereign rates and the policy rates because they are not linked. One is there to manage inflation and the other is a function of the budget deficit. So that decoupling is a good opportunity for banks to park excess liquidity. Banks should not be taking in money and working as a money market fund, but the strategy is bringing as much liquidity as possible. Cater to all loan demand you can find, but take advantage of the fact that you are getting very good returns on your excess cash, which is not available in any other currency. On the loan side, we're focusing on five different areas. One is the corporate book. But with corporate our total strategy is based on profitability rather than market share. So I would rather grow at 10% in profitable areas than 25% and kill my profitability. So the growth in corporate is always linked to ancillary business. Are there fees and commissions? Because corporates have offers from other banks? Right. And the lending margins are very slim. But what ancillary business? And business can be in the form of the operating accounts coming to the bank for a day or two at zero interest or at lower interest. Do they open letters of credit? Do we get fees and commissions? How can we manage their employees' payroll accounts? There are thresholds not just on credit quality, but on return on relationships that we have with the corporates. The second area which I touched on was retail, 34, 35% of the book. Very profitable. Longer durations, fixed rate. It helps mitigate any NIM compression and reliance on the branches where we have 20% banking penetration and local knowledge. This is a great, great area to grow, and in the rural areas the branch is very, very important. Yes, digitization is important, but the branch and the local knowledge are still 90% of the battle. The third area is microfinance, as I mentioned. Very lucrative and local knowledge there.

Patrick FitzPatrick: What’s the ceiling on microfinance?

Hussein Abaza: A million pounds. 

Patrick FitzPatrick: A million pounds, okay.

Hussein Abaza: And a large part of these are unofficial. So effectively, it is not about lending the money. This is where control comes in. This is where knowledge comes in. This is where every Thursday afternoon, the bank officer has to know exactly where the guy who borrowed money is sitting so he collects the interest. You cannot substitute local knowledge. So this is a huge area of growth. As I said, we retooled that product. Average duration is 12 to 18 months. And we started this in January 2025, so we've had 21 months. Loss rates have gone down from 10% down to below 3%. We increased the risk parameters slightly.

Patrick FitzPatrick: Okay.

Hussein Abaza: Secondly, and very obviously, the initiator of the loan does not get a commission until the final collection. He's responsible. Suddenly he's a lot more focused. So that worked beautifully. And now SMEs are another area of focus. If you remember, the central bank had an SME target which most of the banks did meet.

Patrick FitzPatrick: They made it in a way that involved a lot of pooled lending and on-lending. And, you know, if you squint, I can call this an SME transaction. Most people like us don't really have access to bank finance easily.

Hussein Abaza: What we're doing today is going backwards one step. Instead of bringing in someone who's never borrowed and throwing money at him because I need to meet the target, we're bringing in non-borrowing SMEs as depositors. 

Patrick FitzPatrick: Okay. 

Hussein Abaza: And they are now the cheapest source of deposits we have on condition that he brings in his sales revenue as they call it, the throughput, which is not the fancy word for bringing your cash. So he brings in his cash. After 7 to 8 months, we tailor-make a facility based on that cash flow. It gives us several advantages. One, we get the cheap funding forever. Number two, we now know exactly what his needs are and when, and we know the volume that he can repay. Number three, if anything starts to go wrong, you no longer have to wait till financials come out and see if they're reliable or not. So if there's a problem in April, you don't want to find out about it next April. You find out about it after tomorrow when the revenues have dropped.

Patrick FitzPatrick: When the revenues have dropped. 

Hussein Abaza: That is a much safer way of doing it. And it brings in the deposits as well. The last thing we did is we grew a new sector, which we call mid-cap. We define it as revenues of between 800 million to 1.3 billion. The idea is it's a lot more secure than SMEs. If you have a company that's making 1 billion pounds of revenue, there's probably a CFO there. There should be a CFO there. 

Patrick FitzPatrick: Yep. There should be a CFO there.

Hussein Abaza: At the same time, they borrow at higher margins than corporates. And we've carved this out of corporate. So they have their own KPIs. There's a shadow area in risk that only focuses on them because when they were part of corporate, people weren't giving them enough attention. Now it's a separate entity, and a lot of these companies and a lot of the non-borrowing SMEs again come from the rural areas. So that's why I stress, when you asked me why Banque Du Caire? Those 114 branches. It's key to everything. It's key to CASA. It's key to the growth in the various areas in lending.

Patrick FitzPatrick: But to play devil's advocate. Isn't everything going digital?

Hussein Abaza: It's going. But at what pace and to what extent? Local knowledge there is critical. Yes, digital I think will help us to make better decisions quicker. And it will make the visit to the bank less painful. It's never pleasant.

Patrick FitzPatrick: Yeah. Nobody wants to wait in line. 

Hussein Abaza: It's like a root canal, 

Patrick FitzPatrick: That bad?

Hussein Abaza: When have you ever willingly gone to a bank?

Patrick FitzPatrick: No, never.

Hussein Abaza: There you go. So digital is more about making life easier. 

Patrick FitzPatrick: Correct. 

Hussein Abaza: But then again, every time somebody does a transaction off his phone rather than coming to the branch, it's a lost sales opportunity. Even I think there was a very successful bank in South Africa that's purely digital, that is now starting to have physical touch points. So that's what I meant by, to what extent are we going digital and how quickly are we going digital? If you have banking penetration of less than 20% in rural areas, they're not going to suddenly have an app. They'll feel more comfortable coming in. Yes, the younger generation will always want to fiddle around on their phone, but a lot of the wealth is still outside the system. It’s not going to come in through an app.

Patrick FitzPatrick: Where are you guys in your digitization in terms of making it possible for me to bank with you when I want, where I want, however I want? Where are you in that journey?

Hussein Abaza: I think, if we had this conversation five months ago, I would have said we're way behind. We actually changed into the new core banking system. The core banking system is basically the system that accounts for the bank completely. It does everything in the bank. And we did this after our June 30th financials. So June 30th we closed the old system, switched on the new system, and thankfully nothing blew up. Otherwise we wouldn't be here. Since then, we've moved to the new system. On the back of that, we now can put in all of the foundation for digitization. So we've only started our digital journey in earnest in July. And we're lucky enough that we have the branch network in the rural areas where we can afford a bit of breathing space.

Patrick FitzPatrick: Look, 12, 24 months down the road, you choose the timeline. What am I able to do on the app, be it as a business owner or as a retail client that I can't do today?

Hussein Abaza: I think the app has to be a lot more friendly. I mean, most people want everything on the app. You want to do your bill payments, you want to transfer money. One of the things the app has yet to do is get new money in. That is where the marketing is, and that is where we want the footfall in the branch. And we are seeing competition from the NBFIs. We are seeing competition in the sense that ten years ago, if you had 50,000 pounds, you could either go buy some dollars and keep them at home, put money in the bank, or physically go to a jeweler and buy some gold. Now you can buy an app that is in precious metals. You can buy a real estate app. You can buy a money market fund. You can buy this and that. And that's why we've seen in certain areas there's less liquidity. However, all of these fintechs and apps need a back end as a bank. And that's why the relationship between banks and fintechs and between banks and microfinance companies should be one of cooperation, not competition. End of the day, if he is a microfinance lender, he needs to borrow from the banks. He can't take deposits, so he becomes a customer. He always wants to securitize. If he's a fintech, he needs a back end to put the money. They're not allowed to take these deposits. Even the telecoms with their wallets bank with banks. So it's more about making the relationship a win-win. Who's going to get the money? How are we going to use it? Even the large companies, bill payment companies — put them on your app. The landscape is changing. We have to change the way we look. They're not competitors. There has to be cooperation with them. There will be competition in certain areas, but it has to be more of a cooperative thing. They're here to stay.

Patrick FitzPatrick: They're not going anywhere.

Hussein Abaza: This is financial inclusion. Everybody wanted financial inclusion. So why are we complaining when it happens? As long as fintechs and bill payments are not allowed to take deposits, then the cooperation should stay. We can discuss: you get 90% of the flow, do I get 10%? How much are you going to get on it? That's pure market forces, supply and demand. It's a function of liquidity, a function of growth. Where the competition will come is in fees and commissions rather than interest. But as long as they are not able to take deposits, and for very good, valid reasons globally, this is what happens.

Patrick FitzPatrick: Explain that to us, why?

Hussein Abaza: If somebody who took deposits goes under, he’s hacked or whatever, then you've got the depositors on the street. If somebody who's lending money goes under, this is great and people don't have to...

Patrick FitzPatrick: I don’t have to repay.

Hussein Abaza: Exactly.

Patrick FitzPatrick: Yay me.

Hussein Abaza: So, yay everybody! 

Patrick FitzPatrick: Yeah. 

Hussein Abaza: And I think this is something that will continue. Banks are seen as secure. We're much, much more regulated for a reason. So you can't have everything. You're much less regulated, you're much more agile, but the security has to be full. I think the priority is the safety of depositors' money. That is the priority.

Patrick FitzPatrick: The last thing you want is a bank that goes bust and people rioting in the streets saying, bring me my money back. Exactly what can a non-bank lender do better than you guys can, then?

Hussein Abaza: Not better, be quicker. But then again, it's very easy to give out money. You have to get it back. I think banks and lenders manage risk. You can't avoid risk. Risk is part of life, and in banking, it is a huge part. It's more about managing it. And I think going back to what you were saying, digitization, it's getting the right algorithm that you can give out a loan quicker but within good risk parameters. Because then you get into — remember I said asset quality, liquidity — asset quality goes out the window. You go out the window.

Patrick FitzPatrick: Banking is just business. And you know, there's this misconception that people who do well in business must be great risk takers. It's not that you're a great risk taker, is that you're really good at identifying it, quantifying it, figuring out how to mitigate it so that you can uniquely take it on.

Hussein Abaza: Exactly.

Patrick FitzPatrick: Put your crystal ball in front of you, Hussein. Where are rates 12 and 24 months from now? Presuming there's no further deterioration in global macro, no exogenous shocks, as we like to call it, coming from outside the country.

Hussein Abaza: I think it's pretty simple if you work it backwards. The central bank had a target for inflation of seven plus or minus two. Assume the high end of 9%. They would like to see a real interest rate of 3 to 4%. So it would be nine plus three to four. It would be 12, 13%.

Patrick FitzPatrick: A year from now. Two years from now.

Hussein Abaza: I would imagine a year, a year and a half. It depends how quickly we resume the easing cycle.

Patrick FitzPatrick: So look into the crystal ball and tell me at what stage do businesses stop borrowing from you for working capital and start actually borrowing for CapEx and putting that money to work, growing the business, building a new factory, putting in a new line, expanding?

Hussein Abaza: Let me, I have a slightly different take. 

Patrick FitzPatrick: Okay.

Hussein Abaza: I think they always want to borrow working capital. At what stage do they start borrowing CapEx over and above average working capital? This is the bread and butter. A lot of people link it to interest rates. Again, I have a different view on it and I'll explain why. Interest rates are relevant if companies have very high borrowing, what we call highly leveraged. Most companies in Egypt are not at all highly leveraged. So a one, two, 3% difference in interest rate is minimal as a cost on their costing. In fact, a one or two pounds devaluation would be a much, much bigger impact. What is holding back companies, in my opinion, from CapEx? CapEx is buying new machines and expanding. You look into the operating rate of the company. Companies will not invest in new machines unless they're already operating at 90% and seeing more demand. When we had the last devaluation in March 2024, the pound went from 30 to 50. There was a huge hit on purchasing power. A hit like this takes a couple of years to come back. We had a similar hit, if you remember, back in 2016, and it took us until the end of 2019. People started borrowing CapEx January 2020 and then Covid hit. So it's a function of what are the operating rates of companies. As soon as they start hitting that 90%, then the CapEx conversation is on the table.

Patrick FitzPatrick: Okay.

Hussein Abaza: And CapEx tends to come in stages. The first type of CapEx is the smallest, which is: I have a machine. It's so old and inefficient. If I just replace it, there'll be a big jump. It's the cheapest form of CapEx. Then you move on to I have space in the factory, I'll put in an extra production line. Then the final form of CapEx is let's go to a brand new location, brand new company. We still haven't hit the first stage yet.

Patrick FitzPatrick: When we come back, what changes when the bank goes public and who gets to decide how it's run?

———

Patrick FitzPatrick: Very often, state-owned banks have been treated as piggy banks for the state. Has that changed?

Hussein Abaza: If we're talking in reference to Banque Du Caire? Definitely. Remember I was saying when my predecessor came, he was mandated to privatize the bank, and the first thing they did was they stepped back and he was allowed to hire people. Because banks are based on people. So the management team that he hired is top notch, and the bank is being run as a private sector bank, not only in what they do and what they're told to do. Any instructions we get from the central bank are instructions to the banking system. 

Patrick FitzPatrick: To everybody. 

Hussein Abaza: The public sector banks, in my view, have a different mandate, which is warranted. Banque Du Caire is being treated completely as a private sector bank. And this was when it was 100% owned by Banque Misr. So it does not seem logical that once we start privatizing, we see changes. If anything...

Patrick FitzPatrick: There will be an investor rebellion against that.

Hussein Abaza: Absolutely.

Patrick FitzPatrick: I'm buying a minority stake in a bank whose controlling shareholder is another bank. Who protects me from the whim of that institution, deciding, you know, I'm going to compete in this sector whether you like it or not, and you're actually going to be told to leave that sector to create room for me. I'm going to be told as a banker to price a certain way that might disadvantage me so that my numbers look better at Banque Misr. What's the mechanism that prevents that from happening?

Hussein Abaza: Our board is completely independent and our management is completely independent. And I think the proof of that is the numbers and the way the numbers have progressed over the past. The deals, not the deals we've gone into. The deals we've turned down. We have complete independence as to what to finance, what not to finance.

Patrick FitzPatrick: So a state-owned company comes to you and says, I'd really like X million for Y purpose. You can say no.

Hussein Abaza: Absolutely.

Patrick FitzPatrick: How much of that protection depends on you being here?

Hussein Abaza: It was here before I came.

Patrick FitzPatrick: You said that there is a role for state-owned banks in the economy. What is that role?

Hussein Abaza: Exactly what you were saying, funding government projects, even in certain cases guaranteeing a high fixed yield for certain sectors of the economy, be it people on pensions. Their role is to implement government policy. And that's not a bad thing. In fact, it takes that responsibility off the private sector's shoulders. So it's great.

Patrick FitzPatrick: I have this argument with a certain type of foreign investor, or often folks from the embassy community who would love to see zero state involvement in the economy. When you push back and you remind them that whether it's in the European Union, whether it's in Canada, whether it's in the States, there are government-owned institutions that subsidize exports, that, you know, help shape markets, let's say, through the allocation of capital. Why do you think we get beat over the heads so much for it?

Hussein Abaza: I think a lot of the business community are overstating it. I'm not saying that there isn't a lot of involvement, and I'm not saying that there weren't things that shouldn't have happened, but I think that everybody is trying to blame the fact that he's not making 300% ROE in one year on the army. And then you have to remember something very important, in a country of 120 million people, there has to be a social security net.

Patrick FitzPatrick: 100%

Hussein Abaza: Social stability has to be there.

Patrick FitzPatrick: Leave Cairo. Drive for 25, 30 minutes. You're going to start running into shops with private sector brands that you don't recognize. Drive another 20 minutes. You're now getting into brands that are produced by government-owned institutions that are there to ensure that a very large, by population, strata of society has access to food, has access to shelter, has access to infrastructure, water. I'm not saying that we shouldn't want to see more of the pie in the private sector, but maybe the debate is a bit more complicated than people give it credit.

Hussein Abaza: 100%. And we are seeing more of the pie in the private sector. In the aftermath of Covid, the public sector stepped up because we had to have employment. We could not put companies on furlough. Had the government not done a lot of these public projects, we would not have had that employment there.

Patrick FitzPatrick: Staying with the public sector theme for another second. What changes for me as a bank employee when you go public? They've gone on a journey from "I am an employee of a state institution, one of the big three" to "Oh, now you call yourself a private company,” to “You have private shareholders." What changes for them?

Hussein Abaza: Again, I have to give a lot of thanks to my predecessor. He started this transformation in everything. He brought in the right people who've put in the right KPIs, put in the right rewards. But what we've done recently, we've had a year of roadshows. Every call there'd be 15, 20, 30 of us sitting there, to the extent that the investment banks were saying, why do you have all these people? Because it's very important for management to hear what shareholders want. It's not enough for us to say we want to bring in CASA. Why? Because this is going to reflect on profitability. It's going to reflect on NIMs. And that's the first question you asked me. It's the first question every investor will ask every single meeting, let alone earnings calls. So it's getting management in tune with investors because it doesn't matter what I say. It matters what the direct boss says. So getting it to trickle down all the way through is, I think, the best thing that could happen to the bank.

Patrick FitzPatrick: You had already run CIB. It is arguably the crown jewel of the private sector, alongside a very small handful of other institutions like our friends at EFG. What made you want to take on the challenge at Banque Du Caire? Why was it the right move for you?

Hussein Abaza: It was a challenge. Definitely in the back of my mind, I know that Banque Du Caire ultimately will be privatized and for me to IPO it was great. What I didn't expect when I came here is how good the bank is and how ready it is. Coming in, it's a bank ready to privatize. You just needed to focus on certain things. And again, doing the roadshows helped show how important our strategy was, really, if we're going to IPO.

Patrick FitzPatrick: Is that the thing that tilted the balance for you?

Hussein Abaza: Yes, in a sense. 

Patrick FitzPatrick: Yeah. What did you have to unlearn from CIB?

Hussein Abaza: That there's more than one way of doing things. What works at CIB might not be the quickest and most efficient way to do stuff here. Referring to the credit course, for example. This is one thing that we introduced here.

Patrick FitzPatrick: Explain to listeners who don't know what a credit course is. What's a credit course?

Hussein Abaza: The credit course is exactly what you said a few minutes ago. It's about identifying and managing risk. It actually should be called the risk course. But it's the basic principles of finance because balance sheets are very simple, but it's more looking at it as a lender. What do you look at in a borrower? How much do you need to understand him in order to identify risk and then mitigate risk?

Patrick FitzPatrick: So take me through a change that you wanted to make, but where you ran into resistance. How did you solve that?

Hussein Abaza: So we have an appraisal system where at the end of the year, everybody's appraised on their performance and it's five different grades. This is like very weak, weak, good, very good and excellent. There was a rule where people would only get promoted and would get a good profit share if they were very good or excellent, which effectively means everybody has to be in that bracket. So you do not get that bell-shaped curve. What we did is we decided that the bulk of the population is going to be good. However, they are still eligible for promotion and we increased the profit share so that people who are good got the same number of months as people who are excellent the year before. So that sort of got the resistance down. Some people still want to be excellent, but you can't have 80% of the population excellent. The bulk of the population has to be good, which means you're doing your job. And then we put in numerical KPIs where you say you're excellent, we say you're good. This is what you did. This is what you didn't do. Then you are good. But despite the fact that you might not feel you're good, you feel you're better, you're still eligible for your promotion, and you're still getting the same number of months that you would have gotten last year had you been excellent. So it's more about getting people on board with certain things.

Patrick FitzPatrick: So you maintain social peace, but still manage to reward the over-performers.

Hussein Abaza: Exactly.

Patrick FitzPatrick: What's the hardest conversation that you have to have regularly as a CEO?

Hussein Abaza: It's the normal CEO stuff, really. This is part of the job where you're looking at something in retail, but because something is not happening in operations, then you have to sort of align what we do. And I think it's worked very well is there are three deputies. One is the Chief Operating Officer, so he has all of the non-business areas reporting into him. We've got one who's handling institutional business and the treasury, and one who's handling the retail in the branches. We sit down every Sunday morning. We have breakfast together, really, it's an hour, an hour and a half where everything's on the table. This has been a great forum to defuse everything. And what I'm trying very, very hard to do on a management style, I get consensus. All four of us. I don't like having an autocratic where "this is what's going." If this is going to happen, let's discuss it, all of us. Even if it's something between institutional and retail, myself and the COO will still have an input. And we discuss and we handle it because several things. One, each of these guys is ready to run a bank, so they should all know what's happening. Two, I'm 64. One of them will be running the bank pretty soon. Or other banks. So it has to be done in a way where we reach consensus on everything. In that way, nobody's forced and nobody's bitter about it. Even if there's nothing to discuss, we still have breakfast every Sunday morning.

Patrick FitzPatrick: I like that. You have spent years building trust with investors. Many CEOs of listed companies view the investor relations function and talking with shareholders as, to quote you from a few minutes ago, you know, something akin to going for a root canal. There are a few in the middle who sort of view this as box ticking. There are very few who thrive on it. You seem to thrive on it. You run a good program. What's the secret to being a good CEO when it comes to shareholder relations?

Hussein Abaza: I think it's recognizing the value of the input of investors. They open up things for you. Why aren't you doing digital? Why aren't you doing this? Why are you doing this? How does this impact that? If you cannot defend a strategy in an investor meeting, then there's something wrong in the strategy. I genuinely look at investor meetings as an educational experience, and that's why I dragged in all of the people to listen to investors, because outside looking in, they see macro in a different way. And maybe they compare this to Indonesia 18 years ago. I never thought of that. But let's compare it to Indonesia 18 years ago. Or let's answer, if I can't defend my case 400 times a year, then there's something flawed in it.

Patrick FitzPatrick: That's a lot of meetings.

Hussein Abaza: It's a lot.

Patrick FitzPatrick: I still am disappointed that Mark Mobius died. 

Hussein Abaza: Oh..

Patrick FitzPatrick: that was the investor...

Hussein Abaza: My last EFG conference, he came in in the middle of a group.

Patrick FitzPatrick: No way! 

Hussein Abaza: And then I said to everyone, I said you guys all have a job.. 

Patrick FitzPatrick: Your job is because of Mark Mobius. 

Hussein Abaza: This guy created an asset class. And the fact that he's sitting here in the middle of a group...

Patrick FitzPatrick: Mark Mobius in a group meeting.

Hussein Abaza: And I said, if anything, you should be asking him stuff, not me. We can all learn from this guy. He created emerging markets as an asset class.

Patrick FitzPatrick: It wasn't an asset class before him. And to be investing up until your last weeks, traveling up until your last weeks, taking calls up until your last weeks. 

Hussein Abaza: Legend.

Patrick FitzPatrick: What's your advice to a first-time CEO who, now leading a public company, has to disclose to investors an adverse event? How does she handle it?

Hussein Abaza: As honestly as possible because the relationship between CEOs and investors is built on trust. And no matter what you say and what you try to hide, it'll always be found out sooner or later. Once it's found out and the trust is lost, it's gone forever. I think that's the one thing I learned over the years. I started doing investor relations at CIB in 2006 till I left in 2024. So during those 18 years we went through the Arab Spring. First we went through the global financial crisis and we had to tell investors that, yes, something is happening in the US, but it's not affecting us. Then we had Arab Spring, then we had, you know, Covid, we had all of that stuff. And then there were idiosyncratic issues at CIB at certain times. And you. Yeah, if you're not fully open because you will be found out. And to maintain trust you have to be completely. Yes. XYZ happened. We screwed up. We read the market wrong, we priced something wrong. We had a loan that went bad and we're taking a huge hit. What's going to happen moving forward? Is it sustainable if there is a crack in the business model? He will find out sooner or later. If it's something that will be fixed, then this will take X amount of time and we'll come out of it doing doing this. You have to be very clear. You need to maintain that trust. You need to be very honest. It's very difficult and it's very unpleasant calls and you get hammered from everyone, but you just have to do it. You bite the bullet and do it.

Patrick FitzPatrick: A lot of investors know you. They don't know Banque Du Caire yet. They're getting there. You started the investor education process and you are exposing management to them on these calls. But what else needs to be done, if anything, to build that confidence over time? So they know that if you do pull the pin at age 65, 66, 67, the bank is in good hands.

Hussein Abaza: The breakfast with the deputies is very important. Having a lot of people around on investor calls. And the one thing I'm honestly very much against is creating a cult around any head of a large institution. Banque Du Caire has been here for 74 years and inshallah it'll be here for more. Don't take credit and don't make it about me. It's constantly about the branches. It's constantly about the people. It's mostly about the brand name. Push the brand name. One of the things that Heidi does [with us] whenever they put an article about Banque Du Caire in the papers, I try not to have my picture. Put a picture of the bank. Put the bank logo. I don't want the bank associated with anyone. The bank is — you're buying into the institution, which will outlive everyone.

Patrick FitzPatrick: How do you decide where you personally spend time at the bank?

Hussein Abaza: I think what I try to do, first of all, is since I've been harping on and on about the branches, I'd like to do a lot of branch visits. You want to not just go there and talk. You want to go there and listen. We're very lucky that our head of branch network is beyond superb. Other than that, it's more of keeping up with what's happening, because everybody knows what the strategy is. And everybody comes in and the reports are there, and we discuss.

Patrick FitzPatrick: What is the decision that your team made that you would have done differently, but you let stand because you can look at it and say, you know, yeah, they could be as right as I am?

Hussein Abaza: We were talking about CDs and issuing CDs, and I think what we're seeing today in Egypt is there's less liquidity than there was a few years back. My generation of bankers have never seen less liquidity. So we're seeing different bankers. I won't say panicking, but this is a playbook we've never seen. So issuing CDs, almost all the banks have gone out and issued CDs at a time when you're expecting interest rates to come down. So even if these CDs are barely breaking even today, they'll be loss-making in a couple of years. For a lot of them, they needed to see, "Let's issue some CDs." We got to a compromise where it's a certain amount. I look at it as you need stable funding in the balance sheet. So even if it's loss-making, I'll pay a price. And the one thing we added in as a condition is for these CDs to come in, cross-sell something with them. I don't want somebody coming in, buying a CD, and leaving. He's coming in, sell him a credit card, sell him a debit card, give him a loan. But don't let him walk out of here just with the CD. Personally, I wouldn't have gone down that route but I sort of...

Patrick FitzPatrick: Went with the team.

Hussein Abaza: Pretended that I'm democratic.

Patrick FitzPatrick: Pretended you're democratic. After talking about consensus a few minutes ago.

Patrick FitzPatrick: What's something that you're doing right now that won't pay off before three years have passed?

Hussein Abaza: I think we're trying to bring in a lot of young blood and new people who hopefully will reach managerial positions. I think one of the benefits of the credit course, it's a very good hook to put to the bank – because an AUC graduate will not automatically think, wow, I want to go to Banque Du Caire.

Patrick FitzPatrick: I was going to ask, why would I go here? Why not CIB, HSBC, whatever.

Hussein Abaza: Having the credit course, doing that, I think we're trying to sort of raise the profile of a franchise in the sense of we're not a state-run bank, we're a private sector bank. That takes time to change that image. And at the same time, you don't want a very drastic change because in the rural areas, that state-owned image is very beneficial because you are seen as secure. Being attractive to the younger generation, but still being the safe haven of the older generation that we're trying for, it's taking time.

Patrick FitzPatrick: What's the difference between a young banker who knows how to analyze a set of financials, knows how to mitigate risk, and one who will grow as a leader? What distinguishes me if I also have leadership skills? What's leadership for you in that cohort of young people you're bringing into the bank?

Hussein Abaza: I think it's more about curiosity and interest about the bigger picture. It's not about how much I'm going to lend this guy today. It's linking that to the macro. When will he be needing CapEx? Why will he be needing CapEx? And then what's the impact bank-wide. And a willingness to move. Our generation, you'd come into risk, you'd stay in risk till you die. Now you have to have people willing to move. Yes, you got to a certain level in risk. Now he's going to start at the bottom in business. He's going to go to operations, and know absolutely nothing. All his subordinates will know more than he does, and learn. It's this willingness to learn that I think is very important.

Patrick FitzPatrick: What is the role for humans in banking? If Claude and ChatGPT and Gemini are coming for us, what's the role for people in banking five years down the road?

Hussein Abaza: It's the human touch. The ability to read the person. Subjectivity, knowledge. You've gone to school with him. You know him personally. And to be honest, good credit officers, sometimes it's an ego trip. He says, you know, I can smell a good loan. There's something, you get a feel. It's not just the numbers. Claude will crunch the numbers quicker and better than I can, but a good credit officer has experience. I think that is something that, thank God, we still have. By the time it comes, I'll have gone anyway. But I'm just hoping for the next generation, they'll have something to do.

Patrick FitzPatrick: Hussein, thank you so much for making time for us today.

Hussein Abaza: Honestly, it was a pleasure.