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Jan 11 2007

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Ka-ching!

Without a doubt, the deal of the year was the sale of state-owned Bank of Alexandria (BA) , the smallest of the Big Four state-owned banks. Italy's Gruppo Sanpaolo IMI purchased 80% of BA for a staggering $1.6 billion a selling price that, at six times the bank's book value, sets a record for the amount paid for a privatized Egyptian bank. The sale gives Sanpaolo a solid foothold in Egypt, as BA controls a 6.8% share of the local market and 10% of the corporate sector, in addition to having a network of 188 branches nationwide serving more than 1.5 million clients.

Second on the list is the long awaited merger of Banque Misr and Banque du Caire . In September, Banque Misr Chairman Mohamed Barakat set a year-end deadline for the merger, a full year after the decision to merge was initially announced. They missed the deadline, but the finalization of the merger is expected at the beginning of 2007. Barakat has estimated the value of the new bank's assets at LE 160 billion. Together, the two banks will be large enough to compete with the National Bank of Egypt (NBE) , the government's largest bank, and other large foreign banks operating in the country.

Early in 2006, the Central Bank of Egypt (CBE) established a new entity known as the United Bank (UB) , which then acquired the United Bank of Egypt (UBE) , Nile Bank and the Islamic International Bank for Investment and Development . Mohamed Ashmawy, managing director of Commercial International Bank ( CIB , bt100 number 13) was recruited to head the UB, with a goal of reforming the institution's structure and financial position, paving the way for its eventual privatization.

While little information has been made available about the new entity, its component banks offer a variety of services including Islamic banking and telebanking. It continues to roll out a new corporate identity package at branches across the capital city.

In a separate deal, the Industrial Development Bank of Egypt was integrated into the Egyptian Workers' Bank to strengthen the financial position of both banks, which were otherwise in danger of failing to meet the CBE 's capital adequacy requirements.

While the government was busy selling the banks it owned, it was simultaneously divesting its holdings in several joint-venture banks: The NBE sold its 18.7% stake in CIB for $236 million in February to a consortium led by American private-equity giant Ripplewood Holdings. CIB had been one of the 13 contenders bidding for the BA stake, but pulled out as the bidding date drew near and surprised investors with an announcement that it would pursue an opportunity to expand its operations in the region, starting with CIB -Algeria.

Foreigners also had a field day shopping in the banking sector this past year. In January, Beirut-based Bank Audi bought Banque du Caire 's 89% stake in Cairo Far East Bank for $94 million, with plans to launch an offer for the remaining 11% stake from shareholders on the stock exchange. In August, Bahrain's Ahli United Bank bought 89.3% of Delta International Bank for a total of LE 1.65 billion, financed in part through a loan extended by the International Finance Corporation in November.

In July, Abu Dhabi-based Union National Bank bought the public-sector's stake in the Alexandria Commercial and Maritime Bank (bt100 number 80) for LE 65.3 million. That same month, France's Crédit Agricole acquired the Egyptian American Bank (bt100 number 37) and merged it with local-subsidiary Calyon Bank-Egypt for LE 2.9 billion; the new entity is operating under the trade name Crédit Agricole -Egypt.

All this wheeling and dealing was essentially a continuation of activities that took off in the banking sector in 2005.

Greece's Piraeus Bank bought the Egyptian Commercial Bank in July 2005 with plans to add another 220 branches to the bank's network by 2010. The bank is currently 95.35% owned by Piraeus Bank, 1.2% by Oriental Weavers Carpet Company (bt100 number 16) and the balance is held by other small investors.

National Société General Bank (NSGB, bt100 number 23) acquired a 90.7% stake in Misr International Bank (MIBank , bt100 number 21) in September 2005. Since the acquisition, NSGB has been very actively expanding its network, reaching a total of 54 branches by the end of 2006, situated in strategic commercial, urban and industrial locations. NSGB and MIBank celebrated the completion of their merger in early December 2006.

In a deal valued at $97.8 million, Lebanese banking kingpin BLOM Bank acquired a 96.8% stake in Misr Romanian Bank at the end of December 2005: 33% from Banque Misr , 19% from Romania's Banca Comerciala Romana and the remainder from other small investors. To date, BLOM's stake has been raised to 99.36%, with the balance held by small investors. BLOM boasts assets of approximately $11.3 billion worldwide with branches in Jordan, Syria, France, UK and UAE. Misr Romania had 11 branches in the country, which the new administration is rapidly planning to expand.

A Foundation of Reform
This flood of bank mergers and acquisitions has been years in the making. Ever since Egypt launched its privatization program in the 1990s, the sale of some of the country's state-owned banks has been one of the government's top priorities. The program's progress was hindered, though, by disagreements on the valuation of the state enterprises, which left the government -- through the Ministry of Public Enterprises -- in possession of 181 companies by the end of 2002, its self-imposed deadline for offloading all its holdings.

The bank privatization program similarly missed its 1998 deadline to change the face of an industry that was 80% controlled by the state-owned institutions. Law 88 of 2003 served as a catalyst for change as it granted the CBE independent legal status and made it report directly to President Hosni Mubarak. The law, which also dealt with the banking sector and money as a whole, laid the groundwork for the reform of Egypt's ailing banking sector.

But the real turning point for many stalled reform projects privatization being the most prominent came in 2004 with the promotion of Ahmed Nazif from Minister of Communication and Information Technology to Prime Minister and the introduction of his business-friendly cabinet.

When the privatization process was re-launched, the market included nearly 60 registered banks of varying size competing for less than 10% of the country's adult population that today holds a bank account. Services were limited and the sector was troubled by the weight of its non-performing loans (NPLs) causing chronic losses.

It fell to the CBE 's Banking Reform Unit (BRU) to divest public sector holdings in joint venture banks and push for consolidation while improving supervision and solving the sector's chronic NPL problem. The plan was to sell one of the state's Big Four banks and privatize 38 joint-venture banks while reforming and deregulating the sector to enhance its efficiency. In 2004, the Big Four included the National Bank of Egypt (also known as Al-Ahli), Banque Misr , Banque du Caire and BA .

The first task for the newly independent CBE was to reform the banks' finances before putting them on the auction block. Banks operating in the market were required to raise their minimum paid-in capital to LE 500 million by July 2005 and their capital adequacy ratio (a measure of a bank's capital as a percentage of its risk-weighted assets) to 10% from the 8% it had been at in the early 1990s; the aim was to protect depositors by clearing the market of any financially unstable banks.

As the deadline neared, 13 domestic and foreign banks had failed to meet the minimum capital requirements, jeopardizing their ability to continue operations in Egypt. Non-compliant institutions were threatened with forced closure or merger with another entity; indeed, mergers and acquisitions became a frequent occurrence.

Meanwhile, the CBE appointed international accounting firms to conduct full audit reviews of the Big Four public sector banks in accordance with International Financial Reporting Standards. The Central Bank also set up an NPL Unit to resolve the epidemic of bad loans weighing down many of the nation's banks. The new unit was tasked with setting up and monitoring NPL departments at individual banks to improve loan workout policies. To date, about 46% of NPLs have been settled.

The CBE also set up a banking supervision unit, part of a two and a half year program with the European Central Bank that monitors the sector in accordance with international best practices. The banking sector was to be fully compliant with Basel II standards by 2006.

Drawn up in 2004, the bank reform plan aimed to reduce the number of operative commercial banks in Egypt to 30 from 67 by the end of 2006. The CBE closed the year with a total of 42 banks still operating in the market.

Consolidation activity began in September 2005: Société Arabe Internationale de Banque received Central Bank approval to fully acquire Port Said National Development Bank for LE 100 million, while the NBE bought out the National Bank for Commerce and Development and Al-Mohandes Bank. Meanwhile the Arab African International Bank acquired Misr-America International Bank.

Foreign banks with offices in Egypt including Iraq's El-Rafidin Bank, the National Bank of Sudan and the National Bank of Pakistan were also forced to close when they failed to meet capital requirements.

The CBE 's new reform directive for the banking sector has attracted the attention of several foreign banks, which have leapt at acquisition opportunities that give them access to the region's largest market in terms of population.

Where to Go From Here
While a few Arab investors have snapped up stakes in Egyptian banks, the majority have been overwhelmingly European. According to a European advisor to the CBE , who spoke on the condition that he not be named, European banks have an interest in securing a market share in Egypt, bringing with them experience gained from expansions into Eastern Europe's emerging markets, which are very similar to Egypt's.

"Having already tackled an emerging market before, European banks come to Egypt with experience on how to introduce new products and expand services, such as introducing new credit-scoring techniques," the advisor says.

(Another of last year's key benchmarks was the opening of Egypt's first credit reporting bureau.)

To date, banks operating in Egypt have been more successful at providing corporate rather than retail banking services, which the advisor says comes back to the retail market being underdeveloped due to people not trusting banks, not to mention that Egypt is hardly considered a consumer credit society.

In a country of almost 80 million people, less than 10% of the adult population owns a bank account a very limited audience for new bank products. With the recent economic developments, Egypt's social structure is beginning to change as the middle class becomes more prominent, creating a demand for a new class of services.

"The middle class that is slowly forming in Egypt will be the basis for the launch of successful retail banking as will the growing consumer society," the advisor explains.

Some of the sector's bigger problems lack of transparency and a weak legal system that fails to enforce its rulings to secure bank deposits are slowly changing as the inauguration of a credit bureau is around the corner. The perception that a bank is nothing but a vault for depositors' money is also changing; not only are banks starting to experiment with retail products such as consumer loans and credit cards, but consumers are actually starting to look for these products.

Looking at the new year, the merger and acquisition deals that have dominated in 2006 are unlikely to take center stage in the new year. The big fish have already been snapped up, leaving only smaller banks remaining in the market; their acquisition will not attract as much attention as BA 's record-setting sale.

As the Central Bank continues its reform program this year, the focus will turn to creating an interbank market and pushing for a more transparent jurisprudence, according to the CBE advisor. Gradually liberalizing and preparing for expansion and diversity, Egypt's banking sector is set to embark on more technical progress.

It might not be as 'sexy' to the public as the wheeling and dealing of the last two years, but to a burgeoning economy that is emerging from years of deficit and labored growth, the changes are necessary to keep the banking sector and economy as a whole on track.

By Fatima El-Saadani

© Business Today Egypt 2007