Egypt Banking Sector

"Confidence Soars: Neil Ford reports that investor confidence in Egypt's thriving banking sector has never been higher."

Publication: The Middle East

Publication Date: 01-NOV-07

Author: Ford, Neil

WHILE LESS PROGRESS is being made on realigning other parts of the economy, Egypt's banking reforms are changing the face of the country's financial services industry. Following the successful sale of the Bank of Alexandria at the end of last year, the government was determined to press ahead with tenders for the remaining state owned banks. A buyer for Al Watani Bank has already been found, while Banque du Caire will be offered for sale in a tender to be launched next year. Now that Commercial International Bank (CIB) and Arab African International Bank (AAIB) are considering a merger, it seems that confidence in Egyptian banks has never been higher.

At the start of October, AAIB and CIB revealed they were holding talks with a view to an eventual merger. Combining the seventh and third biggest Egyptian banks will create a financial institution with an 8% market share that would rival National Bank of Egypt, the country's biggest bank. No timetable has been set for the merger and the two companies have agreed to keep the details of the negotiations secret for the time being. However, news of the potential amalgamation pushed shares in CIB to an all time high of more than 80 Egyptian pounds ($11.2) in early October.

Any merger will require the approval of the central bank and the general assemblies of the two banks involved, as well as international investors, which hold 18.7% equity in CIB. The bank recorded a 64% rise in its profits for the first half of this year to E635.4m [pounds sterling] ($88.9m), making it one of the country's most profitable banks. Apart from Egypt, the bank is also listed on the Kuwait Stock Exchange (KSE) and Abu Dhabi Securities Exchange (ADSE). It already intends expanding into the Gulf states, Jordan, Lebanon and Syria, and should open an Algerian offshoot by the end of this year.

CIB tried and failed to take over the Bank of Alexandria in 2006. The other unsuccessful bidders were Arab National Bank of Saudi Arabia, Arab Bank of Jordan, BNP Paribas of France, EFG Eurobank, Mashreqbank and Dubai Investment Group, highlighting the quality of the bidders in the tender. The bank was eventually sold to Sanpaolo IMI of Italy for $12.6 a share or $1.6bn for an 80% controlling stake. Of the remaining equity, 15% is being offered to the Egyptian public and 5% allocated to the bank's employees.

A spokesperson for the Ministry of Investment summed up the atmosphere of success around the tender: "As the Central Bank of Egypt's banking sector consolidation programme is nearing completion, there is now a scarcity of acquisition opportunities in the Egyptian banking sector. The privatisation of Bank of Alexandria will provide a strategic investor with a unique opportunity to benefit from the country's favourable economic environment, demographic characteristics and growth potential of the banking sector."

The sale of Bank of Alexandria was followed by a tender for Al Watani Bank. National Bank of Kuwait (NBK) submitted the winning bid of E77.01 [pounds sterling] ($11.23) a share, which valued the Egyptian bank at just over $1bn, ahead of competitors Commercial Bank of Kuwait (CBK) and EFG Eurobank of Greece. The bid was well above market expectations and 39% above the bank's market value at the time of the bid. CBK offered E75 [pounds sterling] ($10.5) a share and EFG E58.30 [pounds sterling] ($8.16). NBK's confidence in its Egyptian asset seems to have been well justified, given that Al Watani reported a 169% rise in net profits for the first half of 2007 to E146.7m [pounds sterling] ($20.54m).

The size of the National Bank of Kuwait's bid also seems to be proof both of the attractiveness of Egyptian financial assets and of the shrinking pool of banks available for purchase. A Ministry of Investment spokesperson said: "As the Central Bank of Egypt's (CBE) banking sector consolidation programme is nearing completion, there is now a scarcity of acquisition opportunities in the Egyptian banking sector." The reforms have cut the number of banks in Egypt to 41 and the CBE expects the number to fall to 34 during the course of 2008. The CBE also predicts that the proportion of all deposits held at state owned banks will fall to 48% by the end of this year, with the shares held by Egyptian private banks rising to 22%, other Arab banks to 11% and non-Arab banks to 19%. Cairo has already sold its shares in most of the 17 joint venture banks that had been set up with foreign investors and its remaining assets, which comprise just 6% of the value of its original stakes, are scheduled for divesture in the near future.

The process of privatising the next state owned bank in line, Banque du Caire, is expected to begin in March or April next year. It was reported within the Middle East region in September that Mashreqbank of Dubai, which lost out in the tender for Bank of Alexandria, planned to bid for Banque du Caire. Omar Bouhadiba, the head of corporate and investment banking at Mashreqbank, was reported as saying that although the bidding process had not yet started, when it does "we will certainly be bidding".

Banque Misr and the National Bank of Egypt have also been listed for sale but a merger between the two has been mooted. Given that major Middle Eastern and European banks have already invested in the sector, the government may not object to National Bank of Egypt's expansion on competition grounds, despite the fact that it is already the biggest bank in the country by market capitalisation.

Bahrain's Ahli United Group (AUG) has sought a slightly different route into the Egyptian market. Along with other investors, it bought an 89.3% stake in Delta International Bank (DIB) in August last year. The bank was then brought fully under the Ahli brand and relaunched as Ahli United Bank Egypt in May this year. The new bank's chief executive and managing director, James Goold, said that DIB was selected because it was the right size for acquisition and had branches spread across the country.

He added: "It was of a size that was manageable in terms of transforming the business. AUB as a group could have looked at some of the much larger banks that might have been for sale and in terms of capital, it wouldn't have been a problem, but in terms of transformation and in terms of changing things, DIB was the right size. We cleaned the balance sheet last year, and this year has been about starting to transform the bank as a business. We have created a lot of the control departments and control functions that the old DIB didn't have; for example, a risk department and a new compliance department."

Financial, technical and managerial investment is all helping to transform the sector and create a feel of progress. Merger rumours and general buoyancy in the banking sector helped to push Egyptian share prices to record highs in early October. The benchmark Case 30 index reached 8,812 points, while the Hermes index exceeded 77,315 points. Housing and Development Bank, Credit Agricole Egypt Bank and National Societe Generale Bank were the biggest winners but almost all bank share prices rose on a wave of optimism. If the government manages to dispose of its remaining banking assets and the economy as a whole remains buoyant, it seems probable this optimism will continue.

From Egypt Banking Sector Return to Articles For Egypt Accounting