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Banking on reform – Egypt’s BOA sold

Divesting of state banks, Cairo looks to modernize

by Executive Staff

In a deal considered to be the largest divestment of Egyptian state assets to date, the government in Cairo last month completed the sale of Bank of Alexandria (BOA) – Egypt’s fourth largest bank – to Italy-based Sanpaolo IMI, generating over $1.6 billion in revenues for the state. The proceeds are expected to be used to re-capitalize other state-owned banks and to reduce Egypt’s public debt. More importantly, however, the successful sale sets a new benchmark in Egypt’s privatization drive and program to reform the banking sector.

Sanpaolo won the bid to acquire 80% of Bank of Alexandria on October 18 after a long and draining process as it was competing against five large regional and international players: Jordan-based Arab Bank, Mashreq Bank of the United Arab Emirates, BNP Paribas, EFG Eurobank Ergasias of Greece and Egypt’s Commercial International Bank.

Under the privatization arrangement, 15% of BOA will be floated in an initial pubic offering while the bank’s employees will hold the remaining 5%.

A milestone sale

“The sale of BOA is a milestone for the government and all parties involved,” Ali Shaker, the chairman of Egypt’s National Bank for Development told al-Hayat newspaper in mid-October. “The whole sector will benefit from this deal as it allowed the largest Italian bank to enter the market which will provide a better competitive environment,” he added.

BOA was the first of the quartet of big state-owned banks to be sold and provides a good outlook for the privatization of the other three, Banque Misr, National Bank of Egypt and Banque du Caire.

The deal, worth 5.5 times BOA’s book value, came nonetheless at a substantial cost to the Egyptian state. According to Finance Minister Boutros Ghali, the government has paid over $1.93 billion to make up for non-performing loans (NPLs) in state-run banks, most of which were on the books of BOA.

Welcomed by many observers and detractors alike, the sale of BOA also lends new momentum to overall banking sector reforms in Egypt. Experts say that the sale – which has been hailed by some as a “banking roadmap” – will strengthen the sector and provide a spike of efficiency, catalyzing the transition to a leaner and more competitive banking system and setting the pace for future reform and privatization.

For years, the banking sector has suffered from a lack of reforms and proper regulations; however, the Egyptian government did acknowledge some of these weaknesses over a decade ago, prompting it to introduce reforms. Despite serious delays in their implementation, these reforms are now helping to strengthen banks’ balance sheets and longer-term outlook, says rating’s agency Moody’s.

Further reforms needed

In June 2003, the government issued a new banking law which paved the way for the Central Bank of Egypt (CBE) to take over the responsibility for restructuring and reforming the banking sector early in 2004. The new regulations required banks to raise their paid-up capital to at least $87 million and their adequacy ratio to 10%. A Banking Reform Unit was created with the primary mission of divesting public sector holdings in joint venture banks, pushing for consolidation, improving supervision and dealing with the menacing problems of NPLs. Joint banks comprise 38% of Egypt’s banks.

So far, only 27 banks have complied with the new capital requirements and only 11 banks have gone through mergers. Bank consolidation was supposed to reduce the number of banks from 57 to 30 by 2006. Currently, the number of banks operating in Egypt is around 42, according to CBE, a reduction of 15 banks. Other mergers in the works include the mega-merger of Banque Misr and Banque du Caire, the country’s second and third largest banks. The deal, which is expected to be completed by the end of 2006, will create a new state-owned institution that can compete with the likes of National Bank of Egypt – the country’s largest bank – and other large foreign banks operating in the country.

Although considerable progress has been made on new regulations and reforms, there are still many challenges ahead for the government and the private sector. These problems include reforming the worrisome bureaucratic practices of some banks and their employees and improving information technology platforms and automation. Furthermore, the CBE still has to adjust and enforce banking regulations to meet Basel II standards, especially in the area of risk-based capital allocation.

If Egypt is to catch up with the recent developments and reforms seen in the banking sectors of most Arab countries, especially those in the GCC, it must move ahead full force with the complete implementation of its privatization and reform drive or risk being left behind at a great loss. Those who are familiar with the market in Egypt know its true potential and are now maneuvering to enter this market as serious players who can effectively compete. But the government must be more convincing and avoid further delays in carrying out reforms.

Egypt’s population of over 75 million is an “asset” for current and future banks. If exploited properly, this asset, especially in retail banking, could lead to satisfied shareholders across the sector. This was the case for Lebanon-based BLOM bank, which acquired Misr Romanian Bank (MRB) last year on the strength of the potential they saw for retail banking in Egypt. BLOM’s Vice Chairman Saad Azhari said that recent reforms and new regulations in the banking sector “made it possible for foreign banks to enter … and we were able to acquire 96.7% of MRB for less then $100 million.”

The sale of BOA has created a new “banking energy” and momentum in the sector. It is now up to the Egyptian government to do its part, and use this energy and the new “banking roadmap” to maintain the pace of privatization and create a more coherent and functional banking sector.

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Executive Staff


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