In search of the stronger credit ratings brought by more stable markets, Lebanese banks have long been conquering new territories and Egypt is no exception.
While only Bank Audi and BLOM Bank have their own franchises in the recently revolutionized country, many of Lebanon’s other banks have correspondent relationships with existing banks in Egypt. Where others have not, Audi and BLOM have dug in deep and the effects on their operations there from the recent upheaval and its resulting power shift and are worth more than a passing glance.
Of the two Lebanese banks operating in Egypt, Bank Audi has the largest presence by a long shot, though both made relatively similar entrances into the market. Audi, the biggest bank in Lebanon by assets and market capitalization, has 30 branches in Egypt, which is set to become the bank’s number two location after Lebanon.
Audi entered Egypt in 2006, outbidding four other regional competitors to acquire complete ownership of Cairo Far East Bank for $94.4 million. At that time, Cairo Far East had three commercial banking branches and one Islamic branch.
BLOM Bank was the first Lebanese bank to enter the Egyptian market, but has taken a much more measured approach, provisioning all of its lending and taking its time with expansion. BLOM came into the Egyptian market through a 99 percent acquisition of Misr Romanian Bank in 2005 for $97.8 million. It is also active on the securities and insurance fronts, having acquired Investia, a brokerage firm, in 2006 and having begun an Egyptian arm of the bank’s insurance company, Arope Insurance, in 2008. BLOM Egypt currently has 26 branches in the country.
According to Nassib Ghobril, head of research at Byblos Bank, Bank Audi brought in $24 million in profit from its Egypt operations while BLOM brought in approximately $5 million.
In the chaos
During the protests, BLOM Bank’s Egypt general manager, Mohamed Ozalp, was in the office by day and defending his home with a baseball bat by night. He spent his days in the closed bank staying in contact with his 720 staff members as best he could, until February 13 when he was able to open nine of the bank’s 26 branches.
“There was orderly conduct of business. Even exchange rates — maybe the first day they edged slightly higher, but then by day two [they] came back to more or less the level before January 25,” said Ozalp.
He continued, “I think it was really a confirmation of confidence in the banking sector when we opened,” Ozalp said over the phone, as the hubbub of his newly returned staff could be heard in the background. After that Sunday, the Central Bank of Egypt (CBE) decided to close the banks again for three days due to protests by employees of Egyptian banks, which conveniently bookended the holiday of the Prophet Muhammad’s birthday. Now, the banks are open and by all accounts functioning normally.
Ozalp said security staff were present at BLOM’s branches throughout the protests. “Except for one branch that had minor damage, most of our assets, if not all of [them], had no problems. At the downtown Cairo branch glass was broken,” he said.
The financial toll
With investment comes risk; no doubt right now international banks with regional outposts are tallying their potential losses. Moody’s’ Mardig Haladjian, general manager of the ratings agency’s Cyprus operations, named Bank Audi and BLOM Bank as some of the regions most significantly exposed banks to fluctuations in the Egyptian economy, along with National Bank of Kuwait and Arab Bank.
“Depending on how their Egypt loan portfolios perform, especially with respect to delinquencies, these banks’ group net profits for 2011 may be negatively impacted,” said Haladjian.
But Egypt remains generally under-banked and with lending ratios low across the board a quick economic rebound could give this dark cloud a silver lining. According to Haladjian, the loans-to-gross domestic product ratio is 30 percent, compared to 77 percent on average in the Gulf Cooperation Council.
“The very low loans-to-GDP ratio in Egypt is an indication of the potential for lending in the country, subject to a well-functioning economy and legal system,” Haladjian said.
Byblos’ Ghobril said that loan delinquencies could well prove a problem for Lebanese banks whose growth strategies depend on aggressive consumer lending.
“The bigger question over the medium term is how much will the quality of assets be affected? Will non-performing loans increase? How will the banks react? Will they continue to lend as aggressively as before?” said Ghobril. “It’s easy to lose confidence. It is very difficult to restore it.”
The recent turmoil will not only have an impact on the numbers but could affect the integration of foreign banks into the Egyptian market; since the early 1990s, gradual privatization has led to increased exterior investment throughout the economy. Since reforms were initiated, 150 state entities, from myriad industries, have been sold to the private sector.
But public support for privatization of government assets has waned in recent years due to the resulting unemployment, and the dregs of the state’s assets have not been fetching attractive bids.
In 2008, the Egyptian government pulled out of a plan to sell Banque du Caire, Egypt’s third largest bank, when lower-than-expected bids came in. The highest bid was $1.4 billion for an 80 percent stake in the bank, lower than the desired $1.6 billion. The privatization program has since been dropped, with many regional banks anxious yet unable to enter the Egyptian market.
In a WikiLeaks release of United States diplomatic cables printed in The Telegraph on February 15, a US diplomat stated that the “restructuring” phase of Egypt’s financial sector reforms ended in 2008 and that there were no plans to revive it.
The cable said: “The CBE is not planning to privatize any of the public commercial banks, but instead is focusing on increasing their efficiency by holding their management accountable and improving their workforce and IT infrastructure.” These cables, however, were from December 2009 and new leadership could change this strategy.
The future
Lebanese banks have long sought international expansion with the intention of raising their credit ratings, which are kept below investment grade by heavy exposure to the domestic sovereign; but with a ‘BA2’ rating from Moody’s (sub-investment as well), Egypt may not be the place to look to rectify that.
With other countries of interest in the region also experiencing unrest, Byblos Banks’ Ghobril surmised that regional expansion plans for Lebanese banks were likely “on hold” for the moment. Marwan Barakat, head of research at Bank Audi, agrees: “What is happening in the region is something quite important and, at least in the near term, banks will not be aggressive in their expansion while waiting for the [outcome of all the changes].”
It is on the long-term outlook where divergent opinions emerge. Barakat remains confident that the overarching plan to increase Lebanese banks’ international business to 50 percent of their balance sheets will hold.
“The needs are there in all of those markets. [They] are passing through short-term challenges. This does not mean that those are not important markets with important needs for financial services,” he said.
But Ghobril said that regional events call into question the validity of the entire strategy. “I wouldn’t look at it on a country by country level. The more relevant question to ask is how will the whole expansion strategy of Lebanese banks in the Arab world be affected, given what is happening? Nobody could have possibly expected this to happen.”
But for now, Ozalp said Lebanese banks in Egypt are returning to their normal functions. “As far as our bank strategy is concerned nothing has changed,” he said. “I think that once the dust settles it will create a lot of opportunities.”
“Is the whole expansion strategy of the Lebanese banks going to backfire given what is happening? Nobody could possibly have expected this”
