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bank of alexandria on the block
by abdel aziz nosseir
as a pivotal part of the aggressive privatization
drive, the government announced in late february that bank of alexandria
(ba) would be sold by the end of summer 2006. the controversial
decision is part of an attempt to reduce the number of banks operating
in egypt from 56 to around 20. ba is the third largest of the state-owned
banks, trailing national bank of egypt (nbe) and the recently –
some would say hastily – consolidated banque misr and banque
du caire.
the government has been offloading its assets in the banking sector
for almost two years through a series of sales, initial public offerings
(ipos) and mergers. beginning in september 2004, banque misr acquired
misr exterior bank, while nbe acquired bank of commerce & development
and mohandes bank. the sector underwent a wave of ownership shuffles
throughout 2005, with a total of £e 8.1 billion in acquisitions.
these shifts introduced new foreign investors to the sector, while
owners already in the market managed to carve out a bigger niche.
french investments in the banking sector grew through société
générale’s partial acquisition of nsgb and misr
international bank (mibank), and the entry of calyon bank, while
greek and lebanese banks got a foot in the door with the successful
entries of piraeus and bank audi respectively.
while there has been some public grumbling over the restructuring
of banking in egypt and the government’s steady retreat before
the private sector – mostly related to the perceived undervaluing
of state bank holdings in sales – these voices are few in comparison
to the public controversy brewing around the sale of bank of alexandria.
from debates over the benefits of privatization to the finer details
of the procedure itself, as well as potential share prices and the
future of the bank’s staff, everyone seems to have a pet reason
for opposing the deal. the government, nonetheless, appears determined
to press ahead.
according to bank of alexandria chairman mahmoud abdel latif, the
bank has overhauled the management, operating procedures and look
of its 192 branches in preparation for privatization. in 2003, the
bank’s balance sheet was £e 22 billion; today it is £e
42 billion. “this bank was the most backward in terms of technology,
training, policies and procedures,” he told business monthly.
“if you had privatized this bank four or five years ago, you’d
have had to pay someone to take it. today, we [have] restructured.
now this bank [can be sold] for a lot of money.”
marwa el sheikh, a senior research analyst at efg-hermes, says ba
is ready for privatization not only as a result of internal changes,
but also because of the series of transformations that have taken
place within the sector itself. “the banking sector was very
fragmented,” she says. “most banks were [more like] shops
than banks. their capital was very [low] – too [low] for a
bank to carry out business [transactions] that generate revenue.”
she explains that according to law, a bank cannot lend one client
or group of companies owned by an individual more than 25 percent
of its base capital. so if a bank has a base capital of £e
300 million, a customer cannot borrow more than £e 75 million,
a relatively small sum in today’s world of business deals.
but since the law allowed banks to function with a paid-in capital
of as little as £e 50 million, the issue of profitability
was left to the individual bank. as a result, the market was flooded
with small banks offering meager services to few clients.
in july 2005, a two-year grace period to allow banks to prepare
for the implementation of new capital requirements expired. local
and foreign banks unable to meet a minimum paid-in capital of £e
500 million and $50 million respectively were ordered by the central
bank of egypt (cbe) to merge or liquidate their positions from the
market. in all, 11 local banks and four foreign banks failed to
make the cut.
the new capital requirement lent momentum to the government’s
efforts to divest state banks, which began in early 2002 with the
“privatization” of management in public banks. a number
of banking experts with private sector experience were assigned
to manage the banks. “however, this did not lead directly to
the targeted financial results, because the ownership still remained
in the hands of the government and it [could directly] influence
performance,” explains el sheikh, who believes bank privatization
should have been completed before moving on to other sectors. “we
cannot work a market-driven banking system with state-owned banks
controlling 55 percent of the market share.”
bank of alexandria will be the first public bank to be privatized,
and how it fares on the block will set the mood and pace for privatization
of the banking sector. while some analysts hold that nbe and the
recently consolidate banque misr and banque du caire will not be
privatized, others argue that their turn will come in time. el sheikh
contends that privatizing these two banks in their current state
would be a tall order, largely because of the large number of non-performing
loans (npls) they hold. “[without] having a re-capitalization
of these two banks, there is no chance for privatizing them,”
she says. “no one would be interested in buying a bank in such
a financial position.”
bank of alexandria, by comparison, is in a better state. to start
with, it has a more easily manageable portfolio of 192 newly renovated
branches, an operating profit of £e 2.2 billion in 2005, 6.5
percent of the sector’s deposits and 4.6 percent of total loans.
above all, the government agreed to repay the bank’s £e
6.9 billion worth of outstanding public sector loans.
ba also made the strategic decision to offload many of its investments
in other banks in order to cut expenses. earlier this year, the
bank’s board sold its 34-percent stake in egyptian american
bank (eab) to calyon bank at the bargain price of £e 45 per
share – a decision that caused an uproar in light of the fact
that eab’s stocks were trading at £e 57.50 at the time
of the sale. ba also sold its 10.2-percent stake in delta international
bank to that institution’s majority investors, and is rumored
to be preparing to sell its 30-percent stake in misr iran bank and
20-percent stake in the islamic international bank for investment
& development.
when privatization comes this summer, 5 percent of the bank’s
shares will be sold to bank employees, while a majority stake of
75-80 percent will go to a strategic investor and the remaining
stocks will be floated on the cairo & alexandria stock exchanges
(case).
some experts argue that floating ba shares on the case should be
the first step in the privatization process so as to allow market
forces to determine the share price. the strategic investor would
then acquire the shares based on this price, making the purchase
more transparent. however, el sheikh believes that naming the strategic
investor and new management of the bank will significantly affect
the pricing of the shares.
ba’s readiness to go private is reflected in the number of
international and domestic banks that have indicated interest. so
far it has attracted bnb paribas, saudi american bank and commercial
international bank (cib), among others.
the interest of international investors is no surprise to abdel
latif. despite the large number of banks operating in egypt for
the past two decades, he says the market is still relatively underdeveloped.
“there is still much interest in the sector because it remains
a virgin market. all the opportunities that are being created...
through the current reform agenda will induce investors to come
and work in this country. all these investors will attract more
banks to work in this market.”
and this should improve the retail banking climate. “there
is still a lot of room for growth in the retail business because
the majority of the people still don’t deal with banks,”
he says. “[there are] many opportunities to introduce products
and services to the retail consumer that generate profit.”
el sheikh agrees, pointing out that financial services in egypt
are underserved and that the sector is still immature. “foreigners
[investors] are coming from developed markets, where the maximum
potential [for growth] is 10 percent, while in egypt they can achieve
20 or even 25 percent,” she says. the fact that the government
no longer issues licenses for new banks means that the interested
investors have to buy one of the already existing banks. the license
is more important to buyers than the actual assets, she stresses.
although international investors hunger after ba’s license,
it is unclear whether they will be as interested in taking on the
bank’s traditional role as a major financier of the country’s
industrial sector. selling the bank could leave this strategic sector
short on financial support. however, el sheikh points out, if an
industrial project will generate revenue for a newly private ba
then securing financial support shouldn’t be a problem. if
it’s not a well-planned project, she argues, no bank –
private or state-owned – should support it.
monal abdel baki, a professor of economics at the american university
in cairo (auc), believes that the trend toward financing unprofitable
projects has hindered the privatization of state banks and led them
to amass too many fixed assets. “the problem is how to liquidate
these assets. simply put, no investor is interested in buying a
bank with that number of assets,” she says. in the case of
nbe and newly consolidated banque misr/banque du caire, she adds,
the deficit has accrued for almost a century, making these banks
extremely difficult to reform.
this is the very problem that ba faced for almost a decade. abdel
latif says it can only be resolved when banks begin making sound
lending decisions by developing firm procedures and understanding
the sector in which the project is taking place and the company
or individual seeking the funding.
although privatization appears from the outside to be an invasion
of the market by foreign banks, abdel baki believes that the shift
is for the best. she disagrees with the notion that privatization
is sweeping the nation as a result of external pressures. “that
was the motive during the 1990s,” she says. “the structural
adjustment programs implemented in turkey, mexico and egypt [were
all] good in the beginning, but because the privatization wave moved
too fast it resulted in an unemployment problem.”
she says the current privatization push is primarily because egypt
needs stronger banks. the first step is to merge or sell the country’s
small banks, which could cause serious difficulties in the market.
“egypt is a member of the basel agreement, which set capital
adequacy standards for banks,” she says. “small banks
are far from the qualifying ratios.”
abdel baki is concerned, however, with the effect of ba’s sale
on the bank’s staff. the bank currently has 6,000 employees,
whose job security, according to the ministry of investment, will
not be affected by privatization.
mushira el bardai, director of auc’s hr department, believes
the ministry will stay true to its promise, arguing that layoffs
would be counterproductive for a new employer. “direct layoffs
are not very common in most cases of privatization [as] the new
employer needs skilled employees.” she added that only those
jobs held by young, under-qualified workers are in real danger.
in these cases, an employer may attempt to retrain workers to or
offer them an early retirement package.
in the case of ba, abdel latif considers it unlikely that privatization
will affect the bank’s employees, since staff have undergone
intensive training for the past three years. moreover, the bank
already managed to trim its workforce by 1,500 since 2003 by offering
early retirement packages.
additional reporting by réhab el-bakry
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