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STATE BANKS WORK TOWARDS COMMON GOAL
BY MAGDY SAMAAN
The merger of Banque Misr and Banque du Caire – Egypt’s second and third largest banks respectively – is expected to be completed by the end of this month, creating a new state-owned entity that will compete in size with the country’s largest bank, National Bank of Egypt (NBE).
“In Banque Misr we have the largest number of affiliate branches [in Egypt] and with the addition of Banque du Caire we will become a massive bank that covers every corner of Egypt,” says Mohamed Barakat, president of Banque Misr. “I believe that this will be positive competition.”
According to data released in July of last year, Banque Misr assets are valued at £E 91 billion compared to Banque du Caire’s £E 45 billion. The merger of the two banks is expected to create a new entity with 21.5 percent of the total assets in the sector, compared to NBE’s estimated 20.8-percent share. Moreover, the entity will hold approximately 25.6 of all bank deposits and 18.8 percent of loans, compared to 22.8 percent and 19.9 percent respectively at NBE.
The merging of the two large banks is part of the sector-wide reform that began with the Unified Banking Law of 2003 and is being carried out concurrently with the government’s plan to privatize Bank of Alexandria, Egypt’s fourth largest state bank, by the end of the year. The shake-up of the “Big Four” public banks follows a similar consolidation of smaller banks.
Last year, the one-year grace period for banks to raise their minimum capital expired. On orders of the Central Bank of Egypt, banks unable to meet the minimum capital requirement – £E 500 million for local institutions and $50 million for branches of foreign banks – were ordered to be merged or liquidated. “This was the state’s strategy to minimize the number of banks to enhance the banks’ monitoring process and to create entities that can compete with other banks,” explains NBE president Hussein Abdel Aziz.
Merging the country’s second and third largest state banks is a much more formidable task, and foreign experts have been called in to ensure the consolidation goes smoothly. UK-based consulting firm Lloyd’s TSB is advising Banque Misr and Banque du Caire on restructuring to ensure a single strong bank results from the merger. Dutch bank ABN Amro, on the other hand, is supervising the management and IT upgrades of the two banks’ branches – many of which were using archaic computer and communication networks. By the end of the year, all Banque Misr and Banque du Caire branches will be linked through a single computer network.
While Banque du Caire will retain its own name for two or three years, as the smaller of the two banks, it will come under the management of Banque Misr. Barakat will relieve Banque du Caire chairman Ahmed El Baradei.
Although ample time has been allotted to make the physical merger as seamless as possible, Ali Negm, president of Delta Bank, argues that this particular merger should be a lot easier than most since both banks have similar administrative rules and regulations as well as management techniques and processes. “[I believe] the problems related to the merging of these two banks will be fewer than [those in] other mergers because they work using a similar unified management system.”
Former Central Bank president Ismail Hassan sees the merger as a synergy that will create a powerful banking entity able to compete in the market and provide a wider variety of services to clients as well as gaining the sufficient clout in the market to actively compete with private sector banks for both corporate and retail clients more effectively. Once the merger is complete, “we will have two large banking bodies, National Bank of Egypt and Banque Misr, which together will promote their services through mutual competition [and will] vitalize the market,” argues Hassan.
Critics of the merger, however, charge that the merger will only exacerbate the two state banks’ chronic problems. “When two weak banks merge, the outcome is a huge weak entity,” says Mamdouh Elwali, deputy editor-in-chief of Al-Ahram newspaper. “The immensity of the assets doesn’t mean that the bank has an advantage. The quality not the quantity of the assets is what really matters.”
Elwali points out that Banque Misr acquired the stumbling Misr Exterior Bank in September 2004 and a majority stake in Misr International Bank (MIBank) in August 2005, but hobbled by its own bad debts was unable to sort out the banks’ non-performing loans (NPLs).
Excess labor is also a major issue. Banque Misr employs over 13,000 employees at its 450 branches, while Banque du Caire is even more overstaffed, with 12,000 employees at 186 branches. In many cases, the branches of the two banks are located on the same street block – leading critics of the merger to assert that the new entity will be severely overbranched, and overstaffed.
Elwali argues that the problem will be amplified when trying to sort out the salary structure. When bonuses are factored in, salaries of Banque du Caire employees are reportedly 40 percent higher than those of their Banque Misr colleagues. But sorting out the conglomerate’s labor issues will be a challenge, especially in light of Barakat’s assertion that he has no intention of laying off excess labor and that all current staff’s rights will be preserved.
The government has not specifically spelled out the reason for the merger of the two large state banks, which is contrary to the privatization process that seeks to reduce the public sector’s dominance of the market. One popular theory is that the merger is intended to help both banks, though Banque du Caire in particular, tackle their NPL problem.
The government hopes that the merger will allow the new entity’s management to sort out Banque du Caire’s inability in addressing its problems with its major loan-holders. In fact, just four of the bank’s major clients were responsible for £E 10 billion of the bank’s total £E 23 billion in non-performing loans as of June 2004.
Barakat admits NPLs remain a major issue for Banque du Caire. “There is a huge amount of money owed to the bank in loans that have not been paid and we are trying to improve this aspect of the bank’s portfolio,” he says. He hopes the merger will create “a larger bank with a greater capacity to stand up to the problems of clients who default on their loans.” He also expects the government to provide assistance in the form of a rumored capital increase to offset the merged bank’s NPL losses.
Elwali remains skeptical. “I don’t think that the merger will be fruitful. The two banks should have been reformed prior to merging them,” he says. “The non-performing loans problem will not be solved in the near future. The administration of the newly-merged bank will need to make bold decisions and lay off excess labor that devours any revenues made by the bank.”
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