IT’S DIFFERENT THIS time. Egypt’s banking sector is at last taking the tough medicine needed to lift it from its moribund past into a more dynamic future.
At least that is the view of public officials, analysts and bank chiefs themselves. The consensus is that the banks no longer resemble money market funds predominantly buying government securities, or, in some cases, speculative investment vehicles taking punts on real estate. Now they are acting more like, well, banks. The argument goes that, spurred on by a government reform process that began in 2004 and still continues, the banks are stronger, more competitive and, all-in, much healthier than in the past.
They have tackled their previous bad debt portfolios and are beginning to make new loans, especially in the retail market with products such as mortgages, auto loans and even credit cards. In the corporate market, too, the banks are beginning to differentiate themselves by turning their hand to SME lending and microfinancing. The Egyptian financial system is up and running.
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"In the future, retail banking is where the real growth will come from"
Hassan Abdalla, Arab African International Bank |
To what extent, though, is it different this time? The phrase is so often used when it comes Egypt’s banks that that in itself tells its own sorry tale. Is the banking system, at last, taking the necessary steps to improve? "The reform process is weeding out the weaker banks," says Hassan Abdalla, vice-chairman and managing director at Arab African International Bank (AAIB), one of the leading private sector institutions.
The analysts are unanimous too in their praise of the government’s efforts. "Following the reform process things are much better," says a banking analyst at a local firm. "Since 2004, the government has made a lot of effort in improving banks’ solvency and efficiency."
A recent research report by Beltone Financial, a local broker, says: "Current players are providing better service quality, a larger product offering, and have become more competitive, especially with the increased entry of foreign players."
"Overall we are optimistic about the sector’s performance," it adds, "and believe the potential for growth is significant."
Even the international ratings agencies are bullish. "The Egyptian banking system has continued to make considerable progress, with a number of the issues that have been tormenting the industry in the past years being addressed," concluded a Moody’s report last year. Those issues included poor asset quality, inadequate capitalization and low profitability which, according to the ratings agency, primarily reflected the banks’ "bureaucratic operating style, overstaffing and weak risk management systems and corporate governance culture."
Recent changes
The biggest change in the past three years has been a fall in the number of banks operating in Egypt. Since September 2004, the central bank has overseen consolidation that has cut the number of banks to 41 from 62.
Tighter regulations have forced many of the smaller banks that were unable to meet the targets to close or merge. The minimum paid-in capital for local banks, for example, has been raised to E£500 million ($91.5 million); for the branches of foreign banks it is $50 million. The minimum capital adequacy ratio has also been raised to 10% from 8%.
The big public banks have also been busy selling their stakes in their joint ventures, so raising valuable capital for their own restructuring needs. These divestments include National Bank of Egypt’s sale of its stakes in National Société Générale Bank, Suez Canal Bank and Commercial International Bank and Banque Misr’s sale of stakes in Misr International Bank and Misr Romanian Bank. In total, according to Moody’s, these and other divestments by the public banks have generated more than $1 billion in capital gains, which has been used primarily to increase provision reserves.
Following the divestments, the government embarked on a privatization process in order to loosen the grip of the state-owned banks, which have historically dominated the industry. The most high-profile transaction so far has been the sale for $1.6 billion of an 80% stake in Bank of Alexandria – another one of the four big state-owned banks – to Italy’s Sanpaolo IMI in 2006.
The government hopes to maintain the momentum through a similar sale of an 80% stake in the second-biggest public bank, Banque du Caire, which has total assets valued at $9 billion. The deal, which JPMorgan is overseeing, should be completed within the first half of the year, and might fetch as much as $2.4 billion, according to analysts. Up to 12 banks are understood to be undertaking the necessary due diligence of Banque du Caire’s books, underlining the growing interest from abroad in the Egyptian financial sector. Leading institutions from the Gulf and Europe will be among the dozen and, once the deal goes through, it is expected that for the first time private-sector banks will have more than 50% of the industry’s total assets – a significant breakthrough.
One item on Banque du Caire’s balance sheet that will be most carefully dissected is its non-performing loans ratio. Bad credit, especially among the state-owned banks and especially in their lending to public enterprises, has been a blight on the industry for years. The level of NPLs across the industry in December 2005 was 25% of gross loans, according to Beltone, which is extremely high even by emerging markets standards.
Over the past couple of years, the authorities have made a big effort to clean up the banks’ balance sheets. Banks were forced to adopt a more conservative provisioning policy. The government, moreover, has demonstrated its commitment to resolving the issue by repaying the state-owned banks the money owed to them by public sector enterprises through privatization proceeds. Although Moody’s reckons it will take "another two to three years before the provisioning gap in the state-owned banks can be substantially covered", the ratings agency does at least believe that the banks and the central bank are committed to cleaning up the corrosive loan portfolios.