THIS was the year when French banking was forced to face up to its uncertain future. A spate of high-profile dramas and heavy losses at some leading institutions, coupled with trouble in Algeria and some other traditional markets has thrown up some awkward questions. The response has been reorganisation and rationalisation.
Recent events have had an impact on business in the Middle East and North Africa. Paris is not a financial centre on the scale of London or New York, but it is a leading centre for channelling finance and banking services into the region. France dominates markets like Morocco and Algeria, and has bid aggressively to win contracts elsewhere, such as the Cairo metro. Backed by export credits guaranteed by Coface and the expertise of institutions which have targeted Arab markets, France has acquired regional business that has caused headaches for even the biggest financial institutions.
This year’s FF 45,000 million rescue of Credit Lyonnais by the French state was only allowed after scrutiny by the European Commission and on certain conditions. One condition is that Credit Lyonnais sells 35 per cent of its overseas assets by 1998. The bank has yet to identify which subsidiaries will go. The government has also said it will privatise Credit Lyonnais by 2000. According to former finance minister Alain Madelin, who resigned on 25 August, the rescue will enable Credit Lyonnais to recover but there is a price to pay. ‘I cannot guarantee that tax-payers will not have to put their hands in their pockets, but this plan should minimise the risks,’ Madelin said.
The Credit Lyonnais saga has been a severe test of the government’s declared commitment to the market rather than state intervention. But, it is too big an institution to be allowed to fail. It is the fifth largest French bank in terms of tier one capital and ranks 36th in the world.
Some of the personnel changes in the past year have also changed the face of French banking. The big casualty has been Gerard Worms at Compagnie de Suez who was forced out by shareholder pressure. Suez controls Banque Indosuez which is ranked 12th in France and has major operations in the Middle East. Indosuez’s shareholders include Lebanon’s Prime Minister Rafiq Hariri and other Arab investors. Hariri also owns a significant stake in Banque Paribas.
Worms’ departure highlights the arrival of shareholder activism in a market where it was relatively unknown. Arab clients are concerned that a take-over of Indosuez or a possible merger involving Banque Nationale de Paris (BNP) will erode its personalised management style.
Other banks have felt the effects of the crisis in Algeria. It has collapsed as a medium-term trade finance market and many of their smaller clients have come under pressure from the loss of Algerian business.
‘Since the oil price crash in the mid-1980s, the story of French banks in Algeria has been one of progressive marginalisation,’ says Omar Benderra, former chairman of Credit Populaire d’Algerie and now a Paris-based banking consultant. ‘Now they are only there for ephemeral, short-term business.’
French banks have taken a lead in rescheduling the country’s debts, however. Societe Generale chairs Algeria’s London Club steering committee and Credit Lyonnais led the early 1990s reprofiling of commercial debt. But they did this only after pressure from the French administration to take a lead, Benderra argues.
Export credits, guaranteed by Coface, are being reduced following the rescheduling of official debt worth over FF 30,000 million. The limited medium-term credit now available is mainly for Algeria’s state energy company Sonatrach.
Paris bankers say they are keen to do this business, but few will contemplate the risk of arranging down-payment financing, traditionally required to accompany these transactions. Paris banks, including BNP, are said to have sold down their Algerian debt on the secondary market. They are continuing to provide short-term credits. ‘Now they have rescheduled and can pay cash, the Algerians want less and we are not having to refuse,’ says the executive responsible for North Africa at a major Paris institution. ‘Morocco is the country that gives us satisfaction,’ he adds.
Banks are turning to new areas in search of expansion opportunities. French financing to Qatar, Saudi Arabia and Pakistan for arms-related deals is generating business. Indosuez has developed an aircraft-financing capability and project finance is another area of growing opportunity.
Coface is also developing its own project finance skills. Its support of loans worth $38 million for the Manah scheme in Oman, the Gulf’s first independent power project, was its first financing of this kind. Buoyed by the success of the effort, which was to back a contract won by GEC Alsthom subsidiary European Gas Turbines, Coface established a dedicated project financing unit in February.
Paribas and other Paris-based institutions have also beefed up their project financing teams. Paribas arranged a $200 million limited recourse loan for Qatar Petrochemical Company (Qapco) in mid-1994. ‘Qapco was rather unusual because Paribas, as a non-regional bank, led regional financing,’ says John Sellers, head of Paribas’ project financing team in Paris. ‘This was helped by our long-time interest in the country.’
Paribas is also arranging one 111/2-year tranche of export credits for the $720 million financing of phase four of the Doha transmission line project in Qatar. The contract to install substations was awarded to a European consortium headed by France’s Cegelec. But the main focus is the Ras Laffan integrated gas project which could cost Qatar as much as $5,000 million.
Paribas has also developed capital markets in the Middle East, working out of Paris and its large London branch. Business has included arranging finance for Beirut property developer Solidere which has the eighth highest company capitalisation in the Middle East.
But in traditional markets like Morocco, French banks are losing out to London-based rivals who are winning advisory mandates linked to privatisation and stock market development.
There are exceptions, however. The Paris bourse has contracts to bring its automated share-trading system to the stock exchanges of Beirut and Tunis. And there is growth in some traditional businesses such as trade finance. Union de Banques Arabes & Francaises (UBAF) is to increase its representative offices as part of a three-year strategy to expand corporate operations and develop trade finance activities, which account for over half the Paris-based bank’s operations. Offices are due to open in Dubai and reopen in Beirut by the end of 1995.
The fortunes of Paris-based banks with specialised niches remain linked to their markets. Societe Bancaire Arabe, for example, which specialises in Syria, reports an upturn in demand as European companies look again at the market.
The recent troubles and changed strategies of the big French banks are proving a blessing in disguise, according to some observers. Benderra sees their departure as leaving the market more open for smaller operators with specialist skills, such as UBAF. They are finding there is plenty of business if they want it.