BANKING: Small banks with attitude

03 October 1997

EGYPT'S loftier banks have been enjoying the attentions of the world financial community of late. Commercial International Bank (Egypt - CIB), Misr International Bank (MIBank) and Egyptian American Bank (EAB) have all made highly successful forays into the global equity and debt markets, and the three banks have, as a result, become familiar names in the world banking almanac.

CIB prides itself on being first Egyptian bank in the modern era to raise both equity and debt finance on the global market. The bank's managing director Adel el-Labban sees the latter as potentially the more significant initiative for the future. Some 60 per cent of the estimated $8,000 million annual capital inflows required to sustain growth rates of 5 per cent or more will need to be in the form of debt, El-Labban told the Tiger on the Nile conference.

But while the big three banks have grabbed the international headlines, Egypt's smaller institutions have also had important stories to tell. This is partly because of the combination of the attractiveness of the banking sector as an investment, and the relative lack of new opportunities to invest in the sector.

'Banking is the best possible area for medium-to-long term investment,' says Farouk Nasser, chairman of International Development Consultants (IDC). 'The sector has been growing by 20-30 per cent a year, and is offering handsome returns to investors.'

However, Nasser says the real value inherent in investing in a bank is that the Central Bank of Egypt is not handing out any new licences. This means that the only way into the sector is to buy out existing shareholders, in particular through acquiring stakes held by public sector banks.

The pickings are limited. In the case of joint venture banks, the foreign partners effectively have the right of first refusal, although only two so far

have concluded deals - Societe Generale and Credit Commercial de France - both with National Bank of Egypt (NBE). The only other deals in progress involve Barclays Bank and Banque Nationale de Paris, which have been negotiating for some time about taking majority control of their respective joint ventures with Banque du Caire.

Further down the scale, local businesses have been buying into private commercial banks in which the public sector banks held stakes. The change in ownership structure has often brought with it a change in management, sometimes with startling results.

Nowhere has this been more apparent than in the case of Egyptian Gulf Bank (EGB), where a new management team appointed in March 1996 had succeeded in just 18 months in doubling the size of the balance sheet. The shareholding structure did not change a great deal, apart from the sale by Banque du Caire of its 14 per cent stake, most of which was taken by Misr Insurance Company. There was also an increase in the stake of the family of Mohamed Mahmoud, whose interests include food packaging and luxury car dealerships. The other shareholders are mostly Gulf businesses and companies, including Abdel-Rahman Sharbatly of Saudi Arabia and Jawad Bukhamseen of Kuwait.

Three members of the new management team, including managing director Mohamed Barakat, were drafted in from EAB. A fourth came from Arab Banking Corporation (ABC) in Bahrain. Barakat says the key to the new approach was an overhaul of the internal organisation of the bank, notably through the creation of a marketing team. Deposits have now more than doubled since the new team took over, reaching about £E 1,400 million ($413 million) in September, and loans have trebled to about £E 1,200 million ($354 million).

In line with the expansion of business, capital has been increased in two stages to the $50 million authorised limit, from $30 million. Plans are in hand to raise a further $30 million from existing shareholders and staff, probably in early 1998, and $20 million through an initial public offering in 1999.

'Our growth was achieved partly because there was room for growth in the balance sheet we took over, but also because we injected an extra dimension, particularly with the speed of response and the strong marketing,' says Barakat. 'We did not seek growth at the expense of the quality of our clients.'

The bank is now expanding its range, both with plans to open two new branches, and with new products. It is planning to issue a £E 100 million ($29 million) bond and is building up its investment activities with a view to launching a mutual fund.

Another smaller bank looking to expand following a change in ownership structure is Egypt Arab African Bank. The Mansour and Maghraby groups were bought into the bank in 1996, and have since built up their stake, so that they control 34 per cent of the equity. Yasseen Mansour, head of the two groups' joint investment company, says they wanted to establish themselves in the financial sector at the start of what is likely to be period of sustained economic growth. 'It is a good, small-sized efficient bank, with not too many skeletons in the closet,' he says. 'There is a new management team in place, with Omar Mohanna as managing director, and they are setting in place new systems.'

Cairo financial analysts are watching closely to see whether Mansour/Maghraby will eventually secure overall control of the bank. The present majority shareholder is Arab African International Bank, with a 49 per cent stake. Mansour/Maghraby have also taken a bold step into the capital market sphere through setting up a joint venture with Flemings (see page 40).

Other business groups that have bought into the banking sector include steel and commodity traders Mohamed el-Gerhy, Hatem el-Hawary and Magdi Kotb, who have built up a stake in Dakahlia Commercial Bank. It has since been renamed United Bank of Egypt, given a new management team and moved from its original Delta base to a new headquarters in Cairo. Its capital has been increased to £E 300 million ($88 million), with further increases planned, and total assets have risen rapidly to about £E 1,300 ($383 million).

It has been a similar story at Egyptian Commercial Bank - formerly Alexandria & Kuwait International Bank - in which a group of prominent industrialists are led by Oriental Weavers Group chairman Mohamed Farid Khamis and Cleopatra Group chairman Mohamed Abul-Einein.

Deals which are still pending include sales of public sector bank stakes in Misr Iran Development Bank (MIDB) and Bank of Commerce & Development (Tigariyoun). In the former case, one of the newly established finance houses, Al-Ahly for Development & Investment, has bid to buy a 10 per cent stake from Bank of Alexandria. The deal is said to have been agreed between the two parties, but has yet to receive official approval from government authorities. Al-Ahly - headed by Fouad Sultan, who was chairman of MIDB before he was appointed tourism minister in 1985 - says MIDB is an attractive proposition because it is ripe for a new phase of growth after dealing with difficulties that dated back to the troubled period of the late 1980s.

Tigariyoun has also been one of the poorer performers among Egyptian banks, and was carrying £E 30 million ($9 million) of retained losses on a balance sheet of about £E 1,000 million ($295 million) in mid 1997. However, it is one of the few banks still available for a private investor, with public sector banks holding 82 per cent in total. Bahrain-based Arab Banking Corporation (ABC) has put in a serious bid to buy into the bank. This is effectively the only means ABC has of increasing its presence in what is fast becoming one of the most vibrant financial markets in the Middle East.

The new entrants to the market will still have a lot of catching up to do. The potential for growth has been most successfully tapped by CIB, whose assets have increased tenfold over the past decade, reaching £E 13,980 million ($4,123 million). Much of that growth has come in the past five years, in which CIB moved faster than its closest rivals to tap into new sources of equity and debt securities. Its closest rivals, MIBank and EAB, have been slower off the mark, but have started to move in these directions over the past 12 months.

The next big challenge for the banking sector is the restructuring of the four public sector banks, which still dominate the sector. The smallest of the four, Bank of Alexandria, is widely tipped to be the first which will be offered for privatisation, although the Central Bank of Egypt emphasises that no decision has been taken. Cairo bankers say it will be intriguing to see whether any of the dominant private players will be tempted to take on the daunting challenge of buying into and reforming whichever of the state-owned banks is offered up for sale first.

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