‘WE are the first truly Egyptian bank,’ says the chairman of Banque Misr, Essam el-Ahmady. The name of Banque Misr pops up again and again in any history of the modern Egyptian economy, and Egypt’s second largest bank is proud of nearly 80 years of service. However, Egypt’s economy is changing fast through privatisation and an influx of foreign capital, and critics of Banque Misr say it will have to move faster if it wants to keep up with the times.
Founded in 1920, Banque Misr is not the oldest bank in Egypt. That distinction goes to National Bank of Egypt (NBE), which was set up with foreign capital in 1898. But Banque Misr was a product of Egyptyian nationalism: its founder, the famous lawyer and businessman, Talaat Harb, conceived of the bank as an engine of industrial development for a backward country struggling for freedom from British hegemony.
Banque Misr was taken over by the state in 1960 during the heyday of Nasserism, when most of the banking sector was consolidated into four state-owned banks. These banks were then charged with financing specific sectors: Banque Misr took domestic trade, textiles and farming. These relationships with companies in particular industries are still important to the banks today, six years after the government began to remove credit controls
Structure and performance
Banque Misr is now the second largest of the four public sector banks in asset terms, behind NBE. Its balance sheet has been growing steadily: total assets in June 1996 – the most recent set of published figures – were 12 per cent higher than the previous year, at £E 47,680 million ($14,065 million). More than 80 per cent of this asset base is funded by deposits gathered from Banque Misr’s network of 425 branches, which is the biggest in Egypt (see table, page 32).
El-Ahmady regards this branch network as one of the main reasons why Banque Misr does not have to fear competition from private sector or foreign banks. ‘They can’t compete with us. These branches have been established over 80 years, not in a moment.’ He adds that the bank also offers Islamic
services with about £E 5,000 million ($1,475 million) in customer deposits, and has dedicated Islamic branches in every governorate of Egypt.
Banque Misr was the first Egyptian bank to introduce automated teller machines (ATMs), of which it now has 50. The bank has also introduced a payment card for its customers and offers use of the Visa and Mastercard services. ‘Up to now, Egyptian society has been a cash society. We are trying to educate people to transfer from cash to plastic,’ says El-Ahmady.
The bank has set up several investment funds in tandem with the New York- based Concord International Investment Partners, as well as advising on and arranging a number of privatisation offerings. In February of last year, it lead-managed an £E 200 million ($58 million) local bond issue for Citibank
in Egypt. The bank has also divested some of its holdings in dozens of affiliated companies which span banking, manufacturing, tourism and services.
This month, Banque Misr is selling about half of its 45 per cent holding in the joint venture Misr International Bank (MIBank), leaving it with about 23 per cent, through an issue of global depositary receipts (GDRs). The issue, lead-managed by Merrill Lynch of the US and Nomura of Japan, is expected to raise $180 million-200 million. Banque Misr has also reduced its stake in another joint venture, Misr Exterior Bank, by selling shares in the local market. Banque Misr owns 19 per cent of the bank, while fellow- founder Banco Exterior de Espana owns 29 per cent and MIBank another 11 per cent.
Despite the size and prestige of Banque Misr, its profitability is low, compared to the performance of the top private sector banks in Egypt. Its return on assets for each of the last three years has been a mere 0.13 per cent. Return on equity has improved slightly, but is still only 5.1 per cent. The main reason for the poor showing is that, like the other three public sector banks, Banque Misr is burdened by a mass of problem loans accumulated before 1991. By way of comparison, its private sector affiliate Misr International Bank (MIBank) made net profits of £E 138.9 million ($41.0 million) in the last financial year on assets of £E 10,225 million ($3,016.4 million). This gives a return on assets of 1.36 per cent, 10 times greater than Banque Misr itself.
Moody’s Investors Service, which rated Banque Misr’s financial strength at the rock-bottom grade of E, thinks its involvement with Egypt’s textiles companies, many of which are loss-makers, could be a problem. ‘Banque Misr’s loan exposure and investment in spinning and weaving companies are significant, compared to the bank’s net worth and give cause for concern,’ the agency says. ‘The bank has been building up loan loss provisions against under-performing loans but the practice should continue.’
El-Ahmady is reluctant to discuss the issue of problem loans, arguing that only the central bank needs to know the detail. ‘The percentage of bad loans in the public sector banks is less than the private sector,’ he says. Like other bankers, he would like the Finance Ministry to make loan-loss provisions tax-deductible – at the moment, the exact definition of which loans are doubtful and which are bad is the subject of regular battles between the banks and the tax authorities. This is because doubtful loans are taxable while bad loans are not. ‘We are asking, but the Finance Ministry says not yet because it is a matter of revenue for them. They have to find another way to replace these amounts,’ says El-Ahmady.
Like much of the Egyptian public sector, Banque Misr has a lot of staff for its size, employing no fewer than 13,500 people. El-Ahmady says this number has not increased in the past 10 years, even though the bank added another 100 branches in that period. Employment is an extremely sensitive political issue in Egypt, where half a million people enter the job market each year. The government’s desire to avoid mass redundancies is one reason why privatisation of the state-owned banks is not likely to move at high speed.
El-Ahmady himself will not say whether he personally favours the privatisation of Banque Misr: ‘We are not afraid of privatisation. But we are not going to speak on behalf of the owner [the Egyptian government].’ He does add, however, that banks in general would probably prefer to answer to private shareholders, rather than to governments.
Analysts say Banque Misr is moving in the right direction by widening its range of services and trying to clear up the messy legacy of the command economy. However, it is adapting more slowly than NBE, which is considered by most bankers and analysts to be by far the most dynamic of the four public-sector commercial banks. Nonetheless, the size of its balance sheet means that Banque Misr is assured a place on the major industrial and infrastructure financings which are likely to follow on from the liberalisation of the economy. Its large branch network is also a big strength.
‘Our strategy is to expand when we find that this expansion is good for the people and for the bank,’ says El-Ahmady. ‘We are trying to organise our systems to give better service.’ He adds that he is not worried by the prospect of growing competition from foreign and local banks. ‘We are ready for any competition. I have a big branch network. I have a big network of correspondents. I have the biggest computer system in the Middle East.’
Some of Banque Misr’s competitors are sceptical. ‘They can’t afford to hire the best foreign information technology professionals,’ says one private sector banker. A rival executive, employed by a foreign bank, says Banque Misr may have upgraded its technology but has yet to make the best use of it. ‘They could reconcile all of their accounts in a day, but they just don’t.’
In all events, El-Ahmady seems confident that the bank’s size and pedigree will help it to maintain market share in future. ‘It’s not about being conservative or aggressive. We work according to our experience and with the banking laws. We’ve had 80 years of experience in this market.’