FRANCE: Growth abroad despite trouble back home

14 March 1997

FRENCH banks have long had a strong commercial connection with the Middle East. France shares a Mediterranean coastline with many Middle East states, and historical links were strengthened as the French empire spread across North Africa in the 19th and early 20th centuries. After the First World War, the Ottoman territories in what is now Lebanon and Syria came under French political control; even today French banks are strongly represented in Beirut.

As a result of this history, the French banks most active in the Middle East have larger networks of branches, representative offices and affiliates than many of their Western competitors. Far from being stable over time, these networks constantly change their shape - they contracted with a wave of nationalisations in the Arab world in the 1950s and 1960s and expanded again with the oil boom and, more recently, with the opening up of the region's economies. Now some of the banks are considering a further expansion of their networks, moving deeper into promising markets like Egypt and the Gulf and, in some cases, buying into local Arab banks.

At home, the French banking industry has been having a hard time. An accumulation of problems over the last decade - ranging from high operating costs to over-exposure to real estate - has hit balance sheets throughout the industry. The most notorious difficulties are those of Credit Lyonnais - the French government has made repeated attempts to bail out the state- owned bank. Compagnie de Suez, an industrial holding company, has solved some of its debt problems by selling Banque Indosuez to domestic bank Credit Agricole. Some of the banks seem to have put the worst of their problems behind them. Banque Paribas, for example, has just reported a world-wide profit for last year after making a loss in 1995 due to heavy provisioning.

Notwithstanding the recent difficulties of the industry at home, those French banks with the largest networks in the Middle East - Indosuez, Paribas, Societe Generale, Banque Nationale de Paris (BNP) and to a lesser extent, Credit Lyonnais - are continuing to build up their business in the region. 'All the French banks are thinking that the situation in the Middle East is improving and there are a lot of opportunities,' says Gregoire Sainte Marie, senior vice-president for the Middle East and Indian subcontinent at BNP.

The banks tend to share one or both of two objectives - to build up their investment banking business and to expand operations in those markets deemed to have the best prospects, notably Egypt and the Gulf. Looking further into the future, the French banks feel that Syria, Iran and Iraq, after the lifting of UN sanctions, are markets where they could do well when the opportunity arises.

Banque Paribas has been one of the most active of the banks in arranging deals in investment banking and structured finance, mainly for projects and exports. The bank lead-managed a $300 million franc-denominated bond for the Moroccan government last August and is working with Lebanon's Solidere property company on financing the redevelopment of central Beirut. Last year the bank opened a representative office in Casablanca to pursue areas of business other than commercial banking - corporate advice, capital markets and the repackaging of Moroccan debt. It has also opened an asset management desk in Abu Dhabi and a separate office to handle structured finance in the Gulf.

'In a few countries we will maintain commercial banking activities, but we will focus on quite specialised banking,' says Paribas' director for the Middle East, Africa and the Pacific, Francois Dauge. Over the years, Paribas has acquired interests in commercial banks in Lebanon, Oman, Morocco and the UAE (see box) 'If these things were done again, they would not be done in the same way,' says Dauge. Paribas, he adds, might consider investing in commercial banks, but not for a minority position and only in institutions with a specialised niche.

Societe Generale also aims to provide more sophisticated financial products in the Middle East, to add to its existing trade finance activities and its corporate and retail banking business in countries like Lebanon, Morocco and Egypt. 'We are traditionally a trade finance bank abroad. Without forgetting this business, we should do more in investment banking,' says Bernard Houtekier, Societe Generale's deputy general manager for Africa and the Middle East. This may mean improving links between local banks and specialists based in Paris, rather than adding staff locally. 'We are working on the liaison. It makes no sense to have a project finance manager in every subsidiary,' says Houtekier.

In the Gulf, Societe Generale's presence is limited to minority shareholdings in two small banks, one in the UAE and one in Oman. It closed its Bahrain office in 1990 and is about to open a new one in Dubai next month to cover the Gulf. 'We established strong relationships (in the area) in the 1970s and gradually we reduced it in the 1980s,' says Houtekier. 'We need three or four years to get it back.'

Dubai expansion

Through the representative office, the bank aims to win business in Dubai from companies who are big clients elsewhere, ranging from South Korean conglomerates to small French oilfield services companies. Trade finance could in turn lead to other related kinds of business for the bank. 'To me, Dubai is a little Singapore,' he says. 'We are not a threat to local banks because we are there to bring more trade.' Societe Generale is also planning to recruit an Islamic banking specialist, and has considered buying into a bank in Jordan.

Egypt's rapidly liberalising economy is proving attractive to the French banks. Societe Generale has just bought a controlling interest in National Societe Generale Bank, where it previously held a 49 per cent shareholding, from state-owned National Bank of Egypt. Credit Commercial de France, which is active in trade finance throughout the Middle East, has also acquired a majority stake in the local Credit Internationale d'Egypte. BNP is considering following suit with its Egyptian joint venture, Banque du Caire et de Paris. Like other French banks, BNP wants to be in control of its regional subsidiaries where possible. 'We don't like to be a minority shareholder, with all the risks and only a small part of the profits,' says Sainte Marie.

Banque Paribas is upgrading its Cairo branch. 'It has been a bit dormant for the last two to three years and we have decided to reactivate it,' says Francois Dauge. 'Our strategy is first to develop the branch and maybe more importantly, to use it as a catalyst to gain other business (in structured finance, the capital markets or asset management). The number of staff will be restored to its full strength of 25 people, from about 10 now.

Financially strengthened through its take-over by Credit Agricole last year, Banque Indosuez is planning to upgrade its representative office in Egypt and it may also buy a shareholding in an Egyptian bank. 'We are definitely too weak in this country,' says the bank's regional head Hugues de Parcevaux. Indosuez plans to expand its existing commercial banking network in the Middle East as a base for pursuing higher-value business. 'In a country like Egypt, you need to have corporate banking. On top of that, you can build relationships with your clients through corporate finance, asset management and private banking.'

Aside from Egypt, Indosuez sees new opportunities in Turkey and Central Asian countries such as Kazakhstan, or Uzbekistan where it already does trade finance. The bank is also adding a sixth branch to its network in Yemen. Prior to the Credit Agricole takeover, Indosuez had already set in place a world-wide plan to concentrate on what the bank regards as its traditional Europe-Middle East-Southeast Asia axis. This has meant shedding peripheral businesses in some areas, though not in the Middle East. The takeover may not have much impact on Indosuez' business in the region, where Credit Agricole has few interests. 'The takeover is not a dramatic change for our strategy in the Middle East, but it gives us more means,' says De Parcevaux.

Three of the countries where the French banks hope to do more business in the future are also the most unpopular with the US. French bankers are happy to do trade finance business with Iran despite US attempts to limit foreign trade with the Islamic republic. 'It's a blunt answer, but no,' says one senior banker when asked if the US attitude inhibits French banks.

Syria's economy remains relatively closed compared to some of its neighbours, but the French banks expect to do well in the once French-ruled country if the liberalisation process takes hold there. Iraq, a big trading partner with France until the invasion of Kuwait in 1990, is likely to be another area of effort once UN sanctions are lifted. French companies should be early beneficiaries although the banks may find it hard to establish a foothold within the country. 'I'm sure that French companies will be the first to be awarded contracts in Iraq, taking into account France's (political) position towards the country,' says Guy de Jacquelot, board chairman of Union de Banques Arabes et Francaises. UBAF is a consortium bank specialising in trade finance, in which Credit Lyonnais has a significant minority stake and a management role. He predicts that Iraq will give priority to rebuilding the two big domestic banks before letting in foreign competition. 'In my opinion, the Iraqi government won't allow French banks to establish representative offices or branches (once sanctions end).'

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