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Cablegate: Banque Du Caire Privatization Postponed

VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #1370 1831324
ZNR UUUUU ZZH
R 011324Z JUL 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 9712
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0420

UNCLAS CAIRO 001370

SENSITIVE
SIPDIS

STATE FOR NEA/ELA, NEA/RA AND EEB/IDF
USAID FOR ANE/MEA MCCLOUD AND RILEY
USTR FOR FRANCESKI
TREASURY FOR MATHIASON AND DENNIS
COMMERCE FOR 4520/ITA/ANESA/OBERG

E.O. 12958: N/A
TAGS: ECON EFIN EINV EG
SUBJECT: BANQUE DU CAIRE PRIVATIZATION POSTPONED

Sensitive but Unclassified. Please protect accordingly.

Ref: A. Cairo 1352 B. Cairo 1335

1. (U) The GOE postponed indefinitely the sale of state-owned
Banque du Caire on June 25, after the highest bid received did not
meet the minimum asking price of $1.6 billion for 67% of the bank's
shares. A GOE evaluation committee set the minimum price based on
the $1.6 billion that Italy's SanPaolo Intesa Bank paid for 80% of
Bank of Alexandria (BOA) in late 2006. Mohamed Ozalp, Vice Chairman
of Banque Misr, owner of Banque du Caire, told us before the auction
that Banque du Caire would sell for as much or more than BOA, as
Banque du Caire has 215 branches (compared to BOA's 180) a
state-of-the-art IT infrastructure with 180 ATMs, and a larger
depositor base than BOA. Banque du Caire's license was also
considered a selling point, as Egypt's Central Bank has not granted
new banking licenses for 20 years. The only way for a new entity to
enter Egypt's banking market is through purchase of an existing
bank. The Egyptian stock market fell by 1.56% on news of the
postponement, with the banking sector index declining 3.19% on June
25.

2. (U) In the first round of the auction on June 25, only three of
the five short-listed bidders submitted offers. The National Bank
of Greece (NBG) submitted the highest offer, $1.3 billion, followed
by UAE's Mashreqbank ($871 million) and the Saudi-Jordanian Arab
Bank Group consortium ($804 million). Neither the UK's Standard
Chartered, nor the Saudi SAMBA Group submitted bids. In the second
round, both Mashreqbank and the Arab Bank Group withdrew. NGB
increased its offer to $1.4 billion, for a total valuation of $2.03
billion, or 3.6 times Banque du Caire's book value of LE 2.67
billion ($499 million). Banking analysts noted that the bids seemed
fair, though the GOE obviously did not agree, possibly because the
last two banks the GOE has sold, BOA and Al Watany Bank, went for
6.1 and 5 times book value respectively.

3. (SBU) Most banking analysts believe using the BOA sale price as
a benchmark was a mistake. BOA's management spent years preparing
that bank for sale, paying off non-performing loans (NPLs),
re-training staff and renovating branches. BOA Chairman Mahmoud
Abdel Latif told us he did not think Banque du Caire would sell for
as much as BOA because less effort was put into preparing Banque du
Caire for sale. Although most of Banque du Caire's NPLs were
reportedly transferred to Banque Misr, the former's balance sheet
was still not in good shape. Analysts contend the bank needs more
restructuring, better investments, upgraded operations and
re-capitalization to make it attractive enough to get the GOE asking
price. At a press conference after the auction, Mohamed Barakat,
Chairman of Banque du Caire, said the GOE would further restructure
the bank and attempt to sell it again, although he declined to set a
timeframe. A senior advisor to the Minister of Investment told us
after the auction that he thinks the bank should be ready for sale
again soon.

4. (SBU) Official statistics indicate Banque du Caire has total
assets of around LE 50 billion ($9.3 billion) and a 6% market share.
Per the audit of Banque du Caire by the local office of Deloitte,
done for purposes of the U.S-Egypt financial sector MOU, the assets
were only LE 34.5 billion ($6.4 billion) in 2006. The same Deloitte
audit, conducted using international auditing standards, indicated
LE 22 billion ($4 billion) of Banque du Caire's LE 28 billion ($5.2
billion) in total loans (79% of total loans), were non-performing in
2006. The GOE currently claims only LE 10 billion ($1.9 billion)
NPLs in the entire banking system.

5. (SBU) Comment: The GOE's fixation with obtaining $1.6 billion
for Banque du Caire suggests that postponement of the sale was not
based on sound economic analysis of the bank's value, but on
political considerations. Only the minimum asking price would have
satisfied elements of the political class skeptical of economic
reform. In the context of record levels of foreign investment, the
sale's postponement, along with the EAgrium investment dispute (ref
A), suggest that there are some limits to Egypt's openness to
foreign investment. Postponement may also be seen as vindication of
those opposed to privatization of the economy, though in the
long-run it undermines the opposition's argument that the GOE is
selling the country "for a song." In any event, coupled with
Moody's downgrading of Egypt's long-term local currency bond outlook
over inflationary and fiscal concerns (ref B), the sale's
postponement shows that continued economic reform is becoming more
challenging.
SCOBEY

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