Cablegate: Surprises in Egypt's Banking Sector

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 CAIRO 007548

SIPDIS

STATE FOR NEA/ELA, NEA/RA, AND EB/IDF
USAID FOR ANE/MEA MCCLOUD
USTR FOR SAUMS
TREASURY FOR MILLS/NUGENT/PETERS
COMMERCE FOR 4520/ITA/ANESA/TALAAT

E.O. 12958: N/A
TAGS: ECON EFIN EINV EG
SUBJECT: SURPRISES IN EGYPT'S BANKING SECTOR

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Summary
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1. (SBU) In a surprise move earlier this week, the GOE
announced the merger of two of Egypt's state-owned banks,
Banque du Caire and Banque Misr. The GOE also announced
that the banks' management would be changed in anticipation
of the merger. The banking sector reacted positively to the
news; through some local contacts believe the move may be
merely a delaying tactic to stall resolution of the public
banks' non-performing loan (NPL) portfolios. Banque Misr
also recently sold its shares in Misr International Bank
(MIBank), which were purchased by National Societe General
Bank (NSGB). MIBank employees resigned en masse in
anticipation of changes to their compensation package. It
is not yet clear if the mass resignation will affect future
acquisitions, but for the time being, foreign banks still
appear to be positioning themselves in the Egyptian market.
The GOE plans to use proceeds from the sale of shares in
Joint Venture (JV) banks to re-capitalize the state-owned
banks. End summary.

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... and Then There Were Three
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2. (U) In a surprise move on September 25, the GOE
announced plans to merge the second and third largest state-
owned banks, Banque Misr and Banque du Caire. The CBE
issued a statement indicating that the merger was another
step in its plan to consolidate the banking sector by
creating fewer and stronger banks. Banque Misr, the second
largest state bank, had assets of LE 91 billion at the end
of FY 2003/04 and a 17% market share. Banque du Caire had
assets of LE 45 billion at the end of FY 2003/04 and a 6-7%
market share. After merger, the new entity will be almost
as large as the leading state-owned bank, National Bank of
Egypt (NBE). The new bank will have assets of approximately
LE 130 billion (USD 22 billion) and 23-24% of the market.
NBE had assets of LE 131 billion at the end of FY2003/04.

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Shuffleboard
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3. (U) Coinciding with announcement of the merger, the
Prime Minister's office also announced a reshuffling of the
boards of directors of the state-owned commercial banks as
well as the Industrial Development Bank and the Egyptian-
Arab Real Estate Finance Bank. According to the Cabinet
press release, the Board of Banque Misr, headed by Mr.
Mohamed Barakat, will manage Banque du Caire for the next
six months to prepare for the merger. Ahmed El Bardei, the
Chairman of the troubled Banque du Caire, was dismissed in
the reshuffle. Banking sector contacts had long predicted a
reshuffling, but most anticipated Barakat would be made
chairman of NBE. An initial meeting has been fixed for
October 3, for the shareholders' general assemblies of both
banks to discuss the merger.

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Bank Sector Reacts Positively
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4. (SBU) Reaction to the announcement was generally
positive. Most banking contacts saw the merger as a sign of
CBE's continued commitment to rapid consolidation of the
banking sector. Some local bankers, however, questioned the
motivation for the move. Michel Accad, Chairman of
Citibank, said the merger gave the appearance of
consolidation, but was really intended to buy time before
making a decision on resolution of the NPL portfolios of the
state-owned banks. The "Big Four" banks hold around 90% of
the debts of Egypt's state-owned enterprises. Although
actual figures for the NPL ratio in the state banks are not
publicly disclosed, most estimates place it at 20-30% of
total credit portfolios.

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Banque Misr Divests Shares in MIBank
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5. (U) In early September Banque Misr sold its 25.5% share
in MIBank to NSGB. The Capital Market Authority had
announced that whomever won Banque Misr's 25.5% could then
bid for 100% of MIBank. NSGB later completed an acquisition
of MIBank on September 15, with a purchase of 90.7% of
shares for LE 1.694 billion at LE 43.20 per share. A merger
of the two banks, which will be completed in a few months,
will follow the acquisition.
6. (U) Completion of the acquisition was delayed a number
of times, however, by the resignation of much of the bank's
staff due to differences in salary scales, remuneration
packages and other benefits between MIBank and NSGB, with
MIBank's compensation being much higher. The major problem,
which generated mass resignations (approximately 250) at
MIBank, was an anticipated change to the MIBank employee
insurance fund, in which employees were entitled to between
LE 70,000 and 1.25 million each in severance pay plus
pensions, and family-member medical insurance. It was
rumored that NSGB intended to liquidate the employee fund.
Mohamed Antably, Head of Correspondence Banking at NSGB,
stated it in a different way: according to NSGB's bid, the
employee fund at MIBank was to be maintained up to the date
of a merger.

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Prospects for future privatization
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7. (SBU) Antably's spin did nothing to prevent the mass
resignation, which according to some local business contacts
has cast a pall over future prospects for bank
privatizations. Hamed Fahmy, Managing Director of Allied
Corporation Egypt told econoff at a dinner of the U.S.-Egypt
Business Council that he feared the MIBank employee exodus
might scare off prospective buyers, who would be hesitant to
enter the market due to potential labor difficulties. Other
contacts in the banking sector are more sanguine, however,
about future prospects for bank privatization. Roderick
Richards, Managing Director of Egyptian American Bank (EAB)
told econoff that EAB had received 15 bids in response to
its recent offering memo. Most of the bids were from
foreign banks looking to either enter Egypt's market or
expand their current operations.

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Re-capitalization
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8. (U) The GOE plans to use proceeds from the divestiture
of state shares in JV banks such as MIBank to cover some of
the cost of the re-capitalization of the state-owned banks.
The Ministry of Finance has also reached an agreement with
the state-owned banks whereby it will issue 20-year bonds,
with a 10% coupon, to repay the LE 18 billion in overdue
debts of public sector companies to state-owned banks.
While the combined proceeds from JV divestiture and a bond
issuance will cover a large percentage of the state-owned
banks' NPL portfolios, it will not solve the problem
completely. The GOE will still have to decide on a policy
for resolution of privately held debts to the state-owned
banks. In particular, the credit portfolio of Banque du
Caire includes the NPLs of two well-known Egyptian tycoons -
Rami Lakah and Hatem El Hawari, whose debts reach
approximately LE 1.7 and LE 2 billion, respectively.

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Comment
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9. (SBU) The Governor of the CBE indicated that decisions
for additional privatization of state-owned banks would
await an evaluation of the privatization of Bank of
Alexandria (BA). BA's privatization is on track for
completion by the first quarter of 2006 at the latest. The
process has been quite lengthy, however, and continues to
face some opposition from voices claiming that privatization
of ownership is not necessary as long as state-owned banks
are managed like private sector banks. In any event, the
GOE decision to merge Banque du Caire with Banque Misr
appears to reflect a realistic assessment of the possibility
of finding a buyer for Banque du Caire. Given the bank's
poor condition and weak balance sheet, CBE most likely
decided that merging it with a large, better managed bank
was the best way to continue consolidating the banking
sector without going through the lengthy, and costly,
process of privatization. End comment.

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