The decision to merge Banque Misr and Banque du Caire came out of the blue this week. Niveen Wahish sounds reactions Prime minister Ahmed Nazif's decision to place Banque du Caire under Banque Misr's management in preparation for a merger to take place in six months time comes as somewhat puzzling. If nothing else, the decision may have been intended as a reminder of how serious the government is about restructuring the financial sector and the economy as a whole. The reason cited by the government for the merger is the creation of a larger entity capable of meeting competition. In the process, Ahmed El-Bardai, head of Banque du Caire, was dismissed from his position despite the fact that he was due to hold his post until February 2007. El-Bardai had come under fire this past year by the business community for his lack of flexibility in solving the problem of non- performing loans. The decision comes at a time when the government is working on various fronts to overhaul the banking sector. It is finalising arrangements towards the sale of the Bank of Alexandria by early 2006. It has sold its ownership in some of the joint venture banks while working on selling the rest. And, a number of banks are in the process of merging together after having failed to meet the minimum capital required by the Central Bank of Egypt. The mergers are intended to help reduce the number of banks from 52 to around 25. Once the merger of Banque du Caire and Banque Misr is complete, the two banks will have between them some LE136 billion in assets, creating an entity that is larger than the National Bank of Egypt (NBE) which holds LE131.7 billion in assets. According to an HC brokerage news bulletin the merger will mean one bank with a larger market share. Collectively the new entity will represent 22 per cent of total assets in the sector. In addition, the HC bulletin said it will capture a market share of 27 per cent of the economy's bank deposits, compared to the 23 per cent controlled by NBE. But these figures are not enough to impress Ahmed Galal, executive director of the Egyptian Centre for Economic Studies (ECES), who fails to see the rationale behind the decision. He says it makes more sense to merge small banks to create larger entities, but questioned why two large banks, by Egyptian standards, need to be merged. He believes that this move contradicts the government's final goal of privatisation. The rule when privatising, he said, is to unbundle and break up any and all entities in order to facilitate privatisation. Amr Bahaa, senior general manager of treasury and money markets of the Egyptian Commercial Bank (ECB), is also sceptical of the decision. He hopes that the move will mean more than simply a change of names. In his opinion, this is a process that is both time consuming and requires a lot of work. For example, he said, aligning the information systems of both banks will take time and investment. Moreover, he pointed out that something must be done about the excess number of employees in both banks and about the number of branches. Currently a branch for both Banque Misr and Banque du Caire can be found side by side. The HC bulletin cites that both banks have together 470 branches and banking units which they describe as having "poor efficiency". The HC summarises it best, "unless the new entity takes measures to cut down on staff, adopt modern technology, enhance asset quality and sell off illiquid assets that plague the balance sheet, it would be hard to see the merits of joining forces." Others are more optimistic. Ali Fayez, director of the Federation of Egyptian banks, sees the decision as testimony to the Central Bank of Egypt's commitment to streamlining the banking sector and to create large entities capable of facing competition. He does not believe that the merger will be difficult as both banks are owned by the government and apply similar policies. Bassant Fahmi, senior adviser for finance, engineering and restructuring of banks, at the Arab Academy in Jordan reiterated a similar view. She believes that the consolidated entity will mean a stronger bank. However, she stressed that the management would need to work on developing the human resources and the technological infrastructure of the new entity to enable it to achieve what it has been created to do. And she does not believe that consolidation means that the new entity will not be privatised. "It could be privatised through an IPO in three to five years," she suggested. With the decision to merge the two banks now taken, it remains to be seen how a number of issues will be tackled. Among these issues is that of the non-performing loans of both banks. According to HC, Banque Misr alone has around LE8 billion of bad debts due for rescheduling and settlement, accounting for almost 20 per cent of its loan portfolio, "excluding loans which could have a 100 per cent loss given default". HC added that despite the fact that both banks have been undergoing major restructuring, asset quality remains a top concern as it is estimated that only 50 per cent of non performing loans are covered by provisions. Another issue, according to HC is the capital adequacy of the new entity. "The merging of Banque Misr and Banque du Caire does not directly improve their capital adequacy, but rather remains contingent upon the willingness of the government to inject more capital into the combined entity." HC believes that state-owned banks are generally undercapitalised and their capital adequacy ratios range from 7-8 per cent which is well below the 10 per cent required by the CBE. With the merger and the sale of the Bank of Alexandria, the big four public sector banks will be down to two. The four public sector banks currently hold 57 per cent of total bank deposits.
