Andrew Long is group general manager and CEO of HSBC Bank Egypt SAE. He was appointed CEO after the 2011 revolution — a critical juncture for Egypt's economy. With 35 years of banking experience, Long tells Al-Ahram Weekly how his bank's operations have been faring since the revolution and how the banking sector and the economy as a whole have been affected. HSBC has been taking measures on a global level to save expenses by cutting jobs and selling assets. Any plans to downsize the bank's operations in Egypt? In the past two years we have been repositioning the entire group globally. As far as HSBC in Egypt is concerned, there is no intention to downsize. We want to grow here. We see huge opportunity in Egypt. Of course, we are making changes because every business has to make changes to exist and so branches that might have been in the right location five or 10 years ago may no longer be in the right location as population moves. We are here to stay and to grow. How have your operations been affected since the revolution? Egypt's economy has obviously struggled for the past two years. The growth of the economy has been substantially less than it had been in the last five years. Despite that, the banking sector as a whole has performed reasonably well. And I suspect that this is because there is quite a strong unofficial economy. As far as HSBC is concerned, 2012 was the best year we have ever had. Our clients have done reasonably well. Whether that will continue, time will tell because the economy continues to struggle. Which areas of your operations were most affected? The banking sector is very liquid and it has become more so in the past two years. And one of the reasons it has become like that is because with uncertainty investors hold back their investment. So banks have not been lending as much as they would like to. In the retail banking sector there has been some demand because there are people whose salaries are frozen or they have been made unemployed or the rise in their salaries has not been keeping with inflation. They need to borrow from the retail side through their credit cards or through their personal loans or overdrafts. But in Egypt as a whole corporate loans are much bigger in value than retail loans and if retail lending goes up by 20 per cent it does not make a huge impact on the banking sector. What is also interesting in Egypt is that there is not much of a mortgage market. In most other large economies, mortgage lending might take up 20 to 25 per cent of typical assets of a bank. The total value of the mortgage market in Egypt is worth about $600,000. In an economy of this size you would expect mortgage finance to be 100 times that size but it does not exist yet. That is one of the reasons why the banking sector is very liquid. Some experts have said that the government's domestic borrowing through treasury bills is crowding out the private sector? I do not think that banks' investments in treasury bills are crowding out the private sector. The fact that there is not much lending to the private sector is because the private sector is not borrowing because they are delaying their investments. So if a bank cannot lend, what is it going to do with the money? There are not many alternatives except to deposit it in the Central Bank of Egypt (CBE) or buy treasury bills. I would always prefer to lend to my customers because not only would I lend to them at interest but I can satisfy their other needs with other products. With the government that is it. They do not want any other services. How is the hard currency shortage affecting banking transactions? Companies that have a source of foreign exchange do not have an issue. For example, if they are importing and exporting, when they export they can use that foreign currency to buy their needs of imports. But other companies that import and sell domestically and need to pay in hard currency need to buy the hard currency. But when the currency is not available then they will be more conservative about how they place orders overseas. Lately there is an increasing demand for cash by overseas suppliers because there is a concern that the foreign currency is not being made available. The CBE recently made available a certain amount to clear outstanding imports of strategic commodities. But there is still a significantly lower volume of foreign exchange taking place than there was in 2012. What type of delay does that cause? The delay would depend on the commodity; if it is a strategic commodity or not would depend on the customer itself and how much demand he has. It will depend on the bank; banks have to bid for currency and some are more successful than others depending on the auction. There is no set standard. Some people have to wait a long time, others will get it instantly. It depends on the guidelines of the CBE. Egypt has always been described as under-banked. What do you think? There are a lot of people who are on very low incomes; those typically do not have bank accounts. But there are models that look after them. If you look at Kenya for example people use mobile phones to transfer value and payment. They do not have bank accounts, so you could say they are unbanked, yet they are using a mechanism that allows them to send money from one end of the country to the other. That for example is a model that could work in Egypt. In Egypt, a large section of the population does not have bank accounts, partly because there are no branches in the villages or cities, partly because they do not have enough money to put in the bank account, and partly because the post office in Egypt has been successful and has attracted savings. The post office is not a bank but is an important part of the economy and is allowing people to make payment through it. Banks, post offices or mobiles are just different mechanisms that allow money to be moved around. But hasn't mobile banking recently been approved in Egypt? There are lots of different types of mobile banking. What has been approved is one part of it but mobile banking is one big area and not everything has been approved yet. Are there plans to introduce Islamic banking products and services in Egypt? HSBC recently refocussed its Islamic banking model by closing branches in many countries because there was not much demand. As it happens, it made very little difference to our profit loss from that business because 83 per cent of our Islamic banking comes from two countries — Saudi Arabia and Malaysia. With Egypt we are looking at what is happening. There is not yet finality around the laws. The laws are evolving. Once there is clarity then we will decide what to do next. We cannot say that we will do something when we do not know yet what the laws will allow or what the CBE will allow for the banking sector because the CBE has its own views as to the participation of the banking sector. Then there is the insurance view as well. We are closely watching it. Separately we are also looking at sukuk. HSBC is the number one bank in the world in terms of managing corporate and institutional and sovereign sukuk. We are talking with the government, offering to give our advice and help. What's your opinion regarding the requested $4.8 billion loan from the International Monetary Fund? The IMF loan in itself, as an amount of money, will not solve Egypt's problems. It does not impose policies but it is not a charity. It is a sovereign institution that wants to get its money back at some stage. It does lend at preferential rates. Around one per cent interest is cheaper than the 14 per cent the government pays for treasury bills. As a source of finance, it is a good source but not enough in itself. Where it is positive, in addition to being cheap, is that it additionally provides a stamp of approval that a lot of other people who want to invest in Egypt want. Will the signature of the loan have immediate effect on investors' willingness to return to Egypt? It would be a very positive move in terms of sentiment for investors outside Egypt. Whether it means immediate money is a different issue. There will be some immediate money, in a few weeks from sovereign organisations such as the World Bank and the EBRD. Private investors are always more cautious. HSBC has investors overseas who are talking to us who want to come here and they are keeping a very close eye and they will be delighted if the IMF loan is approved. And that will accelerate their thinking. Whether it accelerates to immediate money I do not know at this stage. Because clearly the economy and politics of the country are evolving on a daily basis and their decisions on whether to invest are also evolving on a daily basis. So what they might have thought six weeks ago might be different from what they are thinking today. How do investors view the Egyptian economy now? Investors today are less positive than they were six months ago. Six to 12 months ago many of them were hopeful that things would settle down and they would start investing in 2013. I think now they feel that the investment horizon has shifted outwards, the economy is taking too long to recover and some of the decisions they would like to see, they are not seeing. There has been some uncertainty; changes were introduced and then cancelled. That sort of uncertainty makes investors a little bit unhappy. They were hoping to get certainty but certainty keeps being delayed. In today's perspective the economy is not looking as robust as it was six months ago. What would it take to change investors' attitude towards the Egyptian economy? People want to know what the rules of engagement are going to be in the economy. I do not think that people care too much who is in power politically, but they care what the tax rules or investment rules are going to be. Are they going to review contracts that are 10 years old or are they going to draw a line and say we are going to look forward instead of looking backwards? Are there going to be new allowances, is there going to be new support for particular projects? They want that clarity. Investors look for opportunities; some of them have a high appetite for risk and they will step in earlier while others will wait longer. Egypt has massive potential in the long term. We just have to get through the difficulties of the short term and I am personally as indeed are the business people, hoping those difficulties are resolved quickly. They want to get in and to make a profit and provide employment opportunities for lots of people. We are at a time of uncertainty and that uncertainty is not getting better; as you clear the fog and start to get some clarity, people will start to invest. How do you think the increase in interest rates could affect the investment climate? From where we are today, the interest rate moves do not make a huge difference to the investor. I do not think interest rate movement is particularly negative to investors today. What is much more unsettling is the currency situation and the economic policy situation. The banking sector has been described as robust and this has protected the Egyptian economy. Have the past two years taken their toll on the banking sector? Not yet. In a recession — and Egypt is not technically in a recession but it is not growing as fast as it should — more corporate customers fail at the end than at the beginning. So after two years of anemic growth, some companies are struggling because they cannot sell enough to pay their bills. If this flat lining of growth continues, or if it gets worse and the economy starts to shrink, you will see corporate failures. And with corporate failures, banks will lose money. The impact on the bank of losing corporate money depends on how well-capitalised the bank is. The CBE is looking closely at all the banks to make sure that they are all strong enough. There is no guarantee that a bank will not fail; it is hard to see a bank failing this year, or even next year, but if we have five years of the same economic situation as of today, there will be a lot of corporate failures, a lot of people will be out of work and there will be some retail banking customer failures as well. But as of today it does not look like there are any particular stress points in the banking system.
