As the government gets ready to announce the sale of the Bank of Alexandria most financial analysts are hoping for a big name takeover, reports Niveen Wahish Egypt's banking system is undergoing a radical overhaul, and 2006 will probably be the year in which the map of banking in Egypt finally changed. Within a couple of months the Egyptian American Bank will cease to exist as Calyon Bank finishes its takeover procedures. The merger of Banque du Caire and Banque Misr is due to be completed this year as well, and the government plans to continue selling its stakes in other joint-venture banks. The showstopper, though, will be the sale of the Bank of Alexandria (BA), the first wholly- owned public sector bank. The announcement of the sale is expected to be made before the end of March and details of the process have yet to be made public. Marwa El-Sheikh, banking sector analyst at EFG-Hermes, says that the "enormous technical, administrative and financial problems of public sector banks" need strategic investors if they are to be overcome, and she is among many financial analysts arguing that a strategic investor be sought for BA. The bank has come a long way in the past three years. "It's the best-shaped public sector bank," says El-Sheikh, "and has taken on a professional look." BA's recent capital gains, generated by the sale of its stakes in joint venture banks and companies including the Alexandria Mineral Oil Company (AMOC) and the Egyptian American Bank (EAB), have been used to support reserves and make BA into a more attractive proposition. The bank will also benefit from government plans to repay public sector debts. Public sector companies currently owe LE32 billion to the banking sector, of which LE6 billion was loaned by BA. Much of the recent changes undergone by BA are a result of the efforts of the private- sector minded management team led by Mahmoud Abdel-Latif. Since taking over as chairman three years ago Abdel-Latif has almost quadrupled BA's clients from 600,000 to two million. Deposits have grown by 40 per cent, many processes have been automated and the bank, formed in 1957 following the nationalisation of UK-based Barclays' Egyptian operation now employs 8,000 people. But El-Sheikh believes as long as ownership of BA remains in government hands there will be a ceiling on improvements in the bank's performance. "A real turnaround in performance and higher profit returns," she says, "needs private ownership. What has been done so far has been to tackle historical problems." To secure BA's future, she argues, the bank must improve employee skills and cut their numbers. "It needs a professional banking school." Nabil Hashad, chairman of the Arab Centre for Financial and Banking Studies and Consulting, also believes a strategic investor is the best option. The ideal buyer would be a big name bank capable of introducing new technologies and developing banking services. "Such expertise and technology can only be found in foreign banks, though this means a growing share of the banking sector being owned by foreigners." Last year Misr International Bank was bought by Société Générale and EAB by Calyon Bank, while HSBC, Barclays and BNP Paribas are already present in the Egyptian market. Hashad does not, however, see the presence of foreign banks as a threat to Egypt's existing public sector banks. "It will," he believes, "mean more competition that will force the latter to shape up and improve their services." "It's all part of the government's efforts to consolidate and reform the financial sector, creating bigger entities capable of absorbing shocks while meeting Basel II requirements on capital adequacy," adds El-Sheikh. Nor, believes Hashad, will the remaining public sector banks -- NBE and Banque Misr -- be going under the hammer anytime soon. "The government will wait to evaluate the BA privatisation experience first, and that is going to take two or three years." In the meantime foreign banks will continue to operate in the market alongside the public sector banks. "Foreign banks operating in developing countries are fully aware that the banking sector in those countries is characterised by a public sector presence." Foreign investors are needed, Hashad says, to "maximise the cost efficiency, productivity and profit efficiency of banks and not just reduce costs". A Fitch ratings report, issued late last year, pointed out "foreign banks have brought in more innovative products and new delivery channels and are attracting the best skills." Interest in BA is expected to be high, though the actual extent will be determined by price. In terms of assets it ranks third, behind the merged Banque du Caire and Banque Misr (BM/BC) and the National Bank of Egypt (NBE). BA assets stood at LE37 billion in June 2004, compared to BM/BC's LE136 billion and the NBE's LE131. Although it is lower on the list in terms of net revenue and the rate of return on assets it remains a good investment opportunity. "The Egyptian banking sector is underpenetrated," said one analyst, who requested anonymity. "Only 10 per cent of the Egyptian population has bank accounts." And BA's network includes 192 branches. The familiarity of the brand is likely to prove tempting to investors. Following the announcement of the sale potential investors will undertake the necessary legal, financial and marketing due diligence before making offers. The government will then compile a short-list based on its own assessment of technical requirements. The government's aim, says the analyst, will not be to maximise proceeds but to ensure the buyer possesses the kind of expertise that can develop the market. The short-listed hopefuls will then make financial bids and at the end of the auctioning process the highest bid will be accepted. The process is expected to take at least four months from the date of the announcement, and Citigroup has been appointed as advisor to the sale.
