What's the significance of all the recent talk of mergers and restructuring in the banking sector? Wael Gamal investigates There have been three merger and acquisition moves in the banking sector in less than a week. The action was catalysed by the sector reform plan announced by the government last week, which called for the merger of the six smallest state-owned banks with larger financial institutions owned by the state. Thus, the troubled Misr Exterior Bank will be merged into Egypt's second largest bank, Misr Bank. The Central Bank of Egypt justified the move by citing the former's failure to adapt to new banking law criteria. The new banking law, passed in 2003, increased the minimum capital requirement for most banks from LE100 million to LE500 million. Keeping up with another component of the reform plan, involving the selling of public sector banks' stakes in joint-ventures, Misr Bank has decided to sell its 25 per cent share in Misr International Bank (MIBank) to a principal investor, thus opening the door to a number of competing international bids. One of the interested buyers is Sumitomo Mitsui Banking Corporation, which already owns 2.625 per cent of the bank. It has also been reported that the British-based Barclays Bank is considering acquiring Bank Misr's stake in MIBank. Misr Bank is still considering the offers. On the other hand, the board of the Egyptian American Bank (EAB) has approved talks aimed at merging its operations with those of American Express Bank Egypt, which already owns 40 per cent of EAB. The merger could lead to the sale of the state-owned Bank of Alexandria's 32 per cent stake in the bank. The merger is supposed to take place by March 2005. The stock market seemed pleased with these interesting developments. EAB stock rose sharply when the Egyptian exchange opened for the week on Sunday. It hit the 10 per cent ceiling for movement in unbroken trading; the exchange's authorities ended up suspending trade for 30 minutes. When trading resumed the stock continued to rise, with its upward path ongoing over the course of the week. MIBank's share price also surged to a five-year high. "Most Egyptian banks are very small and undercapitalised compared to regional and international standards," explained financial expert Nabil Hashaad. "The small banks are not qualified to adapt to international challenges. In this context, mergers are a good solution, especially if they are accompanied by broadening capitalisation through the selling of joint venture shares." The Economic Trends Report recently issued by the US Embassy states that "Egypt's banking sector has suffered from low profitability in recent years, linked to recession-induced weak credit demand, a shortage of foreign exchange in the banking system, and most prominently a significant non-performing loan problem." Mergers are central to the restructuring process. If the management of the acquiring firm is more efficient than the management of the firm being acquired, both banks can benefit from the move. Mergers are also seen as a way of dealing with the undercapitalisation problem, and providing banks with a better foothold when it comes to handling international competition. With 62 banks operating in Egypt, the CBE stopped granting new licenses a few years ago, and has instead allowed foreign banks to acquire existing local banks. This process, however, has been very slow, with only five mergers accomplished since 1999. Some analysts have been arguing that the Misr Bank moves might not really reflect sound economic rationale. Why is the bank selling its share in a profitable enterprise to buy a troubled bank that might worsen its non-performing loans situation? The move does not appear to be market driven. Misr Bank Chairman Mohamed Barakat provided both economic and political justifications. "We don't only get debts but also a new base of customers. Our investment in MIBank has reached its maturity, and it is not right at this stage to let small banks fall. It is bad for the banking system and the economy's reputation." The other two deals seem more market driven. "The fact that numerous international banking groups are interested in our bank means success. We had problems three years ago, but we initiated a restructuring plan and found our way out of the trouble," said MIBank Vice-Chairman Kamal Sorour. The EAB-American Express merger also reflects market norms, since it is based on evaluation and negotiations.