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UNCERTAINTY LOOMS FOR BANQUE DU CAIRE
BY ABDELAZIZ NOSSAIR
ADDITIONAL REPORTING BY RÉHAB EL-BAKRY
The government has had a change of heart over the sale of Banque du Caire. Instead, it decided to put off the sale indefinitely, after the bids it received fell short of the valuation set for the bank. The auction, which took place on June 25, was the latest in a series of attempts by the government to sell a 67-percent stake in the publicly owned bank. However, following the completion of the bidding, the government announced that it would halt the sale after the highest bid failed to meet the projected price set by the valuation committee.
The top bid, placed by the National Bank of Greece, which valued the whole bank at $2.03 billion, was $1.4 billion for the 67 percent up for sale. The second-highest bid was $1.3 billion, offered by the UAE’s Mashreq Bank PSC, while the third-highest bid of $1.2 billion was offered by Jordan’s Arab Bank. The UK’s Standard Chartered and Saudi Arabia’s Samba Bank withdrew from the bidding process.
Mohamed Ozalp, Banque Misr vice chairman, explains that the simple reason behind the cancellation of the sale was that none of the bids presented met the valuation placed by the committee that set the minimum sale price. “The bank was ready for the privatization process; there had been a due diligence process that was very transparent,” explains Ozalp. “We had retained JP Morgan to conduct the due diligence for the bank. But the bids presented simply didn’t meet the set minimum prices.”
Banque du Caire is one of the public sector banks that the Egyptian government had slated for privatization. It has assets of LE 50.1 billion, 6.7 percent of the deposits market and 215 branches. This is the second scheme attempted by the government to sell the bank. Two years ago, Banque du Caire was merged with Banque Misr. The initial plan was for the two banks to become one large bank. However, the plan was unsuccessful because the management of Banque Misr found that the two banks were simply too similar.
“While we were working on the merger process, we found that there are a lot of overlaps between the two banks,” explains Ozalp. “Normally, when you merge or acquire a bank, we do it because there is value added. [However], we found that in terms of the merger, there was really not much difference between the standards of levels of competence. We had the same base on the deposit side, and offered similar services. We weren’t getting anything in terms of loans or new clients.” This made the idea of selling the bank to a strategic investor of better value to Banque du Caire, Banque Misr and the banking sector as a whole.
In July 2007, the government announced its intention to sell off the bank to a strategic investor. Banque Misr took several corrective actions to prepare Banque du Caire for the sale. It was announced that Banque du Caire’s non-performing loans (NPLs) had been cleared and moved to the portfolio of Banque Misr after conducting some reconciliations, among which was the transfer of the historical branches of the bank along with its Gulf branches to Banque Misr. Furthermore, last year Banque du Caire offered an early retirement plan to its employees to reduce overstaffing. While the minimum sale price as set by the valuation committee has not been made public, some industry insiders have stated that the committee set the price of the 67 percent at $1.6 billion. According to the law, if the bids fail to generate the minimum valuation price, then the sale has to be halted.
With this in mind, banking experts point out that the timing was inappropriate for the privatization. “It was bad timing,” said Pacinthe Fahmy, a banking expert. Fahmy argues that several factors that had little to do with the readiness of the bank for privatization contributed to the failure of the bid. For one thing, she argues that a report published days before the sale by the rating agency Moody’s, in which the outlook for Egypt’s foreign currency bonds was lowered from stable to negative, sent a message to investors that Egypt’s banking sector is to be approached with caution. “I believe that the report had an impact on the bids,” she says. “This might be the reason behind the withdrawal of Standard Chartered and Samba from the auction before the bidding [began].”
And anyone who expected that the privatization of Banque du Caire would have generated as much money as the sale of Bank of Alexandria was simply being unrealistic. The overall economic indicators today are very different from those two years ago.
“Economic indicators, especially increasing inflation, which has reached 21 to 22 percent, unemployment and poverty rates, and we cannot disregard the impact of the EAgrium problem on the investment climate of Egypt, [all had an impact]. Under all these circumstances, the timing was not carefully selected,” says Fahmy.
Ozalp himself agrees that the circumstances under which Banque du Caire was being privatized are very different from those two years ago. “In any purchase, environment, psychology and perception make a huge difference,” says Ozalp. “You can be buying the same assets with no change in circumstances – no change in value or in conditions of the entity on day X or on day Y and it can make a 50-percent difference just because of market developments; political, social and economic [factors] make a difference.”
So the fact that Bank of Alexandria generated $1.6 billion two years ago is no indication of how much Banque du Caire should sell for today. Ozalp also notes that 100 percent of Bank of Alexandria was up for sale, whereas only 67 percent of Banque du Caire was on the market, and this could have also impacted the offer price.
Italy’s Sanpaolo IMI SpA bought 100 percent of Bank of Alexandria in October 2006 for $1.6 billion, a price many considered too high for the bank.
This was two years ago, explains Elena Sanchez, vice president of equity research, EFG-Hermes. But much has changed since them. Had the sale process been slated for earlier this year, the price offered would have been higher. “At the beginning of the year, everything was perfect and the picture was very strong, but now there are some concerns and they relate mainly to inflation.” She says some investors started to worry about inflation’s impact on GDP growth since it would inevitably cause a slowdown in private consumption.
Despite these concerns, the decision to cancel the sale surprised both Fahmy and Sanchez. They both predict this will cause even greater problems down the road.
“The postponing is a bigger problem than the unsatisfactory price because now we don’t have many options,” says Fahmy. “You cannot go for the merger, and to resell it again would take at least two years [and] only if an improvement in the investing climate and the economy happens.”
The rise of petroleum prices resulted in an increase in the price of all other commodities and services. “The increase on costs will result in a severe payment obstruction. Accordingly, the loaning process will not be as easy as before,” she says. And there is no way for the government to guarantee that the world economy will have improved within the next two years.
Sanchez also argues that the last minute cancellation of the sale may increase negative investor sentiment towards Egypt’s banking stocks in the short term, particularly for banks that were viewed as acquisition targets by the market. “When you sell a bank for a high price, that works as a trigger for retail investors to buy stocks because they just look at the news and high multiples.” This would also mean that the cancellation may delay the government’s plans to reduce public sector debts.
And sudden decisions are never popular with foreign investors. This is especially true since the sale of Banque du Caire should be to a foreign bank if it is to add value to the market. For those banks that already exist in the Egyptian market, Fahmy characterizes their bids more as tactical maneuvers than anything else.
“I understand that obtaining the license is the major motive behind buying Banque du Caire because it is the only way to enter the market,” she says. “But for those who already have a license, I do not see a good reason to offer a serious bid.” Banks working in Egypt can grow their market share by opening more branches, offering new services or increasing their capital. “However, they don’t need to buy a whole bank.”
“Buying a bank such as Banque du Caire is a very big process. You need to train the staff, get an IT system, change the procedures and manuals, and, most importantly, merge the two cultures; it is not an easy job. Therefore, for a local bank to grow it would be better to open new branches,” says Fahmy.
Moreover, the bank still needs further restructuring and upgrading in order for it to be of true value to the sector as a whole. “Although the government announced that most of Banque du Caire’s non-performing loans had been transferred to Banque Misr, I believe that Banque du Caire would still need further restructuring and investments to revamp its franchise and upgrade systems and human resources,” says Sanchez. For example, Banque du Caire’s shareholders’ equity assets ratio is 6 percent compared to an average of 8 percent for other large private banks in Egypt.
While some in the market had speculated that an initial public offering (IPO) could be a potential solution for Banque du Caire, both Ozalp and Fahmy are uncertain that this will be a good long-term solution because it will not provide the development that the bank or the sector needs.
Although no official decision has been made, Ozalp says that the bank will continue to function as normal. He predicts that there might be more of a separation between it and Banque Misr, perhaps even the appointment of a separate board of directors.
Fahmy predicts that the government will likely assign an executive administration to manage the bank for a transitional period and try to privatize it later down the road. But how much later, she is uncertain. “All I do know is that it will be much harder to privatize Banque du Caire any time soon.”
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