Egypt is lining up its state-owned banks at the privatisation starting block. Nick Kochan reports on the prospects.

Egypt’s bank privatisation process is set to make a leap forward by the end of the year, when the Bank of Alexandria, the fourth largest commercial bank in Egypt with assets totalling $6.5bn, is sold. As many as 12 major international banks are said to have expressed an interest in acquiring the bank and are currently being screened by Citigroup.

According to Mahmoud Mohieldin, the minister of investment: “The privatisation is on stream. The prospective buyers have been given two months for due diligence. As soon as they are finished, we are going to ask for bids, open it up. By October, the thing should be sold. We sincerely want an international bank; somebody good, competent. We have 12 big banks that have expressed interest.”

Good prospects

The chances of a successful sale have been enhanced with a $1.2bn payment from the government to clean up Bank of Alexandria’s portfolio of bad loans. These were built up by public sector companies during a period when Egyptian banks were accustomed to supporting public sector projects of dubious commercial viability. The government has also wound down the bank’s investments in other local financial institutions, notably the Egyptian American Bank.

Rating agency Fitch Ratings, which recently published a report on the country, says Bank of Alexandria was chosen as the first privatisation candidate because of the relative ease with which its non-performing loan (NPL) portfolio could be cleaned up – most of the NPLs were attributable to public sector enterprises. But it warns that the sale of the three remaining large state-owned Egyptian banks, Bank Misr, Banque du Caire and National Bank of Egypt, will be tougher. It estimates a E£26bn ($4.5bn) clean-up cost for the three banks, requiring the government to issue debt to fund it.

Cleaning up NPLs

“When we started cleaning up [the NPL portfolio], we were talking about the NPLs of all categories amounting to 8%-10% of gross domestic product (GDP),” says Dr Mohieldin. “When you include the portion owing to the public sector, this comes to E£32.5bn. We reduced the total amount of NPLs by E£10bn [with the restructuring of Bank of Alexandria]. The president announced last year that he was instructing the government to have a programme for dealing with E£50bn-worth of NPLs. This includes E£32bn for the publicly owned banks and E£20bn for the private banks.”

A 75% slice of Bank of Alexandria’s share capital will be sold to a trade buyer, 5% will be distributed to employees and the remaining 20% will be sold through an initial public offering (IPO) on the Cairo and Alexandria Stock Exchange.

The ministry of investment, meanwhile, has begun to restructure two of Egypt’s other public sector banks, the National Bank of Egypt and Banque Misr. This has involved selling NPLs in public sector enterprises to the National Investment Bank, the government’s investment arm, for E£6.9bn. Government shares in joint venture banks are also being sold in a bid to reduce the state-owned share of banking assets from its current level of 58% to a more acceptable 40%.

Mergers continue

Consolidation in the banking sector is another government goal. Measures to impose new minimum capital requirements in line with Basel II are responsible for many mergers in the past two years: the number of Egyptian banks has decreased from 57 to 43. The government has also put outside auditors into the main four state-owned banks to bring accounting standards in line with International Financial Reporting Standards. Plans are also afoot to tackle the sector’s wider NPL problem.

Although the banking sector is responding to tighter management controls and the influence of the market, some storm clouds remain, according to Fitch. “Banks will continue to be vulnerable to systemic risks on account of their large holdings of government debt (34% of banks’ balance sheet) and still-significant (albeit declining) dollarisation.

“It remains to be seen how well banks will adjust to the new paradigm of lending to the private sector. Many banks remain ill-equipped to assess this kind of risk and continue to favour lending to the government,” it says.


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