US embassy cable - 05CAIRO5941

UNCLAS SECTION 01 OF 03 CAIRO 005941 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR NEA/ELA, NEA/RA, AND EB/IDF 
USAID FOR ANE/MEA MCCLOUD 
USTR FOR SAUMS 
TREASURY FOR MILLS/NUGENT/PETERS 
COMMERCE FOR 4520/ITA/ANESA/TALAAT 
 
E.O.  12958: N/A 
TAGS: ECON, EFIN, ETRD, EINV, EG, Banking Sector 
SUBJECT: EGYPT:  BANK PRIVATIZATION UPDATE 
 
Sensitive but Unclassified.  Please protect accordingly. 
 
Ref:  Cairo 5350 
 
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Summary 
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1.  (SBU) In early July the Ministry of Investment (MOI) 
announced the choice of Citibank as the financial advisor 
for privatization of the Bank of Alexandria (BOA), the first 
of Egypt's "big four" public banks scheduled for 
privatization.  Bids will be considered in September, with 
the goal of completing the privatization by the end of 2005. 
The GOE plans to sell the bank to a strategic investor, 
preferably an international bank.  Some bank managers have 
questioned this plan, claiming that privatization through an 
offering of shares on the stock market would be preferable, 
as it would increase market depth and allow trading of other 
banks' shares on Egypt's exchange.  Sale of public stakes in 
joint venture banks has also advanced significantly in the 
last few months, with one of the biggest joint ventures, 
National Societe General Bank, now fully privatized. 
Progress on privatization has sent a positive signal to 
international investors.  Some banking contacts doubt, 
however, that the GOE - after selling off its weakest banks 
and addressing non-performing loans - will be prepared to 
complete privatization by selling off its strongest public 
banks.  End summary. 
 
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Progress on Bank of Alexandria Privatization 
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2.  (U) On July 5, 2005 the MOI announced the choice of 
Citigroup International as the financial advisor for the 
sale of BOA, the first of Egypt's "big four" public banks to 
be privatized (Note:  the other three of the "big four" are 
National Bank of Egypt (NBE), Bank Misr and Banque du Caire, 
in order of size).  A committee of representatives from MOI, 
BOA and the Central Bank of Egypt (CBE), chaired by CBE, 
reviewed initial offers from eight investment banks to act 
as financial advisor.  The committee short-listed three - 
Deutsche Bank, JP Morgan, and Citigroup - before selecting 
Citigroup. 
 
3.  (U) As financial advisor, Citigroup is charged with: 
 
- Conducting a total review of the bank's operations and 
prospects for future development; 
 
- Recommending a policy and method of sale to the private 
sector; 
 
- Preparing a valuation based on the bank's financial 
position and conditions of the market and similar markets; 
 
- Preparing sale documents including an information 
memorandum; 
 
- Conducting a promotional campaign in international 
markets; and 
 
- Managing the process through the final sale. 
 
4.  (SBU) According to BOA, Citigroup will work with BOA's 
auditor, KPMG International, and an international legal 
advisor to prepare promotional information for the sale. 
The request for bids is scheduled for issuance in September, 
with the goal of concluding the deal by the end of 2005. 
Minister of Investment Mohieldin told USG officials in a 
recent meeting that he expected the privatization to be 
completed on schedule or by early 2006 at the latest. 
 
5.  (SBU) In preparation for the sale of BOA, one of its 
main subsidiaries, Egyptian-American Bank (EAB) was recently 
merged with another subsidiary, American Express Bank, in an 
$8 million deal completed June 30.  BOA, which owns 33% of 
EAB, now plans to sell its stake in EAB by the end of 2005. 
The Managing Director of EAB, Roderick Richards, recently 
told econoff that the information memorandum for the sale 
would be issued soon and that he had already received 
several inquiries from potential buyers.  Credit Suisse is 
acting as financial advisor for the sale. 
 
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Strategic Investor vs. IPO 
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6.  (SBU) Prime Minister Nazif, CBE Governor El Okdah, and 
BOA Chairman Abdel Latif have all made public statements 
indicating that BOA would be sold to a strategic investor, 
with a possible initial public offering (IPO) of shares on 
the Cairo and Alexandria Stock Exchange (CASE) at a later 
stage.  CBE Deputy Governor Tarek Amer recently told econoff 
that the GOE is hoping to sell BOA to a large international 
bank to increase competition, and thus overall efficiency, 
in Egypt's banking sector and help solidify investor 
confidence in Egypt's economy. 
 
7.  (SBU) Some bank managers have expressed concern about 
the GOE's plan to sell BOA to a strategic investor.  Hisham 
Ezz El Arab, Chairman of Commercial International Bank 
(CIB), told econoff that he would prefer BOA be privatized 
through an IPO.  Ezz El Arab was concerned that CIB, as one 
of the few banks traded on the CASE, was becoming 
overexposed in the market.  Listing BOA on the exchange 
would reduce the risk of overexposure for other banks listed 
on the exchange, adding depth to the market and increasing 
trading volume.  Ezz El Arab noted, however, that the GOE 
was fixated on bringing an international bank into Egypt's 
market, in large part for the value added in the banking 
sector's operations and the symbolic value.  Other senior 
bank managers and some CBE officials have echoed Ezz El 
Arab's view that an IPO - or at least an IPO after sale to a 
strategic investor - would be preferable to an exclusive 
sale to a strategic investor. 
 
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Progress on Privatization of Joint Venture Banks 
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8.  (U) As part of the GOE's overall plan to restructure 
Egypt's banking sector, CBE Governor El Okdah has called on 
the big four public banks to divest their stakes in joint 
venture (JV) banks within the next two to three years, 
starting with the four largest of the JV banks: 
 
  -    Misr International Bank (MIBANK), 26% owned by Bank 
     Misr; 
-    Commercial International Bank, 18.5% owned by NBE; 
-    National Societe Generale Bank (NSGB), 18% owned 
(formerly) by NBE; and 
-    BNP Paribas, 12% owned by Banque du Caire. 
 
In a recent public statement, El Okdah said that a total of 
nine JVs would be privatized by the end of 2005. 
 
9.  (U) Progress on divestiture of public shares in JV banks 
has been steady over the last several months.  In February, 
the French Societe General Bank (SGB) acquired 24% of NSGB. 
SGB purchased NBE's 18% stake in the bank and 6% of the 
shares of private investors, for a total of LE 714 million. 
Sale of NBE's 18% stake generated LE 535.6 million in 
revenues for the GOE.  SGB now owns 78% of NSGB, with the 
remaining shares freely floating on the stock exchange. 
NSGB is the second largest private sector bank in Egypt 
after CIB. 
 
10. (U) CIB is currently working with financial advisor 
Goldman Sachs to find a strategic partner to buy NBE's 18.5% 
stake in CIB.  CIB Chairman Ezz El Arab has indicated that 
he would like to find a partner that will bring value-added 
to CIB's operations and future prospects.  Goldman Sachs is 
expected to find a foreign partner by the end of 2005, and 
until then, CIB is continuing to restructure and modernize 
its domestic and regional banking operations. 
 
11.  (U) At the end of July, CBE short-listed two banks - 
BNP Paribas and SGB - to buy Bank Misr's 26% of MIBANK. 
Bank Misr is also in the process of selling its 51.3% stake 
in another JV bank, Bank Misr Romania.  Bank Misr employed 
investment firm EFG-Hermes to evaluate and promote Bank Misr 
Romania in preparation for its eventual sale.  In addition 
to selling its shares in JV banks, Bank Misr is in various 
stages of merger with a number of smaller banks, including 
Mohandes Bank and Misr Exterior Bank. 
 
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Non-performing loans 
-------------------- 
 
12.  (SBU) Among the most difficult issues confronting the 
GOE in the privatization process is the non-performing loan 
(NPL) portfolios of the public banks.  The CBE has begun to 
address this issue by establishing a special unit to handle 
NPLs.  The unit recently launched an arbitration mechanism 
designed to speed up settlement of NPLs.  CBE Governor El 
Okdah, speaking before the Economic Committee of parliament 
in late July, stated that LE 15 billion in NPLs had already 
been settled, and predicted that 26% of the public banks' 
NPLs would be settled by the end of 2005.  El Okdah aims to 
have the total public banking sector's NPL portfolio 
resolved within the next 18 months.  To complement these 
efforts, El Okdah and Minister of Finance Youssef Boutros 
Ghali have indicated to USG officials that the GOE intends 
to issue a bond, the proceeds of which would be used to re- 
capitalize the public banks. 
 
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Comment 
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13.  (SBU) The progress the GOE has made on bank 
privatization in a relatively short period of time has sent 
encouraging signals to foreign investors, who now appear 
lined up to enter Egypt's market.  The jury is still out, 
however, on how quickly the GOE will privatize the remaining 
public banks once the sale of BOA is completed.  Banking 
sector contacts have indicated that Banque du Caire is next 
on MOI's list for privatization, but some believe the GOE 
will stop short of selling Bank Misr and, in particular, 
NBE, which is viewed as the "champion" of the banking 
sector.  International banking experts, however, are still 
being hired, with support from the EU and European Central 
Bank, to assist in the restructuring of the public banks. 
Further developments in banking sector reform will be 
reported septel. 
JONES