US embassy cable - 05CAIRO7548

UNCLAS SECTION 01 OF 02 CAIRO 007548 
 
SIPDIS 
 
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, EINV, EG 
SUBJECT: SURPRISES IN EGYPT'S BANKING SECTOR 
 
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Summary 
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1.  (SBU) In a surprise move earlier this week, the GOE 
announced the merger of two of Egypt's state-owned banks, 
Banque du Caire and Banque Misr.  The GOE also announced 
that the banks' management would be changed in anticipation 
of the merger.  The banking sector reacted positively to the 
news; through some local contacts believe the move may be 
merely a delaying tactic to stall resolution of the public 
banks' non-performing loan (NPL) portfolios.  Banque Misr 
also recently sold its shares in Misr International Bank 
(MIBank), which were purchased by National Societe General 
Bank (NSGB).  MIBank employees resigned en masse in 
anticipation of changes to their compensation package.  It 
is not yet clear if the mass resignation will affect future 
acquisitions, but for the time being, foreign banks still 
appear to be positioning themselves in the Egyptian market. 
The GOE plans to use proceeds from the sale of shares in 
Joint Venture (JV) banks to re-capitalize the state-owned 
banks.  End summary. 
 
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... and Then There Were Three 
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2.  (U) In a surprise move on September 25, the GOE 
announced plans to merge the second and third largest state- 
owned banks, Banque Misr and Banque du Caire.  The CBE 
issued a statement indicating that the merger was another 
step in its plan to consolidate the banking sector by 
creating fewer and stronger banks.  Banque Misr, the second 
largest state bank, had assets of LE 91 billion at the end 
of FY 2003/04 and a 17% market share.  Banque du Caire had 
assets of LE 45 billion at the end of FY 2003/04 and a 6-7% 
market share.  After merger, the new entity will be almost 
as large as the leading state-owned bank, National Bank of 
Egypt (NBE).  The new bank will have assets of approximately 
LE 130 billion (USD 22 billion) and 23-24% of the market. 
NBE had assets of LE 131 billion at the end of FY2003/04. 
 
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Shuffleboard 
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3.  (U) Coinciding with announcement of the merger, the 
Prime Minister's office also announced a reshuffling of the 
boards of directors of the state-owned commercial banks as 
well as the Industrial Development Bank and the Egyptian- 
Arab Real Estate Finance Bank.  According to the Cabinet 
press release, the Board of Banque Misr, headed by Mr. 
Mohamed Barakat, will manage Banque du Caire for the next 
six months to prepare for the merger.  Ahmed El Bardei, the 
Chairman of the troubled Banque du Caire, was dismissed in 
the reshuffle.  Banking sector contacts had long predicted a 
reshuffling, but most anticipated Barakat would be made 
chairman of NBE.  An initial meeting has been fixed for 
October 3, for the shareholders' general assemblies of both 
banks to discuss the merger. 
 
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Bank Sector Reacts Positively 
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4.  (SBU) Reaction to the announcement was generally 
positive.  Most banking contacts saw the merger as a sign of 
CBE's continued commitment to rapid consolidation of the 
banking sector.  Some local bankers, however, questioned the 
motivation for the move.  Michel Accad, Chairman of 
Citibank, said the merger gave the appearance of 
consolidation, but was really intended to buy time before 
making a decision on resolution of the NPL portfolios of the 
state-owned banks.  The "Big Four" banks hold around 90% of 
the debts of Egypt's state-owned enterprises.  Although 
actual figures for the NPL ratio in the state banks are not 
publicly disclosed, most estimates place it at 20-30% of 
total credit portfolios. 
 
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Banque Misr Divests Shares in MIBank 
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5.  (U) In early September Banque Misr sold its 25.5% share 
in MIBank to NSGB.  The Capital Market Authority had 
announced that whomever won Banque Misr's 25.5% could then 
bid for 100% of MIBank.  NSGB later completed an acquisition 
of MIBank on September 15, with a purchase of 90.7% of 
shares for LE 1.694 billion at LE 43.20 per share.  A merger 
of the two banks, which will be completed in a few months, 
will follow the acquisition. 
6.  (U) Completion of the acquisition was delayed a number 
of times, however, by the resignation of much of the bank's 
staff due to differences in salary scales, remuneration 
packages and other benefits between MIBank and NSGB, with 
MIBank's compensation being much higher.  The major problem, 
which generated mass resignations (approximately 250) at 
MIBank, was an anticipated change to the MIBank employee 
insurance fund, in which employees were entitled to between 
LE 70,000 and 1.25 million each in severance pay plus 
pensions, and family-member medical insurance.  It was 
rumored that NSGB intended to liquidate the employee fund. 
Mohamed Antably, Head of Correspondence Banking at NSGB, 
stated it in a different way: according to NSGB's bid, the 
employee fund at MIBank was to be maintained up to the date 
of a merger. 
 
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Prospects for future privatization 
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7.  (SBU) Antably's spin did nothing to prevent the mass 
resignation, which according to some local business contacts 
has cast a pall over future prospects for bank 
privatizations.  Hamed Fahmy, Managing Director of Allied 
Corporation Egypt told econoff at a dinner of the U.S.-Egypt 
Business Council that he feared the MIBank employee exodus 
might scare off prospective buyers, who would be hesitant to 
enter the market due to potential labor difficulties.  Other 
contacts in the banking sector are more sanguine, however, 
about future prospects for bank privatization.  Roderick 
Richards, Managing Director of Egyptian American Bank (EAB) 
told econoff that EAB had received 15 bids in response to 
its recent offering memo.  Most of the bids were from 
foreign banks looking to either enter Egypt's market or 
expand their current operations. 
 
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Re-capitalization 
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8.  (U) The GOE plans to use proceeds from the divestiture 
of state shares in JV banks such as MIBank to cover some of 
the cost of the re-capitalization of the state-owned banks. 
The Ministry of Finance has also reached an agreement with 
the state-owned banks whereby it will issue 20-year bonds, 
with a 10% coupon, to repay the LE 18 billion in overdue 
debts of public sector companies to state-owned banks. 
While the combined proceeds from JV divestiture and a bond 
issuance will cover a large percentage of the state-owned 
banks' NPL portfolios, it will not solve the problem 
completely.  The GOE will still have to decide on a policy 
for resolution of privately held debts to the state-owned 
banks.  In particular, the credit portfolio of Banque du 
Caire includes the NPLs of two well-known Egyptian tycoons - 
Rami Lakah and Hatem El Hawari, whose debts reach 
approximately LE 1.7 and LE 2 billion, respectively. 
 
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Comment 
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9.  (SBU) The Governor of the CBE indicated that decisions 
for additional privatization of state-owned banks would 
await an evaluation of the privatization of Bank of 
Alexandria (BA).  BA's privatization is on track for 
completion by the first quarter of 2006 at the latest.  The 
process has been quite lengthy, however, and continues to 
face some opposition from voices claiming that privatization 
of ownership is not necessary as long as state-owned banks 
are managed like private sector banks.  In any event, the 
GOE decision to merge Banque du Caire with Banque Misr 
appears to reflect a realistic assessment of the possibility 
of finding a buyer for Banque du Caire.  Given the bank's 
poor condition and weak balance sheet, CBE most likely 
decided that merging it with a large, better managed bank 
was the best way to continue consolidating the banking 
sector without going through the lengthy, and costly, 
process of privatization.  End comment.