View from abroad: A largely untapped market is drawing increasing international interest

Entering Egypt’s banking sector has long been a challenging proposition. The large number of domestic players serving a bankable population limited by low salaries and high informal employment has left the Central Bank of Egypt (CBE) reluctant to license new lenders. The last major alteration to the sector’s ownership came in 2004, when the Central Bank of Egypt established a minimum capital requirement of LE500m ($71.2m), which resulted in a series of mergers and acquisitions and saw the market shrink from 61 banks of 2004 to the 40 of 2013.

CONDITIONS: A privatisation programme for state-owned banks, which was an alternative route to market for foreign investors, came to an end in 2009 when an attempt to sell Banque du Caire was called off, with the state announcing that it could not obtain a fair value for the institution. “The banking sector is one of the most successful sectors in the economy in that it performs its role to the fullest by supporting the government and key market players since the January 25, 2011 revolution. The banking industry is the most inviting for foreign direct investment since the revolution,” Mounir El Zahid, chairman and CEO at Banque du Caire, told OBG.

Unfavourable economic conditions from the global economic crisis saw the postponement of a second attempt to sell the bank, originally scheduled for 2011, and therefore the Ministry of Finance has decided to create what it describes as “national champions” of the remaining government-owned lenders. The extensive branch networks of these monolithic institutions represent a challenge to new market entrants: five public sector banks play a dominant role in the market, with three of them ( National Bank of Egypt, Banque Misr and Banque de Caire) controlling an estimated 40% of all sector assets.

NEW ENTRANTS (AND EXITS): The end of the privatisation programme appeared to close the door on significant acquisition activity in Egypt’s banking sector, and at the beginning of 2011 it appeared that the market structure would remain largely unchanged for the foreseeable future. However, the political upheaval which began in January of that year, combined with the continued distress resulting from the eurozone crisis, provided the opportunity for one of the most sizeable market shake-ups in years.

In September 2012 it was announced that Qatar National Bank was negotiating with Société Générale’ to purchase a 77% stake in the latter’s Egyptian subsidiary, National Société Générale Bank (NSGB), the second-largest private sector player in the country. Its eventual purchase of 97.12% of the domestic lender for LE17.1bn ($2.4bn) in March 2013 made it the largest deal in the Middle East financial sector of the year to date. Furthermore, Société Générale was not the only French lender to leave the Egyptian market in 2013. In June Dubai-based Emirates NBD bought BNP Paribas’s share of Egyptian assets for $500m, and by the close of the first half of 2013 it was waiting for regulatory approval to buy out the remaining minority shareholders, which includes a 4.8% stake held by both the Banque Misr and Banque du Caire employee insurance funds.

DRAWING INVESTMENT: Yet more Gulf interest in the Egyptian market came from Qatar-based investment firm, QI nvest, although its overtures met with less success. In 2012 the Qatari-state-backed company agreed to split Egyptian investment giant EFG Hermes’s banking business into a joint venture, in which it would take a 60% stake. The resulting investment banking platform would have been the largest bank in the Arab world, and the new joint venture planned to pursue opportunities in the Middle East, Africa, Turkey and South and South-east Asia. However, the putative deal failed to reach final fruition after the 12-month deadline for regulatory approval from the Egyptian authorities was not met in 2013.

A more significant scale of international interest in Egypt’s banking sector has come from Turkey, from where that nation’s largest listed bank by assets, Türkiye İş Bankası(İşbank), announced in 2012 that it was looking into a possible purchase of the Egyptian unit of Greece’s Piraeus Bank. The Greek player is seeking interested parties after a potential deal with Standard Chartered failed to conclude.

THE BUSINESS ARGUMENT: The departure of two of Egypt’s longest-standing French interests in the banking sector, and their replacement by Qatari lenders, springs from a convincing business rationale. Many French banks, like their counterparts in the rest of Europe, face the dual challenge of a slow recovery from the global economic crisis and the requirement that they meet the capital and liquidity requirements of Basel III – so strengthening their capital bases has therefore become a strategic priority. According to a statement by Société Générale, the sale of its majority interest in NSGB will add 0.3% to its core tier-one ratio by the end of 2013, representing a significant boost to its capital reserves in the face of the ongoing eurozone debt crisis and more stringent regulatory requirements.

Gulf banks, on the other hand, face altogether different challenges. Their capital positions are generally more robust than their international peers. Even taking into account the higher risk concentrations that result from big-ticket lending to a relatively small number of clients, the capital reserves of Gulf players compare well to their counterparts in other markets: according to Standard & Poor’s risk-adjusted capital (RAC) framework, the average RAC ratio for GCC banks was around 13% as of December 2011, compared to the 7.4% average the company projected for the 100 largest banks it rates. In Qatar, which through QI nvest and QNB has shown the greatest interest in the Egyptian market to date, the aggregate capital adequacy ratio (CAR) reached as high as 20.6% in 2011, well above the 10% set by the Qatar Central Bank and the 8% established by Basel II. Capital reserves of this scale make expansion the obvious strategic option, but market saturation and the relatively small populations of Gulf nations limit their options in this regard. Qatar’s banks are therefore looking outwards, and in the view of many of them Egypt is a land of opportunity despite its political situation.

KEY DIFFERENCE: The most obvious advantage that Egypt offers expansion-minded banks is the size of its market and the potential for expansion: banking penetration is estimated at around 10% of the population of 85m, while a survey carried out by the National Bank of Egypt in conjunction with French consultants Cofas revealed that only 40% of the nation’s licensed SMEs are being served by the banking sector. Moreover, the potential inherent in the 90% of SMEs that are currently operating informally is significant, and banks such as NBE have already begun reaching out to them with small-ticket offers in a bid to bring them into the formal financial sphere – a move that is to the benefit of the entire sector (see analysis). When targeting Egyptian banks with sizeable branch networks, Gulf players have been able to tap directly into this promising SME market segment: QNB’s purchase of NSGB has granted it more than 160 branches distributed across Egypt’s 24 governorates, while Emirates NBD has picked up 69 branches from BNP Paribas.

In Qatar’s case, many see a political motive as well as an economic one. The state has demonstrated its consistent support for Egypt since the uprising of 2011 through cash grants and assistance with its natural gas supply, and the fact that the government of Qatar has a significant interest in both QNB and QInvest suggests to some that the courtship of Egyptian institutions by these companies is part of a wider Qatari initiative to establish links with the country.

STRENGTHENING RELATIONSHIPS: Whatever the case may be, the arrival of regional players in the local market promises a number of benefits for Egypt, such as the strengthening of trade relationships, new financial products and a growing proportion of the population able to access them. And, while the current trend is clearly one of European retrenchment and Gulf expansion in the Egyptian banking sector, some Western lenders continue to view the nation as rich with opportunity.

Barclays Egypt, a subsidiary of the UK-based banking giant, has been present in the country since 1864. Having experienced numerous revolutions over the intervening years and only leaving the market temporarily during the implementation of Nasser’s nationalisation programme, the bank has now undertaken an expansion mode once again.

“We currently have 54 branches, and we have received central bank approval for another six, to bring us to 60,” Sheriff Elbehery, director of strategy and business development at Barclay’s Bank, told OBG. “The situation is fluid, we wanted to open a branch in Port Said but we have had to delay it, so our focus is on Cairo and the Delta.” Egypt’s transition might make for a difficult environment, but there is no shortage of international interest.