Destination Egypt

While the Covid-19 pandemic has postponed a spate of deals, regional institutions want a piece of the Egyptian banking sector.

Boasting growth rates above 5% during the two years before the Covid-19 pandemic struck, Egypt—a gateway to Africa with the Arab world’s biggest population—remains one of the Middle East and North Africa region’s most attractive markets. And Arab lenders want a piece of the action.

But entering the Egyptian market isn’t easy. The Central Bank of Egypt isn’t issuing new licenses, which means the only way in is to find an existing lender that wants to find its way out—typically a Western one.

European and US banks started selling off their Egyptian assets after the 2008 financial crisis, typically as part of a readjustment of their overall global strategy, as many international banks felt overstretched and chose to limit their presence in emerging markets. The 2011 revolution in Egypt, followed by years of political instability and the introduction of challenging new banking laws, accelerated the trend.

“At the beginning of the revolution, some banks were convinced that on top of their decision to leave the region, Egypt had entered a dark era and would take a long time to recover,” says Ali Awdeh, a Beirut-based bank expert. “On the contrary, Egypt re-emerged immediately, and the departure of Western banks opened the opportunity for Arab banks to benefit from this void.”

The scramble for Egypt started in 2012 with Emirates NBD, Dubai’s largest bank, buying up French BNP Paribas Egypt’s 69 branches for $500 million, or 1.6 times book value. A few months later, Qatar National Bank (QNB) acquired the 160 branches of another French lender, Societe Generale, for $2 billion.

Between 2012 and 2017, Arab lenders—and especially those based in the Gulf Cooperation Council (GCC) countries—bought every Western bank leaving Egypt (see table below). At the time, many close observers saw the deals as risky, given Egypt’s political instability. But Arab buyers took the gamble, knowing that if the situation turned sour in Cairo, they could rely on a pool of clients among the millions of Egyptian expatriates living in the Arabian Peninsula.

According to Oxford Business Group, Egypt is the largest recipient of remittances on the African continent, with most of the money coming from Arab countries. “Egyptians working in the GCC send around $20 billion of remittances a year back home. This alone is a huge opportunity for a GCC bank,” says Awdeh.

In 2016, the Egyptian authorities launched an economic reform program that showed quick and positive results; GDP has grown over 5% year-over-year since 2018. Even faced with Covid-19, Egypt’s financial sector has remained liquid, with good asset quality and profitable banks.

Al Ahli Bank of Kuwait (ABK) is among the few that have been able to set up in Cairo, after acquiring Greece’s Piraeus Bank in 2015 for $150 million.

“It was a very good investment decision,” says Khaled El Salawy, CEO and managing director, who reports uninterrupted balance-sheet growth froman estimated $575,000 in 2015 to $2.4 million at the start of 2020. “The banking sector in Egypt is very solid and the central bank is supportive, which creates a positive environment for banks to grow.” 

Gateway to Africa

Arab lenders see Egypt as a gateway to the rest of Africa, as well. “Egypt is a key player in both regions,” says El Salawy. “It has one of the largest and most developed financial sectors in Africa, with highly capitalized banks. I believe that Egypt can be an entry point, especially given the recent focus on relations with countries on the African continent,” he adds.

“GCC banks already have some presence in North Africa, Sudan and South Sudan, but they have no real experience sub-Saharan Africa,” says Awdeh. “Egypt is like a bridge that allows them to reach the entire African continent. Gulf countries, and particularly Dubai, are very interested to provide a link in terms of banking services and trade between Africa and China, or more generally, East Asia.”

As one of the biggest countries on the continent, Egypt is in a prime position to benefit from recent multilateral free-trade agreements, including the Common Market for Eastern and Southern Africa (COMESA) and the African Continental Free Trade Area (AfCTA), which aims to more than double the region’s volume of trade. North African banks, too, are also trying to secure a piece of the pie, but with a limited number of spots available, competition is fierce—and Egyptian banks don’t sell cheap.

Morocco’s Attijariwafa Bank admitted paying twice book value to acquire Barclay’s Egyptian operations in 2017. According to CEO Mohamed al-Kettani, however, it was worth it. “Attijari Bank Egypt will be the group’s entryway to Gulf states and East Africa,” he told Reuters after the signing. The bank is reportedly looking at other acquisitions in Rwanda, Kenya and Ethiopia.

Up for Sale Next?

In the scramble for Egypt, Lebanon’s Bank Audi and Blom Bank are expected to be up for sale next. Struggling with an unprecedented financial crisis at home, Lebanese lenders are being forced to sell operations abroad.

Late last year, First Abu Dhabi Bank (FAB), the United Arab Emirates’ largest bank, began talks to acquire Bank Audi Egypt, which carries approximately $4.4 billion in assets and 50 branches. The potential $300 million deal is currently suspended due to the pandemic. Meanwhile, Emirates NBD, which acquired BNP Paribas Egypt in 2013, is negotiating to buy Blom Bank Egypt’s 41 branches. Due diligence is underway.

A question also hangs over Ahli United’s Egyptian operations. The parent bank in Bahrain is in the process of merging with Kuwait Finance House, an Islamic lender, and AUB’s Egyptian branch will require a specific shariah-compliant license from the Central Bank of Egypt, local media reports.

Other upcoming sales will most likely be privatizations of state-owned institutions following a government strategy to revamp the country’s financial sector, attract foreign investors and refill state coffers. In February, news broke that a minority stake in state-run Banque du Caire would be up for acquisition through an initial public offering on the Egyptian Exchange early this year.

At the time, Chairman Tarek Fayed indicated that the bank was looking to sell between 20% and 30% of shares to raise $500 million. The deal, which had been expected to go through in April, has been postponed due to the Covid pandemic.

That doesn’t mean the trend is reversing, however. In September, EFG Hermes, one of MENA’s largest investment bank received approval from the Central Bank to acquire 76% of state-owned Arab Investment Bank (aiBank). Still expected deals include the sale of public shares in United Bank of Egypt and the Arab African International Bank.