Citigroup executive foresees higher growth in retail banking and increased bond issues

Waleed Khalil Rasromani
11 Min Read

CAIRO: The Egyptian banking sector has witnessed substantial developments since the unified banking law was introduced in 2003. The law strengthened the independence of the central bank and increased the minimum capital requirement five-fold, from LE 100 million to LE 500 million for local banks and from $10 million to $50 million for branches of foreign banks.

The increased minimum capital requirement prompted a series of mergers and acquisitions, and the number of banks has subsequently fallen from 56 at the end of 2004 to 43 today. The government has also started to extricate itself from financial services, selling its stakes in 17 banks, merging two of the big four public banks (Banque du Caire and Banque Misr) and working to sell another (Bank of Alexandria).

Michel Accad, Citigroup s division head of corporate and investment banking in the Middle East and North Africa, discussed the state of financial markets in Egypt and Citigroup s strategy in an interview with The Daily Star Egypt.

We view Egypt as one of our key countries, not just in the Middle East but worldwide, says Accad. So far, our growth has been essentially organic rather than by acquisition. But I think that we have progressed very well and that we ve been able to increase our market share remarkably. Six years ago, we were interested in acquiring a bank that was twice our size, and when we looked at it recently, we had become twice their size.

Citigroup has approximately $1 billion in assets in Egypt and employs some 450 individuals here. The bulk of the bank s local business in terms of volume is in corporate banking, although there is considerable potential for growth in the retail market.

The corporate investment bank is about twice the size of the consumer bank in terms of volume and revenue, says Accad. And the corporate investment bank has over the past two years, because of the specific market conditions, grown faster than the retail bank. But if I have to look forward, I d say that the biggest opportunity for us remains in retail banking and I think that in the next few years retail banking will catch up with our corporate banking business.

Accad explains that the retail market generally lags behind the corporate market in terms of its responsiveness to overall economic growth. As a result, the accelerated domestic economic growth of the past year is yet to fully manifest itself in the retail banking market.

When the market conditions are positive, the corporate investment bank grows much faster, because it tracks the market much more closely, explains Accad. When the conditions are less positive, the opposite occurs; the retail business continues to perform relatively well but the corporate investment banking business tends to grow much more slowly or even contract.

In terms of products, Citigroup is actively pursuing the credit card market and currently has approximately 100,000 cards issued in Egypt. Accad believes that, while the number of cards issued by his bank is relatively modest, Citigroup is the fastest-growing issuer in Egypt.

We believe that credit cards are the fastest-developing method of payment, says Accad, not just in Egypt, but throughout many of the emerging countries that are progressing quickly.

The bank targets middle-income individuals and families for its credit cards and has a very positive experience with the credit-worthiness of this group. We found that the percentage of write-offs in Egypt is no different than the percentage of write-offs that we experience in most other countries, including the most developed, and this is very good news given our focus on the middle income level, explains Accad.

Credit losses are also minimal on the corporate side. We have a history of practically zero loss [in corporate lending], says Accad. We tend to concentrate on the large local corporates, but we are currently in the process of studying the possibility of going down the market, towards mid-sized companies on the corporate side.

Although the bank is very active in financing automobile purchases, it has not entered the mortgage finance in Egypt despite the introduction of the new mortgage finance in 2001. This law has generally failed to invigorate the mortgage market due to continued difficulties with property registration procedures and high property taxes. Ownership of the majority of property in Egypt is not properly registered with the government, and this has created the ironic condition of unfulfilled demand for housing despite the availability of vacant residential buildings and the anticipated availability of funds for mortgages in the financial system.

Mortgage finance is not an area we think will be very attractive over the next year or two, but eventually as the markets develop we ll be there as well, says Accad. There is a new law and it may indeed work for new residential construction projects. But, frankly, for existing ones, I think it still is very complex to register a title. And if you don t have a title and if you don t have comfort that you can have access to the security very fast, then it looks more like an unsecured loan than a mortgage.

Citigroup also requires the mortgage market to grow to a critical mass before it can participate. It is important for us to be a mass player on the consumer side, explains Accad. That is, if we want to do a business, the business needs to have a critical mass and we need to do it in very large numbers, because the infrastructure that we would need for thousands of mortgages is not going to be very different from the infrastructure to do hundreds of them.

Accad cites the floatation of the exchange rate as one of the biggest accomplishments of the central bank. The value of the Egyptian pound was once tightly controlled by the government, and the high official rate inhibited trade and caused a shortage in foreign exchange. The pound was devalued drastically by 30 percent against the U.S. dollar in 2001 and allowed to float freely two years later.

Foreign investors were not hot on Egypt until just a couple of years back, says Accad. But when the foreign exchange situation was resolved, what we saw was that they came back to Egypt with a vengeance and with large sums of money being transferred into Egypt, in the billions of dollars a year compared to three years ago when there was almost nothing, which is an incredible turn around.

The stability of the pound has, in particular, encouraged foreign institutional investment in fixed income securities such as bonds. The supply and demand for such securities has historically been limited in Egypt, with trading concentrated amongst a handful of banks who invested mainly in treasury bills.

I think the bonds market will be developing, because more and more companies will consider capital markets as an alternative to a syndicated loan, says Accad.

Meanwhile, Citigroup has directed some $4 billion of foreign investment in financial instruments to Egypt last year. Approximately 40 percent of this investment was made in bonds, which reflects international confidence in the currency.

It s normal to expect foreign investors to invest in a stock market that is growing very fast, explains Accad. But it s less usual to expect them to invest in fixed income instruments such as corporate and government bonds in emerging markets. The reason they are investing is that they feel comfortable enough with the Egyptian pound and that the interest differential between the pound and, say, the dollar or the euro is attractive enough to offset any potential devaluation in the pound over the period of their investment. And I think this is an incredible vote of confidence for the Egyptian economy.

Until recently, the Egyptian stock market has also experience exceptional growth in capitalization, increasing four-fold in the 24 months from Jan. 2004 to Dec. 2005. Recently, however, in part due to the correction in Gulf markets but also as a result of the overvaluation of a number of local companies in the view of many analysts, the Egyptian stock marke
t has had several negative shocks.

A lot of people have felt that maybe there was a bubble, says Accad, and surely, there must be some stocks that are overvalued; that s normal. But if you look at it on an average basis, the earnings of Egyptian companies have also progressed very rapidly during that period [from Jan. 2004 to Dec. 2005], and therefore the price-to-earnings ratio of the stock indices is still in the teens, meaning that despite the phenomenal growth in the stock market valuation, Egypt does not appear to be particularly overvalued.

Share This Article
Leave a comment