CAIRO: Hit by a series of unfortunate events – from a record-high inflation rate to Moody’s negative rating – it seems that the auction of state-owned Banque Du Caire was doomed to fail.
“A couple of days before the auction, Moody’s rating agency lowered its outlook on a number of Egyptian banks from stable to negative. Such a downgrade by an international agency had its negative impact on the auction, said Passant Fahmy, banking expert and senior consultant at Egyptian-Saudi Tamweel Bank.
“Add to this the high inflation rate that peaked to more than 20 percent, which adversely affects investment in Egypt. Furthermore, forecasts on economic growth rates were not as positive as expected. All these circumstances weighed on the bids submitted by foreign banks which did not meet the government’s reserve price, she added.
In what could have been Egypt s largest privatization process since the sale of Bank of Alexandria in 2006, five regional and international banking players lined up on June 24 to bid for a 67 percent stake in Banque Du Caire.
The five banks cleared to bid were the National Bank of Greece, UK-based Standard Chartered Bank, Saudi Arabia s Samba Financial Group, Dubai s Mashreqbank (UAE), and a consortium formed by Jordan s Arab Bank and the Saudi Watany Arab Bank.
Before the official bidding began, Standard Chartered and Samba Financial Group were disqualified from the race, leaving three bidders remaining.
During the first round of the auction, National Bank of Greece (NBG) reportedly made the highest bid at $1.9 billion for the entire bank (equivalent to $1.3 billion for the 67 percent stake). Mashreqbank came in second at $1.3 billion, followed by Saudi Arabia s Arab National Bank and its Jordanian affiliate Arab Bank Group consortium at $1.2 billion for the entire bank.
The second round of the auction saw both Mashreqbank and the Saudi-led consortium pull out of the bidding after submitting their maximum bids, leaving only NBG, which later submitted the top bid at $2.025 billion for the entire bank, or $1.4 billion for the 67 percent stake of the bank.
“The only bidder remaining offered a low price, which was a polite way of exiting the auction, Fahmy stated. “The government did not realize that its expected price was higher than it should be.
The government explained it rejected NBG s offer because it was $200 million lower than its reserve price. The government expected the bank would fetch up to $2.4 billion for the entire bank, equivalent to $1.6 billion for the 67 percent stake.
Based on Beltone Financial s records, Banque Du Caire had a book value of LE 2.67 billion ($0.499 billion) by Egyptian Accounting Standards at the end of March 2008. This makes NBG s offer at 4.1 times its book value. This was a fair price for the bank, however, it did not meet the government s expectations, Radwa El Swaify, senior banking analyst at Beltone Financial told Daily News Egypt in June.
The bank s evaluation committee expected a price of $1.6 billion, equal to the amount paid for the 80 percent stake in Bank of Alexandria, which was sold at 6.1 times its book value at $1.613 billion.
The Central Bank of Egypt anticipated revenues from the purchase of Banque Du Caire to exceed those of the Bank of Alexandria, as the former was larger with more branches and a more sophisticated electronic database.
Banque Du Caire is Egypt s third-largest state-owned bank with total assets of LE 50.1 billion ($9.3 billion) and a six percent market share. The bank has 215 branches across all Egyptian cities and around 180 ATM machines.
“The government’s reserve price was only suitable prior to the release of Moody’s report. However, they [the government] did not take into consideration the abrupt turnaround of events, especially after Moody’s negative outlook, Fahmy explained. “As soon as a rating is lowered, banking evaluations fall down.
One day before the auction, rating agency Moody s Investors Service lowered its outlook for Egypt s foreign currency bonds as well as five Egyptian banks to negative from stable, citing surging inflation, which currently hover at around 20 percent, a 19-year record high.
Moody s cited the political risk of inflation because of the country s relatively low income per capita and high poverty rate. It said Egypt s fiscal constraints make it difficult for the government to reduce the strain of inflation on the people.
Egypt has the widest fiscal deficit and the highest public debt burden in relation to government revenues of any Ba-rated country, Moody s stated.
“Following Moody’s downgrade, Banque Du Caire’s evaluation was deemed overpriced, which led to the failure of the auction, Fahmy said. “I think the government exaggerated a little.and NBG’s offer was a fair price for the bank.
“The price can vary from day to day, depending on the country’s political and economic outlook, she added. “Banks do not want to venture into politically unstable regions; and in the Middle East, there’s instability from the war in Iraq as well as threats of another war in Iran.
Since the announcement of the sale process, public opinion has been at odds with the decision. Amid growing public dismay, the government amended its decision and announced offering a 67 percent stake in the bank, 28 percent in an initial public offering on the Egyptian stock exchange, and the remaining five percent to employees.
“In my opinion, selling the bank was necessary because proceeds from the sale are needed to revamp the country’s banking sector, Fahmy pointed out. “Generally speaking, all public sector banks are in massive need of an overhaul to cope with the sector’s global development.
Banque Du Caire was expected to fetch a good price for the government because it was the last big bank available for the foreseeable future. The Central Bank refuses to issue new banking licenses, so buying a bank is the only way into the Egyptian market.
Lenders see massive potential for retail banking in a country with 75 million people, of whom only about 10 percent have bank accounts.
“Egypt’s banking sector will be much more attractive if the central bank issued new banking licenses. However, acquiring a bank is more costly because the buyer will have to conduct due-diligence, clear up the bank’s portfolio and non-performing loans, and face-lift the entire bank, which all overstrains buyers, Fahmy said. “But if the government issues new banking licenses, the new lender will start clean from scratch.
In the meantime, the government still plans to sell the bank, and experts expect the government will further improve the bank s financial performance before attempting to offer it once again for sale in order to receive a higher bidding price that could meet its estimated $1.6 billion.
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