Bank of Alexandria's business turns around on privatisation

Cairo: The headquarters of Bank of Alexandria in downtown Cairo exudes old-world elegance. Clients are served in a vast arcaded hall that has marble floors, columns and a vaulted ceiling painted to resemble a blue sky.

A few years ago, the word old-world would have described much about Bank of Alexandria. It was an unmodernised and loss-making, state-owned institution; its books hid billions of dollars in bad loans; and its staff, untrained and demoralised, still did everything by hand.

But that time is firmly in the past.

The smallest of the four big state-owned institutions, which have dominated banking in Egypt for decades, was sold in October 2006 to what was then Sanpaolo IMI of Italy.

In a landmark privatisation, the buyers paid $1.6 billion - 5.5 times book value - for an 80 per cent stake. The deal was widely considered solid evidence of the Egyptian government's determination to press on with reforming the banking sector and turning it into an engine for growth in the wider economy.

A year and half after privatisation, the bank is an integrated part of the Intesa Sanpaolo group. It is a fully automated institution, offering an expanded range of services to retail and corporate clients.

"We have all kinds of products in all segments," says Mahmoud Abdul Latif, chairman. "We are one of the most active players in microfinance and in lending to [small and medium-sized enterprises] where we have grown our portfolio by 300 per cent in a year."

In corporate activities and project finance, the bank is a "major player", he says, and its retail business has increased by "200 to 215 per cent in a year".

Modernisation had started before the sale to Sanpaolo IMI when, in 2003, the government brought in management from the private sector to prepare for privatisation. The balance sheet was cleared of non-performing loans - mostly to public sector companies - an information technology system was introduced, and staff were retrained and their numbers reduced.

Abdul Latif presided over the turnround, and he and others in the top management team were retained by the Italian buyers.

"After the clean-up of the balance sheet and the port-folios, we lost half of our market share," Abdul Latif says. "It really was a fictitious share because of the non-performing loans."

The loan portfolio went down by 70 per cent, he says. "So for us it has been another challenge to rebuild a proper market share based on proper process."

The bank's market share is "back to our original position", he says, of between three and four per cent.

Bank of Alexandria's sale went smoothly and brought in twice as much money as the government had expected. But a similar attempt to privatise a 67 per cent stake in Banque du Caire, the next biggest public-sector lender, foundered this summer.

After an auction in June, in which none of the bidders was deemed to have offered a fair price, the sale has been put off for two years. The highest bid came from National Bank of Greece, which offered $1.36 billion.

Industry analysts say that, even though the balance sheet is understood to have been cleaned up, restructuring and modernisation have not been carried out to the same extent as at Bank of Alexandria.

All the same, the failure of the sale is seen as a temporary setback rather than a sign that the government is rowing back on banking reform.

"I think the government is determined to reform the sector," says Elena Sanchez, banking analyst at EFG-Hermes. "But I think they would have faced a lot of criticism if they had sold it at a price below the valuation that was set for it."

Privatisation of Banque du Caire was to be the last big event in a programme of reforms kicked off by the banking law of 2003, which introduced stricter rules on provisioning and increased minimum capital requirements to force consolidation in the sector.

The number of banks in Egypt has fallen from 62 to 40, and the share of state banks has been reduced to 45 per cent from 80 per cent. Private-sector banks have been expanding aggressively by opening more branches and offering new financial products.

Egyptian banks have also attracted interest from institutions in the Gulf, which have abundant liquidity and are searching for opportunities to expand. Egypt is a large country with a youthful demographic and banking services have yet to penetrate far.

"In the retail sector there is still huge unexploited potential," says Nancy Fahmy, banking analyst at Beltone Financial, a Cairo brokerage. "Only 10 per cent of the population have bank accounts."

- Financial Times