CAIRO: Having recently been downgraded by the ratings agency Moody s, National Bank of Egypt (NBE) will share a capital injection of $1 billion (LE 5.7 billion) with the Banque Misr.
Central Bank of Egypt Deputy Governor Tariq Amer announced the capital increase of the nation s two largest banks without specifying the proportion of allocation of the funds to each bank.
The announcement comes less than two weeks after Moody s, one of the world s leading credit rating agencies, downgraded NBE s financial strength rating from D+ to D.
The agency s foreign currency deposit rating for NBE, which takes extrinsic factors into account, remains at the country ceiling of Ba2/NP (not prime) because of the possibility of external support.
Moody s cited the bank s increased problem loan book and the agency s stricter classification requirements as the reasons for the downgrade. The agency adds that NBE also suffers from low profitability, a weak balance sheet and poor administration.
Some of these issues, namely the bank s liquidity and the health of its balance sheet, will be addressed by the injection of funds.
State-owned banks have accumulated a significant amount of bad debt in the past ten years resulting in inadequate capitalization, but they have not been particularly proactive about resolving this issue.
NBE has also faced difficulty in the settlement of its loans to the public sector and Moody s says that the bank s public sector mentality has depressed its rating.
The government is expected to make use of part of its privatization proceeds to repay the debts of public entities to NBE and Banque Misr. Amer says that LE 20 billion of these loans has already been settled in the past 18 months.
NBE controls nearly one quarter of Egypt s banking market in terms of assets, loans and deposits. Banque Misr s current share is much smaller, but it is expected to rival NBE after its merger with Banque du Caire.
The capital increase is modest relative to the loan portfolio of NBE and Banque Misr of LE 64.8 billion and LE 32.6 billion, respectively, in June 2005 and bad debts of up to 20 percent of the loan portfolio.
Attempts to reform the big four public banks (NBE, Banque Misr, Banque du Caire and Bank of Alexandria) are part of the government s efforts to restructure the financial sector as a whole.
The Unified Banking Law was introduced in 2003, strengthening the independence of the central bank and increasing the minimum capital requirement from LE 100 million to LE 500 million for local banks and from $10-50 million (LE 60-290 million) for domestic 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 also began to extricate itself from the business of financial services by selling its stakes in 17 banks.
Although the big four public banks continue to dominate much of financial sector, foreign financial institutions are keen to pursue the Egyptian market in the new regulatory environment.
A number of international banks including Citibank have chosen to grow organically. Others such as the Lebanese BLOM Bank and the French bank Calyon have taken the approach of acquiring some of the smaller banks that were up for sale over the past year.
But the biggest acquisition is yet to come. Over the past year, the government has focused its efforts on preparing for the sale of Bank of Alexandria, the smallest of the big four public banks. Commercial International Bank and eight foreign banks expressed an interest in acquiring the bank last month.
With the tender process about to begin, attention is now turning to the other public banks, and particularly to the merger of Banque Misr and Banque du Caire.
A significant amount of work is necessary to prepare for the merger. The recapitalization of Banque Misr is one such measure, improving the state of the bank s balance sheet and enabling it to acquire the assets of the smaller Banque du Caire.
