PARLIAMENT APPROVES SALE OF BANQUE DU CAIRE

UNCLAS CAIRO 002307 SIPDIS SENSITIVE SIPDIS STATE FOR NEA/ELA, NEA/RA USAID FOR ANE/MEA MCCLOUD AND DUNN USTR FOR SAUMS TREASURY FOR MATHIASON AND HIRSON COMMERCE FOR 4520/ITA/ANESA/OBERG E.O. 12958: N/A TAGS: ECON EFIN EG SUBJECT: PARLIAMENT APPROVES SALE OF BANQUE DU CAIRE Sensitive but Unclassified. Please protect accordingly. REF: Cairo 2188 -------------- Summary -------------- ¶1. (SBU) The Economic Committee of the People's Assembly approved the Central Bank's plan to sell the state-owned Banque du Caire, despite strong criticism from opposition parties. Criticism focused on a perceived lack of transparency, as CBE had previously stated it would not sell any public banks after Bank of Alexandria (BOA). Some parties also warned of foreign domination of the banking sector. CBE Governor El Okdah told the press that merging Banque du Caire with Banque Misr would have severely burdened the state budget. Proceeds from the sale will be used to pay Banque du Caire's public sector non-performing loans (NPLs),which have been transferred to Banque Misr. Deputy CBE Governor Tarek Amer told emboffs that Egypt has a painful history of foreign domination of the banking sector. But even if Banque du Caire is sold to foreigners, the foreign share of the market will amount to only 24%. CBE and Banque Misr management believe that Banque du Caire will be very attractive to potential buyers due to its market share and large branch network. While the sale announcement has raised a fury of protest in parliament, local bankers are enthusiastic and hope it will strengthen Egypt's banking sector. -------------- Parliament Approves Sale -------------- ¶2. (U) Amid heated debate, the Economic Committee of the People's Assembly (PA) approved the proposed sale of Banque du Caire (reftel) on July 18. Opposition parties criticized the government for lack of transparency in banking policy and expressed concern over foreign domination of Egypt's banking sector. Criticism came from all quarters, including the liberal al Wafd party, which focused its criticism on the government's lack of transparency in deciding to sell the bank. Independent parliamentarians linked to the Muslim Brotherhood joined leftist Tagammu party representatives in condemning sale of government assets, especially in light of the CBE's previous statements that no public banks would be sold after BOA. Tagammu MP Muhammad Abdel Aziz also raised the specter of colonialism, saying that foreigners should not be allowed to control Egypt's economy by controlling banks. Some MPs recommended that at least 30% of the bank's shares be set aside for Egyptian investors and bank employees. NPD member Dr. Mustafa El Said, Chairman of the PA Economic Committee, told the press that in approving the sale, the committee emphasized the importance of transparency in the sale process. -------------- Central Bank Explains Decision -------------- ¶3. (U) Prior to the debate in the PA, CBE Governor El Okdah and Banque Misr Chairman Mohamed Barakat held a press conference to explain the decision to sell Banque du Caire. El Okdah explained that Banque du Caire's NPLs totaled LE 12 billion, a burden the state would bear if Banque du Caire were merged with Banque Misr, as originally planned. CBE and Banque Misr management decided to sell Banque du Caire and use the proceeds to pay Banque du Caire's public sector NPLs, all of which have been transferred to Banque Misr. If there are additional proceeds from the sale, they will be used to pay other public sector NPLs held by Banque Misr and NBE, which are estimated at a combined LE 6 billion. In addition to NPLs, some of Banque du Caire's investments, its branches in the Gulf, and a few branches in Egypt were also transferred to Banque Misr. ¶4. (U) El Okdah told the press he expects to obtain LE 12-15 billion for the bank, LE 3 billion more than SanPaolo paid for BOA. (Comment: No valuation of the sale has been done yet, so we do not know if El Okdah's estimates will reflect bidders' perceptions of Banque du Caire's value). The stock market could not absorb an IPO of a majority of the bank's shares, according to El Okdah, and an IPO would also not bring in professional management, which the bank desperately needs. Answering a question on foreign domination of the banking sector, El Okdah said the sale would not allow Israel to control of Egypt's banking sector. He also stressed that Banque Misr and NBE will remain state-owned. Together these two banks control 41% of the market. Minister of Finance YBG added that the GOE retains the right to reject any offer for the bank without a reason. Prime Minister Nazif echoed these statements at a press conference the following day. ¶5. (SBU) CBE Deputy Governor Tarek Amer told emboffs and visiting Treasury official Michael Hirson that Egypt has a painful history of foreign domination of the banking sector. However, the current foreign share of the market is only 18%. Even if Banque du Caire, with 6% of the market, is sold to a foreign entity, foreign ownership will only amount to 24%. Amer noted that there is a lot of interest from potential buyers, and he agreed with the Governor's view that the bank will sell for more than BOA. CBE will give most weight to bidders looking to invest in long-term development of the bank. The sale will likely be completed by February 2008, according to Amer. -------------- Banque Misr's Perspective -------------- ¶6. (SBU) Mohamed Ozalp, Deputy Chairman of Banque Misr, told emboffs that Banque Misr decided to sell Banque du Caire because a merger would not have added value to Banque Misr. Banque du Caire has a small deposit base, with a customer demographic similar to Banque Misr's, and 11,000 employees. Adding those employees to Banque Misr's 13,000-strong payroll would create an unmanageable behemoth. Banque du Caire's only specialization is microfinance, an area Banque Misr does not want to enter. Ozalp agrees with his CBE colleagues, however, that Banque du Caire will be more attractive to investors than BOA. Banque du Caire has over 200 branches in all Egyptian governorates, a state-of-the-art IT platform, and a new headquarters building acquired as settlement for the NPLs of one of the bank's major clients. Moreover, Banque du Caire offers potential buyers a license - its most valuable asset, as CBE is not issuing new licenses. Ozalp expressed surprise over the intensity of opposition to the sale, noting that the CBE never said that it would not sell any public banks after BOA, but merely that Banque Misr and NBE would not be sold. ¶7. (SBU) Ozalp said the terms of the sale will be virtually identical to those of BOA, except that the proceeds from the sale will technically go to Banque Misr, as the owner of Banque du Caire, rather than to the Ministry of Finance. In the best case scenario, proceeds will be sufficient to pay off all of Banque Misr's public sector NPLs, give the bank a capital injection, and possibly transfer some funds to the state budget. A clean balance sheet will make Banque Misr competitive with private sector banks and improve the bank's overall rating. Ozalp added that LE 22.5 billion of Banque Misr's private sector NPLs have already been settled (LE 11 billion of those in cash) and 90% of the remaining loans have been reactivated. -------------- Comment -------------- ¶8. (SBU) The decision to sell Banque du Caire has added fuel to the anti-privatization fires in Egypt, bringing together diverse voices in opposition to sale of state assets. So far the opposition has not succeeded in stopping large, important transactions, such as the flagship department store Omar Effendi. We do not anticipate that opposition will be able to stop the sale of Banque du Caire either, despite calls for public protest from opposition political parties. By the same token, bankers in Cairo seem energized about the prospects of new, high quality entrants into the market, and hope that it will have a positive impact on a sector that is already doing well. The use of the sale to further clean up public bank balance sheets is consistent with the overall GOE strategy of strengthening the financial sector. RICCIARDONE