BANQUE DU CAIRE PRIVATIZATION POSTPONED

UNCLAS CAIRO 001370 SENSITIVE SIPDIS STATE FOR NEA/ELA, NEA/RA AND EEB/IDF USAID FOR ANE/MEA MCCLOUD AND RILEY USTR FOR FRANCESKI TREASURY FOR MATHIASON AND DENNIS COMMERCE FOR 4520/ITA/ANESA/OBERG E.O. 12958: N/A TAGS: ECON EFIN EINV EG SUBJECT: BANQUE DU CAIRE PRIVATIZATION POSTPONED Sensitive but Unclassified. Please protect accordingly. Ref: A. Cairo 1352 B. Cairo 1335 ¶1. (U) The GOE postponed indefinitely the sale of state-owned Banque du Caire on June 25, after the highest bid received did not meet the minimum asking price of $1.6 billion for 67% of the bank's shares. A GOE evaluation committee set the minimum price based on the $1.6 billion that Italy's SanPaolo Intesa Bank paid for 80% of Bank of Alexandria (BOA) in late 2006. Mohamed Ozalp, Vice Chairman of Banque Misr, owner of Banque du Caire, told us before the auction that Banque du Caire would sell for as much or more than BOA, as Banque du Caire has 215 branches (compared to BOA's 180) a state-of-the-art IT infrastructure with 180 ATMs, and a larger depositor base than BOA. Banque du Caire's license was also considered a selling point, as Egypt's Central Bank has not granted new banking licenses for 20 years. The only way for a new entity to enter Egypt's banking market is through purchase of an existing bank. The Egyptian stock market fell by 1.56% on news of the postponement, with the banking sector index declining 3.19% on June ¶25. ¶2. (U) In the first round of the auction on June 25, only three of the five short-listed bidders submitted offers. The National Bank of Greece (NBG) submitted the highest offer, $1.3 billion, followed by UAE's Mashreqbank ($871 million) and the Saudi-Jordanian Arab Bank Group consortium ($804 million). Neither the UK's Standard Chartered, nor the Saudi SAMBA Group submitted bids. In the second round, both Mashreqbank and the Arab Bank Group withdrew. NGB increased its offer to $1.4 billion, for a total valuation of $2.03 billion, or 3.6 times Banque du Caire's book value of LE 2.67 billion ($499 million). Banking analysts noted that the bids seemed fair, though the GOE obviously did not agree, possibly because the last two banks the GOE has sold, BOA and Al Watany Bank, went for 6.1 and 5 times book value respectively. ¶3. (SBU) Most banking analysts believe using the BOA sale price as a benchmark was a mistake. BOA's management spent years preparing that bank for sale, paying off non-performing loans (NPLs), re-training staff and renovating branches. BOA Chairman Mahmoud Abdel Latif told us he did not think Banque du Caire would sell for as much as BOA because less effort was put into preparing Banque du Caire for sale. Although most of Banque du Caire's NPLs were reportedly transferred to Banque Misr, the former's balance sheet was still not in good shape. Analysts contend the bank needs more restructuring, better investments, upgraded operations and re-capitalization to make it attractive enough to get the GOE asking price. At a press conference after the auction, Mohamed Barakat, Chairman of Banque du Caire, said the GOE would further restructure the bank and attempt to sell it again, although he declined to set a timeframe. A senior advisor to the Minister of Investment told us after the auction that he thinks the bank should be ready for sale again soon. ¶4. (SBU) Official statistics indicate Banque du Caire has total assets of around LE 50 billion ($9.3 billion) and a 6% market share. Per the audit of Banque du Caire by the local office of Deloitte, done for purposes of the U.S-Egypt financial sector MOU, the assets were only LE 34.5 billion ($6.4 billion) in 2006. The same Deloitte audit, conducted using international auditing standards, indicated LE 22 billion ($4 billion) of Banque du Caire's LE 28 billion ($5.2 billion) in total loans (79% of total loans),were non-performing in ¶2006. The GOE currently claims only LE 10 billion ($1.9 billion) NPLs in the entire banking system. ¶5. (SBU) Comment: The GOE's fixation with obtaining $1.6 billion for Banque du Caire suggests that postponement of the sale was not based on sound economic analysis of the bank's value, but on political considerations. Only the minimum asking price would have satisfied elements of the political class skeptical of economic reform. In the context of record levels of foreign investment, the sale's postponement, along with the EAgrium investment dispute (ref A),suggest that there are some limits to Egypt's openness to foreign investment. Postponement may also be seen as vindication of those opposed to privatization of the economy, though in the long-run it undermines the opposition's argument that the GOE is selling the country "for a song." In any event, coupled with Moody's downgrading of Egypt's long-term local currency bond outlook over inflationary and fiscal concerns (ref B),the sale's postponement shows that continued economic reform is becoming more challenging. SCOBEY