Lebanon's ailing banks must sell their prized Egyptian subsidiaries, with Gulf lenders the most likely buyers as they seek to bolster their presence in the Arab world's most populous country.
Revolution and counterrevolution roiled Egypt's economy early last decade, but business-friendly reforms helped GDP expand 5.3% and 5.6% in 2018 and 2019, respectively. The banking sector is seen as having sizeable potential, with a vast unbanked population and widespread need for business financing. The country's credit-to-GDP ratio stands at around 24% and has declined steadily for the past 15 years, while household debt-to-GDP is about 7%.
"There's growth opportunities in retail banking, plus SME lending, which banks haven't focused on," said Elena Sanchez-Cabezudo, head of MENA financials, equity research at EFG-Hermes in Dubai. "In corporate banking, there is pent-up demand for capex loans. … It's the usual emerging market dynamics of low credit penetration and a growing population."
Dubai's Emirates NBD Bank PJSC, which bought BNP Paribas Egypt for $500 million in 2013 and declined to comment to S&P Global Market Intelligence, is interested in buying the Egyptian units of Lebanese duo BLOM BANK SAL and Bank Audi SAL, according to media reports in Egypt.
And it is not alone among Gulf Cooperation Council, or GCC, banks showing an interest. First Abu Dhabi Bank PJSC, or FAB, the United Arab Emirates' largest bank by assets, halted exclusive talks to acquire Egypt-based Bank Audi (SAE) in May due to uncertainty around the coronavirus pandemic but is now reconsidering that decision. Arab Banking Corp. (BSC), or ABC, is in early discussions to buy BLOM Bank Egypt SAE. ABC, Blom, Bank Audi and FAB did not respond to requests for comment.
Lebanon's banks are technically insolvent and face absorbing $71 billion of losses on government securities as the country defaults on its debts amid economic collapse and hyperinflation. With depositors facing a substantial bail-in, banks must sell their foreign assets.
"GCC banks have long targeted Egypt because it offers things the Gulf lacks aside from in Saudi — a large population and structural opportunity for growth," said Sanchez-Cabezudo. "The UAE, Bahrain, Kuwait, Qatar are all overbanked and credit penetration is high, so their growth prospects are limited. It's an opportunity to either scale up your existing Egyptian operations or enter the market for the first time."
Egypt lags the Middle East in financial inclusion in key areas, according to data compiled by S&P Global Market Intelligence. Around one-third of Egyptians have access to a bank account or mobile-money provider, compared to the Middle East average of one in two, while the country's branch density of 6 per 100,000 people is behind the Middle East average of almost 14.
Bank Audi Egypt posted net profit of 651 million Egyptian pounds in the first half of 2020, down from 701 million pounds in the prior-year period — in line with a sector-wide 9% to 10% decline in half-year profit, according to EFG calculations.
The bank had 46 branches in mid-2019, while from 2010 to June 2019 it achieved a compound annual growth rate of 20% in assets and 30% in net profits. As of June 30, Bank Audi Egypt's had assets of 76.33 billion pounds, 66.95 billion pounds of deposits and 26.65 billion pounds in loans, according to S&P Global Market Intelligence data.
"Bank Audi Egypt is a medium-sized bank with a more aggressive credit strategy than other foreign banks in Egypt. It has a pretty active retail lending portfolio," said Monsef Morsy, co-head of research at Cairo's CI Capital.
"The metrics for Blom and Bank Audi subsidiaries are similar and in line with the rest of the market. They have relatively good retail lending franchise, especially in auto loans."
Blom Egypt had 44.68 billion pounds of assets at the end of the second quarter of 2020 and a 12.8 billion pound loan book. About 43% of the Lebanese parent company's total 2019 earnings came from its Egyptian unit.
"There's nothing especially different about these two banks — they have universal licenses so offer retail and corporate banking, while they're both small in a fragmented market with an asset share of 1.0% to 1.5%," said Sanchez-Cabezudo. "They're both well established."
Egyptian banks have a combined loan-to-deposit ratio of 57.9%, according to a September note by CI Capital, while their capital adequacy ratio is 22.1%. The sector's nonperforming loan ratio is 4.3% and its net interest margin is 6.9%.
"Egypt banks stand out on capitalization, profitability, and valuation versus [Middle East and North Africa] peers," the report states.
The pandemic's impact on Egyptian banks' balance sheet is uncertain, with the central bank ordering six-month payment holidays on all corporate loans from March 15 onward.
Interest rate reductions had less effect on Egyptian banks than cuts elsewhere in the region because of lenders' large holdings in Egyptian treasury bills and bonds. The yield on government securities has increased around 1.2 percentage points this year, Morsy said, which has supported banks' margins and profitability.
"Egypt banks had been preparing for a very strong credit cycle in 2020, entering the year with an optimistic, aggressive growth plan," said Morsy. "They had the capacity to finance this expansion, whether in terms of liquidity, capitalization or balance sheet strength. When COVID-19 hit these plans were put on hold, but this capacity helped the banks weather the pandemic. There aren't any major worries regarding the bank sector."
As of Sept. 28, US$1 was equivalent to 15.75 Egyptian pounds.