ericellis

September 2011

Egypt’s top bankers took extreme measures to ensure that the country’s financial infrastructure did not break down as the Mubarak government fell. Now, as they desperately hope that a new regime will enable the banking industry to flourish, optimism is tempered with the reality of how much work there is to do. Eric Ellis reports from Cairo.

IN JANUARY AND February this year, as revolution coursed through Cairo and beyond, Egypt’s central bank governor, Farouk Abd El Baky El Okdah, called the heads of the country’s main banks to a series of urgent meetings at the Cairo Marriott on Zamalek Island in the middle of the Nile.

"We were called for meetings every two days with the central bank governor," recalls Barclays’ country head, Khalid El Gibaly. "It was off-site at the Marriott, we were not even to go to the central bank head office." That’s because to do so would have left bankers, particularly those coming from Cairo’s downtown or from the western Giza side of the Nile, with the then dangerous, near impossible trek through the clogged Tahrir area. And, with the country on fire, and the blaze threatening to spread to the financial system, Okdah demanded that everyone show up at the Marriott.

It’s only 800 metres from the Marriott across the Nile’s Sixth October Bridge to Tahrir Square. From the hotel, anxious bankers, many of whom had reluctantly left neighbourhood posts keeping potential looters at bay to come to the meetings, could hear and smell the uprising – the million-strong roar of protest rising from the square, the headquarters of Hosni Mubarak’s disgraced National Development Party smouldering by the riverside.

These were extreme times and if ever there was a moment to display one’s independence from government (as many central bankers claim to do but rarely actually achieve in practice), this was it. The country was in chaos, the system was crumbling, the economy had largely ceased to function – Crédit Agricole estimated that the month-long revolution cost the economy at least $300 million a day; other estimates were higher – and vigilantes roamed the streets as police abandoned their posts. And Mubarak, who had appointed Okdah in 2003, was grimly holding on.

In the midst of this anarchy, bankers fretted that their branch networks would be overwhelmed by angry, desperate depositors. There were already rumours of runs on banks. Barclays’ Khalid recalls "a tough few days in the battlefield going around my branches seeing hundreds of customers queueing. There was the start of a run, on everybody." In wealthy Nasr City’s Abbas El-Akkad Street, where many banks have branches, Khalid says: "It was a sight to see. It was crazy because there were mile-long queues out of every bank branch, without exception."

And then there were the private calls to field from regime members, from cronies who had got richer the closer they were to the Mubaraks. They wanted their cash too, and fast before they fled, a particular issue for the state-owned market leader, National Bank of Egypt. (Egypt’s newly formed Illicit Gains Authority has claimed that Mubarak’s wife, Suzanne, kept an account with a $145 million balance at the NBE’s Heliopolis branch. She has admitted to – and handed back to the state – an NBE account with $4 million in it.)

"We discussed two things very clearly," recalls Khalid. "One was convertibility and we had to ensure that was seen as free and possible any time in any quantity for any individual. The other was transferability, to ensure there is confidence in the FX markets, unlimited." The dominant NBE, sometimes seen as a de facto central bank in Cairo, even volunteered to fly in dollars in cash from abroad to service customers and other banks.

The Central Bank of Egypt also injected dollars from its reserves. Indeed, Egypt’s reserves have fallen from about $36 billion pre-revolution to about $25 billion today, partly explaining why the Egyptian pound has traded in a narrow, some say artificial, 5.67 to 5.97 range to the dollar since January 1, one of the world’s most stable currencies this year. For foreign investors willing to plunge into Egyptian treasuries or stocks there was free transferability, not that many took advantage of this.

Another of the Marriott meetings’ participants remembers: "We made plans. We didn’t know if they’d be workable plans, but little was left unsaid." On the table were myriad micro issues: bank and staff security, how to maintain liquidity and confidence, the logistics of physically moving money around the country. And then there was the macro picture: stabilizing the currency, and dealing with expected capital outflow. The bankers weren’t entirely convinced Okdah would remain in his post. His was – and remains – one of the many Mubarak-era positions at which revolutionary fingers pointed accusingly.

The CBE made some broader edicts but left the implementation and detail up to banks themselves. The meetings were well received and participants spoke well of Okdah’s calm. "We left the meeting more confident than we entered it," says one.

Khalid says Barclays was "literally the first bank to realize that this was something bigger than the usual protest". That was on January 27, two days after Tahrir Square began to fill. Barclays’ office is barely a rock’s throw from the square. It’s also next door to a key military barracks. Some 50 metres away is the US embassy. It’s a high-security area that, at that uncertain time, was no place to do any banking.

"We were the first bank to invoke a business continuity plan," says Khalid. In other words, closing the doors of its downtown headquarters and moving a skeleton staff to the less-frantic Nasr City, in Cairo’s well-heeled east. Closed by order of the central bank, Barclays reopened on February 6. Five days later, Mubarak fell. (Khalid’s team would later win an internal accolade from their London headquarters for their handling of the crisis.)

Across the river at the headquarters of the Bank of Alexandria (AlexBank), the country’s biggest privately owned bank, its 39-year-old head of retail banking, Bassel Rahmy, had no time to join his countrymen in revolt even if he had wanted to, and he did.

A formidable former member of Egypt’s Davis Cup tennis squad (he was part of the team that whitewashed Tunisia 5-0 in 1993) Rahmy was frantically interpreting and tailoring the plans as transmitted from the Marriott meetings. "It was a very interesting time," he recalls. "We were trying to figure out what decisions were best. This was new stuff for us."

The central bank had ruled that 10% of a bank’s branches should remain open – it was up to the bank to choose which ones. But there was an imperative to maintain a geographic spread, not just in the more economically literate parts of Cairo and Alexandria but in the poorer Nile Delta and Upper Egypt too. That created security headaches.

"Security was a very big issue, especially in February," says Rahmy, "to move money to supply branches. For example, it is 1,000 kilometres to Aswan. We used the army."

He continues: "I was always consulting my branch managers, because they knew their customers, and we wanted to see which customers were knocking on our doors for their money and where." In the event, bank branches were closed for almost three weeks and ATM networks – a target of looters (AlexBank had 18 ATMs destroyed) – were down for about a week.

"We didn’t want another revolution from the ordinary people because they don’t have money. They need to eat," says Rahmy. "We didn’t want rumours and speculation about liquidity, so on purpose we told our customers: Whatever amount you want to withdraw, please withdraw.’ We didn’t apply a ceiling."

It was a high-risk strategy, one that counters a conservative instinct to limit withdrawals and hold cash. "Yes, it was high-risk," he says, "but if you do the opposite and you tell them you can only withdraw E£10,000 (about $1,700), they will panic."

It worked "beautifully," says a proud Rahmy. "It went smoothly and people understood there was no problem."

Hisham Ezz Al-Arab, executive chairman of Commercial International Bank, Egypt’s biggest locally owned private bank, didn’t have to go far to the CBE meetings – he lives in the same Zamalek neighbourhood. But from his office in Giza, he implemented a contingency plan he had previously commissioned to deal with riots, natural disasters or terrorist attacks. When the revolution arrived, he closed CIB’s 155 branches for about 10 days but the bank continued to function internally, as employees stuck at home telecommuted on landlines, which Mubarak hadn’t cut, unlike the mobile systems.

"We were still operating – our asset liability division, international dealing treasury, all operating," says Al-Arab. "Everything went by the book. The army helped us." He says the projection of cash withdrawals was exaggerated. "In reality, after a week, the cash held in our vaults went up."

He says: "We were determined to go back to normal but it wasn’t out of love for the ex-president. It was out of love for the country." (Al-Arab’s remarks reflect a flowering of nationalism since the revolution – in advertising and popular culture, even down to poignant memorials in banking halls and offices to the fallen shaheed, or martyrs, who died during the Tahrir protests.)

At Barclays, Khalid worried about the re-emergence of the FX black market, which had been largely killed off in the previous decade. "We said free convertibility, unlimited," he recalls. "If somebody walks in and wants to convert E£100 million into dollars, let them do that so that they have confidence that their money is safe. We had a significant amount of customers do that in the early days until they realized there was no issue."

He recalls: "We were discussing and agreeing strategies. Strategies revolving around how to service customers, how to re-instil confidence in the market because things were getting out of control. We had to be one of the few sane entities around. We had to placate, we prepared and we gave people confidence. And we gave them their money." (Another problem for Barclays was documents that surfaced in the newly liberated Egyptian media and online that purported to show a $7.45 million treasury bond issued by Barclays in Hosni Mubarak’s favour. The bank was forced to make a statement insisting that the documents were bogus.)

A veteran of the Cairo operations of Citibank and Jordan’s Arab Bank, AlexBank’s Rahmy says: "We were expecting much worse." AlexBank had revisited reasonably rosy pre-revolution forecasts in March, and downgraded its expected business – returns, commissions, net revenue – by about 50%. AlexBank’s Rahmy claims that deposits have actually increased since February by about E£700 million, a sign of confidence in a banking sector that has often struggled in the past for public trust in Egypt. "It’s been one of the success stories in Egypt since the revolution," he says.

Restart time for the banks

A massive new billboard framed by the Nile’s Sixth October Bridge speaks to a telling transition in these revolutionary times. The iconic bridge marks an Egypt whose time has passed, the 1973 war when Cairo’s military regime – with Hosni Mubarak as air force chief of staff – led an Arab coalition across the Suez Canal and started a campaign against Israel on its Yom Kippur holy day.

But this billboard parades the more modern accomplishment of the January revolution. A counterpoint to much of the capital’s poverty, it depicts a young man with a computer screen that declares "Egypt 2011" and a taskbar with the icons "STOP. PAUSE. RESTART", his finger poised over RESTART.

But one area that’s still waiting for someone to press the restart button is Egypt’s torpid banking sector. It is plodding along much as it has for years. This is the country where just 8 million people – out of an 80 million population – have bank accounts.

Further evidence that Egypt has some catching up to do is seen in the downtown district that passes for a Cairene Wall Street. All around here in quiet streets coated sepia brown by years of pollution and desert dust, grand villas built for local pashas a century ago, when London held sway in Egypt, have become the gracious headquarters of banks. HSBC, Barclays, Citibank, Paribas, Bank of Alexandria and Arab African International Bank among many others operate from here, making their way in tumultuous times.

In other comparable commercial centres – Mumbai, Jakarta, Istanbul, São Paolo – economic boom times have led to gleaming new financial centres soaring from urban badlands. In Cairo, few financial institutions have invested in modern towers to house their banks and make a statement too. In Mubarak’s Egypt, the money and incentives hadn’t much been there. It perhaps speaks volumes that the deal that has local bankers a-twitter is the yet to be closed purchase by London’s Standard Chartered of Greece’s Piraeus Bank’s 40-branch strong Egyptian operation. If consummated, it will be the most important deal in Egyptian banking since the $1.6 billion purchase by Italy’s Intesa SanPaolo of government-owned AlexBank in 2006.

That landmark deal also further reduced the government’s hold over banking here via NBE and Banque Misr, now measured at around 40%, about half the level of 20 years ago. Still, at around $150 million, the Piraeus deal is hardly transformational for the market; it’s a play that’s as much about shoring up loss-making Piraeus at home as it is on Egypt’s future.

And things can move extremely slowly in Egypt. For example, it was only six years ago that AlexBank centralized its network. Until then – and AlexBank wasn’t alone – each of its branches operated as if it was a separate standalone bank – with its own balance sheet, loan officers and discretion, and its own profit-and-loss. It was like banking in the 1930s.

But eight months after Tahrir, Cairene bankers are hoping that revolution is imminent. While the prevailing tone among Egyptian bankers is wait-and-see as they ponder what type of government and policy will emerge from the chaos, they tread water with a cautious optimism that Egypt will quickly be transformed into a Middle East tiger economy. Or, as one cricket-savvy banker put it to Euromoney: "We’re ready to graduate from the Goldman Sachs ‘second 11’ (a play on Goldman’s N-11, or the ‘next 11’) to adding an e to Bric."

That will take some time. AlexBank’s Rahmy says: "As a banker, I feel ashamed to have only 8 million accounts across 80 million people. There are only 1.2 million credit cards. But we see this as a big chance to expand."

Of Egypt’s privately owned non-government banks, AlexBank is first in retail banking assets and third in liabilities. In the wider banking sector, government-owned NBE is the elephant in the room. Banque Misr and NBE each has about 400 branches and AlexBank has around half that, the widest-networked of the private-sector banks, with a presence in all of Egypt’s 27 district governorates, rare for private-sector banks, which have tended to focus on the urban centres of Cairo and Alexandria. Then comes the well-regarded National Société Générale Bank.

Rahmy says AlexBank’s typical customer is from the C-D demographic but the bank is also creating new profiles for the upper-middle class – quasi-private banking similar to HSBC’s Premier offering. In Egypt that market has tended to bank abroad.

"It’s a matter of education – people have to know what it means to save, to get a return, to have a debit card, a credit card, and that banks can help you start a business."

But he has concerns about how the revolution has trended since February. He says the Tahrir demonstrations of recent months have been different to the January rallies. Now, he says, Egyptians go there when they have any sort of grievance. "What’s happening now in Tahrir is not positive," he says. "The bad people are in jail, people are in court and we have to trust the system to work it all out, and we go back to work." He worries that with the Mubarak family on trial, "people are not going to calm down unless they see something tangible come out of them. We don’t have a magic wand to change everything in one day. People have to be patient, we need to go back to work and do our job, rebuild the economy. We have lost a lot."

He says Egyptians were distracted by the revolution. "We didn’t know where the ship was sailing. How many people will be fired from all this, from the private sector and the government? What will the bad loans be? The credit card bills? The non-payment of mortgages? The lack of tourists? We had no guide for this, of which way to go.

"And then we recovered, strongly and especially in retail banking. We started seeing it in May, after the new government came in.

"The success of the banking in the coming five years is retailing to small businesses and micro-financing. This is where the big potential is, at the grassroots, from people who were economically disadvantaged before, people who were unbankable; you give them the money, they do a project. We are trying to unlock that entrepreneurism, we have all the tools to make this country successful. We have 6 million people working in the government sector – that’s too many."

He says there are two remaining bottlenecks – getting a good president and a capable cabinet. "The people will work. You put them in place, Egypt will boom in no time."

Rahmy at AlexBank thinks agriculture and resources, notably petroleum, will be the drivers of a new Egyptian economy. Infrastructure was neglected by Mubarak. "It’s like we will have to destroy everything and built it better again," says Rahmy.

Khalid El Gibaly at Barclays says Egypt needs a cabinet that is seen to be for the long term, to enable clarity on policy, which has been lacking since the resignation of Samir Radwan as finance minister after just six months.

When asked how business is going, Khalid says: "It goes without saying that it is not doing nearly as well as it was last year, partly because of politics, security and the general mindset of consumers and corporates, all interlinked."

He adds: "Any decision to get into a long-term borrowing arrangrment has been put on hold. It’s not that plans have changed, they’ve just been rescheduled, [the thinking is] let’s see what happens in 2012 and that’s leading to a big impact in 2011. And this is not helped by the global economic environment, in a lot of the traditional trading partners of Egypt.

"The security situation is leading to a lot of uncertainty, unrest and unease. The new-found liberty and freedom is having a negative mpact on productivity. People are saying: ‘I’m going to continue on strike until I get what I need’ and they are not very clear [what they want]."

Khalid says there are questions over tourism and construction, not because they are bad industries but because "for the next six to 12 months customer demand will not be as strong and income flows into these sectors might not be sufficient to service their debt".

Khalid says the "critical agenda item" is the upcoming election. "The army can only do so much, they can’t be the police, so a fundamental requirement is the feeling that security is in place."

"They [Egyptian citizens] say they want everything and it doesn’t seem they are willing to get into a dialogue. The balanced maturity required to reach a middle ground is still to come." Khalid says, though, that he is "cautiously optimistic" about Egypt. "There’s a danger of things going in the other direction, of going to extremes, even the days of socialism, even beyond.

"The jury’s out. There are obviously balancing forces to all this directionlessness."

Khalid says he is starting to see good signs at his branches. Although a wholly-owned subsidiary of Barclays UK since 2004, when it ended a joint venture with state-owned Banque du Caire, 60-branch-strong Barclays Egypt now operates as a local bank, with the same rights and functions as any locally owned operation. Khalid says: "We’ve taken measures, so we do more business with the segments we know really well." He pinpoints these as the food and beverage sector, farming and oil and gas.

He says the banking system is very sound, thanks to reforms "fortunately" set down over the past decade, often in response to earlier crises from abroad. "The banks are very well capitalized," he says. "We are operating with a capital adequacy ratio of over 20%." The CBE’s minimum requirement is 10%.

"Banks," he says, "are swimming in liquidity. The loan-to-deposit ratio is around 53% to 54% so banks are overly liquid."

He says non-performing loans had become a problem because borrowers had not been able to service loans as banks were closed, and then customers were fearful of venturing onto the streets. "These guys were good credit in December," notes Khalid. "And all of a sudden not-so-good credit in January and February on the books, so we are not concerned about the fundamentals of the market, it’s a logistical thing. Starting from May, things had gone back to just about normal, and we’ve been heartened by that."

He adds: "This is a period of maintaining our business rather than hyper-investment. But we have great ambitions in this country. Fingers crossed, by the third quarter of next year, things should’ve returned to some semblance of normality and we’ll get back to the same growth as before."

Bearded ambiguity

In the Giza headquarters of Commercial International Bank, executive chairman Hisham Ezz Al-Arab has a portrait of Karl Marx on the sideboard by his desk.

That’s not because Al-Arab believes there is much inspiration in Das Kapital for a modern-day Egyptian banker. With rhetoric flying around the confused nation, he tells the story that after the revolution, his clients and colleagues were speculating what type of democracy and economy would emerge from the chaos. Will it be the Islamist Muslim Brotherhood and its Shariah doctrine? Or could it even be communism?

Al-Arab jokes that it doesn’t matter who comes. "I can say to the brothers that he was a salafi," he says, referring to the pious, heavily bearded 12th-century followers of Islam. And the communists would recognize him too. "I could tell any of them, ‘Look, I’m a believer!’"

As CIB employees break for midday prayers in the lift lobby outside, he agrees that Egypt’s banks are sound. "We are proven to be well structured and well capitalized. We got through the 2008 financial crisis, and then we went through the revolution, and banks are solid.

"What brought the banks down in Europe and the US was a lack of financial oversight; it is different here in Egypt. In terms of asset quality, liquidity and capitalization, we are by far better than the majority of the countries in this region."

Rare in being Egyptian-owned and privately held – its share free-float is 91% of issued stock – CIB boasts a market share of 8.1% in loans and 7.1% in deposits made at its 155 branches nationwide, not far shy of the Italian-owned AlexBank. But CIB’s shares were hit hard in the aftermath of the crisis, down to almost half its year high, against the Cairo stock exchange’s benchmark EGX30 index, which is off 35%. The bank’s stock began to marginally edge back in August after it reported a better-than-expected 11% fall in second-quarter profits of E£443 million on the earlier quarter.

"We got hammered," laments Al-Arab. "Obviously I’m poorer now, but people are starting to calm. Policy is starting to open again, and we’ve started to lend more. There is starting to be a catch-up, even in tourism at [the Red Sea resort of] Sharm El-Sheikh, which had been cursed [because Mubarak was exiled there after resigning].

"But from now until the parliamentary election it’s going to be very much like a rollercoaster. Some good days, some bad days. Fasten your seatbelt. After the elections, the fundamentals will not have changed, there are still 80 million people who have to eat, grow, find houses, raise their families. But I know smart people closing deals now, while prices are depressed."

He adds: "The entire business model is changing. The previous business model was built around who-do-you-know – who do you know to bribe to get a licence, or a permit to expand. When the model changes from who-do-you-know to what-do-you-know, this country will flourish."