Two's company

Pierre Loza finds out why mergers between banks are easier said than done

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Latest mergers and acquisitions in the banking sector

Law 88/2003 aimed at reducing the number of players in the banking sector from a weak many to a powerful few. In the wake of the legislation banks have rushed into mergers in an effort to consolidate their positions in a market where the number of players is expected to shrink by two-thirds over the next few years.

Ahmed Nazif's government has further catalysed restructuring in the sector by pushing forward the privatisation of state-owned banks. Moves to enlarge the nation's banks are driven by the belief that the more streamlined operations that result will better utilise existing assets and allow the remaining banks to increase lending. More loans, more investment, higher growth rates leading to more jobs -- that, at least, is how the cycle is supposed to work.

Rashad Abdu, general manager of the Arab African Bank, is not totally convinced. Though he concedes that sustained economic growth cannot take place in the absence of capable financial institutions, he does not believe that larger banks will automatically generate a growth in GDP. "It is helpful to have larger banks that can provide investors with the liquidity they need but at the end of the day growth is determined by whether the government adopts expansionary or contractionary economic policies."

Abdu questions whether the high profile accorded the proposed merger of Banque Misr and Banque du Caire, Egypt's second and third largest state banks, was altogether wise.

"The government announced the merger would happen in six months. Now we are hearing that it has been postponed for a year. This reveals a lack of transparency and opens the door to speculation. It's not as if these are military secrets. People have a right to know," said Abdu.

Nor does he think the ramifications of the merger of two state- owned banks with combined assets of LE136 billion have been sufficiently explored by the government. If the aim is to consolidate banking services, argues Abdu, then it would be far more effective to concentrate on small- to medium-sized banks, where the technological infrastructure is generally weak.

Non-performing loans (NPLs) are a major hurdle to mergers within the sector. In readying itself for privatisation the Bank of Alexandria was obliged to settle its public sector NPL portfolio by issuing 20-year bonds earning 10 per cent a year. The merger of Banque Misr and Banque du Caire must address the LE8 billion of bad debts -- 20 per cent of its loan portfolio -- accumulated by the former.

Not that NPLs are the only problem.

"Although NPLs represent an obstacle to mergers an even greater problem is dealing with social insurance packages for employees," believes Said Abdel-Ghaffar, manager of the Arab Egyptian Bank for Real Estate.

There are two types of social insurance in the banking sector, a complementary package and a substitution package. Complementary packages, operated under the auspices of the Authority for Social Insurance Supervision (ASIS), require employees to pay LE1,000 a year towards their cover. In the case of a merger taking place the distribution of the accumulated funds will be determined by actuarial study.

According to Mohsen Ismail, general manager of ASIS, the merger contracting process has generally ignored how to deal with such funds: "I think the banks either overlooked these funds and how they should be dealt with, or were sometimes unaware of their existence."

Substitution packages must cover a minimum of 1,000 employees, and be capitalised at no less than LE10 million. They operate under the auspices of the Social Insurance Ministry.

"It is very difficult to merge banks where one has a substitution fund and the other a complementary fund," says Ismail. In some cases, such as the merger of National Société Générale and Misr International Bank, a large number of senior employees of the latter applied for redundancy to ensure they retained their share in the fund, severely depleting the capital, and forcing the Central Bank of Egypt to amend Article 10 of Law 64/1980.