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  • 1. Global Research BankingEgyptEgypt Banking Sector Heating Competition ... September 2008

2. Global Investment House KSCC Sharq, Global Tower P.O. Box 28807 Safat 13149 Kuwait Tel: (965) 295 1000 Fax: (965) 295 1005 E-mail: [email protected]w http://www.globalinv.netGlobal Investment House stock market indices can be accessed from the Bloomberg page GLOH and from Reuters Page GLOB Omar M. El-Quqa, CFA Executive Vice President [email protected] Phone No: (965) 295 1110Faisal Hasan, CFA Head of Research [email protected] Phone No: (965) 295 1270Mahmoud Soheim Manager-Egypt Research [email protected] Phone No:(202) 37609526Cherine Fayez Farkouh, CFA Financial AnalystSenior Financial [email protected] Phone No: (202) 37609526Naveed Ahmed Financial Analyst [email protected] Phone No: (965) 295 1280 3. Table of ContentsInvestment Summary .......................................................................................................... 1Economic Overview ............................................................................................................ 4Background on the Banking Sector ................................................................................... 8Financial Performance of the Banking Sector ............................................................... 15Peer Group Comparison .................................................................................................. 28Banking Sector Outlook ................................................................................................... 33Valuation & Recommendation ........................................................................................ 34Players Profile Commercial International Bank .................................................................................. 37 National Societe Generale Bank ................................................................................. 58 Credit Agricole-Egypt ............................................................................................... 78 The Egyptian Gulf Bank ............................................................................................ 98 Export Development Bank of Egypt ......................................................................... 115 4. Global Research - EgyptGlobal Investment HouseInvestment Summary The Egyptian banking sector has gone through major reforms in the last few years. The main reasons triggering such reforms were to eliminate disturbed banks and to enhance the assets quality and capital adequacy of the banking sector.The problem rose when the large four public banks, constituting approximately 50% of the sectors total assets in 2003, had a huge amount of Non Performing Loans NPLs, resulting mainly from extending large portions of loans to distressed public enterprises, in addition to having a lack of adequate risk management practices.Therefore, the government decided to restructure the banking system through several methods. One of which was to sell stakes of public banks in other joint ventures in order to solve the NPLs problem. Another form was to amend regulations concerning the minimum required paid-in capital and the capital adequacy ratio.A consolidation trend prevailed in the banking sector, during the last few years. Small banks and poor performers were easy acquisition targets, as they couldnt abide by the regulations modified by the Central Bank of Egypt CBE, while foreign banks were involved in such actions, in an attempt to enter the Egyptian banking sector, especially after the governments announcement that no banking licenses will be granted for the time being.This foreign interest in the Egyptian banking sector reflects how the sector is perceived as having a promising growth potential, given the fact that there is a low banking penetration rate and many of the Egyptians do not have banking accounts. Besides, a large proportion of the population is in the youth age, lying between 20 and 45 years old, implying a potential growth of demand from this group. Another factor drawing the foreign interest is the continuing growth of the economy, which was reflected on many sectors. This growth, in turn, provided an improved business climate and encouraged investments by Egyptians and foreigners as well. The result was greater lending opportunities necessary to finance emerging projects, boosting the performance of the banking sector and implying promising aspects.Foreign interest was illustrated by the participation of foreign players, whether international or regional banks in the bids that took place to acquire stakes in the Egyptian banks. These banks include BNP Paribas, Barclays, Piraeus, Credit Agricole, Societe Generale, BLOM and Audi. Foreign banks expressed their desire to enter the Egyptian banking sector by offering higher premiums in bids over local banks. The latest acquisitions that took place in 2007 were the acquisition of a 51.3% stake in the National bank for Development by Abu Dhabi Islamic Bank, as well as the acquisition of a 98.1% stake in Al Watany Bank of Egypt by the National Bank of Kuwait.Another attempt by the Egyptian government to enhance the performance of the banking system was the privatization of Bank of Alexandria in 2006, where the Italian Intesa San Paolo Bank acquired an 80% stake in the Bank, reflecting again the attractiveness of the banking sector in Egypt.Banque du Caire was about to be privatized, but the deal was cancelled in June 2008, as the presented bids did not match the value set by the government for the Bank. It is worthSeptember 2008Egypt Banking Sector1 5. Global Research - Egypt Global Investment House mentioning that there were 5 International and regional banks competing to acquire a stake in the Bank, which was set to be a maximum of 67% of the Banks shares. These banks were the Saudi Samba Bank, the National Bank of Greece, the British Standard Chartered Bank, a consortium composed of the Jordanian Arab Bank group and the Saudi Arab National Bank, and another consortium led by Mashreq Bank. The Saudi Samba Bank and the British Standard Chartered Bank did not participate in the auction, as they did not present bids. On the other hand, the three remaining banks presented their bids, with the highest price being that presented by the National Bank of Greece, amounting to US$1.4bn. Surprisingly, the government declined to sell the Banks stake at that price, revealing that the Banks intrinsic value is much higher.As for the regulatory intervention in the banking system, the CBE has moved towards targeting inflation through employing a tight monetary policy and assigning the Monetary Policy Committee MPC, which main responsibility was to set each six weeks the deposit and lending rates at the CBE. This is done in accordance to the prevailing rate of inflation. Given the economic growth that the country is witnessing, along with skyrocketing food and energy prices internationally and in the local market, inflation reached 23.6% in August 2008, forcing the CBE to raise its rates to reach 11.5% and 13.5% in September 2008, respectively.Our outlook for the Egyptian banking sector is positive, on the back of the promising prospects of the Egyptian economy and the resulting attractive investment climate. This climate is expected to spur projects in various sectors along with attracting foreign investments, representing enormous lending opportunities for banks in Egypt.Additionally, there are still plenty of hidden opportunities in the sector. These are represented by many segments that do not participate extensively in the banking activity. The most apparent opportunities rely in the retail segment, which is almost unexploited. Large percentage of the population has no banking accounts. This represents a great potential for Egyptian banks, as they can capitalize on growth opportunities in this segment, given the growing demographics and the fact that more than half of the population is in the working age. Hence, demand from this segment is huge and is expected to increase furthermore. This is one of the reasons that triggered almost all private banks to announce the expansion of their branches in 2007 to satisfy larger client base.Other untapped segments are the mortgage lending and lending to the Small and Medium Enterprises (SMEs). These segments constitute a minor fraction of the banks loans due to the high risks associated with them. However, the latest government regulations concerning the registration of the housing units and the SMEs, along with the establishment of the credit bureau are expected to boost lending to such segments.Another key driver for potential growth is the fierce competition existing among local players. Though the number of banks was reduced from 62 banks in 2000 to 41 banks now, local lenders compete harshly to gain more market shares, through introducing new products and services, as well as investing in their infrastructural system.The growth of the banking activity over the last few years supports our positive vision for the banking sector. This is expressed by the development of the total deposits and loans in the2 Egypt Banking Sector September 2008 6. Global Research - Egypt Global Investment Housesector. Total deposits (including government deposits) grew at a CAGR of 14.6% over theperiod from 2002/03 to 2006/07, reaching LE658.2bn, while total loans increased at a CAGRof 5.6% during the same period, reaching LE352.4bn in 2006/07. Table 01: Global Valuation Matrix Upside Price (LE) Target (LE) Reco.Potential BVPS* (LE)EPS* (LE) P/BV* (x) P/E* (x) CIB 46.9 49.0Hold4.514.65.0 3.29.5 NSGB30.0 34.3 Buy14.4 13.24.0 2.37.5 CAE 15.2 17.0 Buy11.8 5.8 1.7 2.68.7 EGBE (US$)2.6 2.0 Sell-22.5 0.9 0.1 2.8 23.0 EDBE21.1 20.6Hold-2.2 12.82.9 1.67.2Source: Global Research, market prices as of September 7th, 2008.* Based on 2008E for all banks and 2008/09E for EDBE, adjusted for goodwill and extraordinary items, if any.September 2008Egypt Banking Sector 3 7. Global Research - EgyptGlobal Investment HouseEconomic Overview The Economy is Still Gaining Momentum Following the sound performance of the Egyptian cabinet led by Prime Minister Ahmed Nazif since 2004, the Egyptian economy has strengthened and showed positive signs. Effective means were carried out resulting in a buoyant GDP growth and major improvements in various sectors. The government implemented several economic reforms including privatization, cutting tax rates, attracting foreign investments, financial sector reforms, as well as public and private sector reforms. These reforms were reflected by a better investment climate.Nominal GDP went up at a CAGR of 14.1% during the 5-year period from 2001/02 to 2006/07, whereas real GDP witnessed a 5.1% CAGR over the same period. Considering y- o-y growth, nominal GDP grew by 18.4% in 2006/07, reaching LE731.2bn, while real GDP increased by 7.1%, reaching LE486.5bn.Moreover, nominal GDP grew by 21.0% y-o-y, over the 9M period ending March 2008, as it reached LE652.7bn, compared to LE539.4bn, realized in the same period of the previous year.The development in the general economy was transmitted to a better standard of living for Egyptians, as the per capita GDP rose at a CAGR of 6.3% in the last five years and at 16.8% y-o-y, from US$1,460 in 2005/06 to US$1,706 in 2006/07.Contributing Sectors The sectors that showed major contribution to the GDP in 2006/07 were the agriculture sector with 13.8% of GDP, the extractive industry (compromising petroleum and natural gas), contributing to 15.2%, whilst the manufacturing industry alone constituted 16.8% of GDP. Finally, the wholesale and retail trade portion of GDP was 11.4%.The extensive efforts of the Egyptian government resulted in better than planned figures, as the actual fiscal deficit in 2006/07 amounted to LE54.7bn, compared to an estimated figure of LE62.2bn. Such decline was a result of the 9.9% increase in the actual revenues over the budgeted figure, reaching LE180.2bn instead of LE163.9bn, which was a consequence of an 8.2% rise in tax revenues. The actual fiscal deficit realized in 2006/07 represented 7.5% of GDP, compared to 8.2% in 2005/06, showing evidence of the significant efforts implemented by the government.Current Account Egypt has proven competitiveness in the export market illustrated by the increase of the exports by 19.3% y-o-y in 2006/07, reaching US$22.0bn and a 25.3% CAGR from 2001/02 to 2006/07.It is worth mentioning that the major component of exports in 2006/07 included fuels, mineral oil and products, constituting 46.6% of total exports. Finished goods, in turn, attributed to 34.2% of total exports in the same year.The major export market for Egypt in 2006/07 was the European Union, with a share of 33.8%. The second highest market was the USA with a 31.1% share, followed by Asia, with 4Egypt Banking SectorSeptember 2008 8. Global Research - EgyptGlobal Investment House 13.5%. Exports to the USA, growing by 21.4% from 2005/06 to 2006/07, have significant importance in the external trade market for Egypt. One of the main reasons that led to increasing exports to the USA was the Qualified Industrial Zones (QIZ) Protocol that Egypt entered in 2004, which helped boost exports to the USA, given the fact that Egypt could export goods to the USA without quota or duties. Exports to the Arab countries were 12.4% in the same year, while the remaining 9.2% of total exports were distributed among Europe, Africa and other countries.On the other hand, imports grew by 24.3% y-o-y in 2006/07, realizing US$37.8bn. The major portion of imports was directed to the intermediate goods, which constituted 27.6% of the total Egyptian imports, then came the investment goods with 26.0%, while consumer goods reached 14.0%. It is worthy to note that the major export markets were the same main import markets, the European Union, the USA and Asia, with 34.4%, 21.8% and 15.9% of total imports, respectively.The fact that imports reached US$37.8bn in 2006/07, while exports reached only US$22.0bn, resulted in a preliminary trade deficit of US$15.8bn. Fortunately, this deficit was compensated by a 39.8% increase in the services account, which was mainly attributed to receipts from transportation, especially from the Suez Canal, as well as growth in investment income.Such improvements in the services account along with the 27.3% y-o-y increase of net transfers, contributed to a rise in the current account surplus by 53.9% y-o-y in 2006/07, reaching US$2.7bn, compared to US$1.8bn recorded the previous year.In March 2008, exports proceeds surged by 31.1% y-o-y, reaching US$20.8bn. This incline was pushed by the 35.4% increase in oil exports and the 27.4% rise in other exports. As for imports, they amounted to US$37.6bn, realizing a y-o-y growth of 43.1%. This was attributed to the significant surge in oil imports, growing by 138.1% y-o-y, reaching US$6.8bn, along with the 31.5% rise in other imports, amounting to US$30.8bn. The fact that growth in imports surpassed that of exports resulted in an increase in the trade deficit balance, reaching US$16.8bn, compared to US$10.4bn, over the same period a year before.It is worth mentioning that this deficit was compensated by a surplus in the service and transfers accounts by US$10.9bn and US$6.4bn, respectively. This led to a surplus in the current account, amounting to US$488.4mn. September 2008Egypt Banking Sector5 9. Global Research - Egypt Global Investment HouseAccelerated Inflation After the floatation of the Egyptian pound in 2003 and the enhanced confidence in the Egyptian economy, as a result of the economic reforms adopted by the government, the demand for investing in Egypt increased, causing an appreciation of the local currency against the US$ starting from 2005. The exchange rate reached LE5.5:US$1 in Nov 2007, compared to LE5.8:US$1 in 2005. Fortunately, the appreciation of the Egyptian pound did not negatively affect the Egyptian exports, as shown earlier.In 2005, the Central Bank of Egypt moved towards inflation targeting. For this purpose, it established the Monetary Policy Committee, which was scheduled to meet every six weeks to identify the corridor range, representing the overnight deposit and lending rates at the CBE, which were set initially at 9.5% and 12.5%, respectively. In June 2006, rates were reset at 8.0% and 10.0%. Since then, these rates have been moving according to the development of the inflation rate. In April 2008, the inflation reached 16.4%, while deposit and lending rates reached 10.0% and 12.0% in May 2008, respectively.In May 2008, the government announced the removal of tax exemption on treasury bills, private schools and universities, as well as extensive energy consuming industries, operating under the free-zones system, mainly fertilizers, cement, steel and petrochemicals. In addition, energy subsidies have been reduced for all energy intensive industries. Moreover, new fees were imposed on car licensing, with different categories according to the engines types. Later on, the tax exemption on newly issued treasury bonds was also removed.These decisions were reflected on higher inflation, reaching 23.6% in August 2008, pushing the MPC to further raise the corridor range, which reached 11.5% and 13.5% in September 2008, respectively.Hikes in inflation during the last few years were also a result of the increased money supply in the Egyptian economy, which was illustrated by the jump of the Domestic Liquidity (M2) by 18.3% in 2006/07, reaching LE662.7bn. This could be attributed to the 20.1% growth in Narrow Money Supply (M1) and the 17.8% rise in Quasi Money. These rises were a result of the growth realized in the economy, which triggered the development of many investment projects, leading to the current increase in liquidity witnessed in the banking system.On the other side, interest rates reflected a slight decrease over the period from 2003/04 to 2006/0 7, where deposit rate for less than one year declined to 6.9% in June 2007 from 7.77%. Also, the lending rate for less than one year went down from 13.27% to 12.60%. 6 Egypt Banking SectorSeptember 2008 10. Global Research - EgyptGlobal Investment HouseOutlook for the Egyptian Economy Our outlook for the Egyptian economy is positive given the strong growth realized since the appointment of the current cabinet in 2004. The achievements made in various sectors of the economy and the thriving investment climate are all signs of continuing development in the years to come.The continuous efforts of the government towards improving the economys growth support our positive vision for the Egyptian economy, as the government announced many objectives to be achieved within the 5-year governmental plan ending mid 2012. Such objectives are represented by shifting the annual GDP growth to 8%, decreasing inflation to 6%, reducing unemployment to 5.5% down from 9% along with other objectives, which if achieved should bring fruitful benefits to the Egyptian economy. We believe such objectives could be realized relying on the fact that the Egyptian cabinet has proven to be successful in reaching planned goals.Currently, the main challenges facing the Egyptian economy are the rising inflation rate and the weakening US Dollar. Up till now, the government has been successful in dealing with both problems, which are more external than internal. September 2008 Egypt Banking Sector7 11. Global Research - Egypt Global Investment HouseBackground on the Egyptian Banking Sector Banking Structure Development The first Egyptian bank was the National Bank of Egypt NBE, which was established in 1898, with a capital of GB1mn. It used to perform the duties of a central bank in the 1950s. Banque Misr BM was then established in 1920 followed by Banque du Caire BdC in 1952 and Bank of Alexandria BoA in 1957. The Central Bank of Egypt CBE was established in 1961. During the 1960s, banks were nationalized and NBE acted as a commercial bank, while still carrying out some of the duties that were not covered by the CBE at that time.The open door policy adopted in Egypt in the 1970s to attract foreign investments resulted in an expansion of the banking system, which was composed at that time of 4 public banks, 3 investment banks and 19 specialized banks. Meanwhile, the banking law was established, identifying the three types of banks, along with the functions of each type.The banking structure swelled significantly since then and until the 1990s, as the number of banks soared from 26 to 63 banks in 1999. The branch network also expanded from 527 to 2,434 branches. As a result of the consolidation movement that took place in the sector during the last few years, represented by mergers and acquisitions actions, and the fact that 7 branches of foreign banks ended their business in Egypt, the number of banks shrank to 41 by 2007 and the branch network expanded to compromise currently 3,252 branches in order to cover larger client base.Table 02: Banking Structure Development Commercial End of JuneInvestment Banks Specialized Banks Total # of Banks Banks1970 5 020 2519754319 26198019 29 452198543 33 480199044 33 481199528 32 464200028 31 362200527 22 352200623 17 343 Source: CBE, Global ResearchChart 01: Banking Structure in 2006/07 It is worthy to note that the private andOff-Shore BanksPublic Sector joint venture banks constituted 68.3% 17.1%14.6%of the total number of banks in 2006/07, whereas off-shore banks and public banks shares were 17.1 and 14.6%, respectively. Private and JointVentures 68.3%Source: CBE, Global Research 8Egypt Banking SectorSeptember 2008 12. Global Research - Egypt Global Investment HousePoor Performance Triggered ReformsThe Egyptian banking sector was dominated by the four large public banks NBE, BM, BdCand BoA. As a result of long existence in the Egyptian market and accordingly, having hugenumber of branches serving greater share of the population compared to the private banks,the public banks constituted approximately half of the sectors assets in 2003. This beingthe case along with the fact that these banks provided large portion of their loans to publicenterprises had negatively impacted the performance of the four banks and resulted in acombined non-performing loans/ total assets ratio of approximately 12% in 2002. That said, the Egyptian government was urged to alleviate the banking systems turmoil,realizing its importance in the development of the economy. Therefore it devoted significantefforts to make major reforms in the sector, including amendments in some regulations,accompanied by privatization and consolidation actions. The main objective behind thesereforms was to improve the sectors efficiency, in terms of asset quality as well as capitaladequacy. Public Banks Being the Primary ConcernThe Government adopting several reforms tools, began with selling stakes of public banks injoint venture banks to curb the problem of hefty bad debts. The following table summarizesthe public stakes sold over the period from 2004 to 2007.Table 03: Sale of Public Banks Stakes in Joint Ventures Divested Public Bank Acquirer Acquired Shares in Joint VenturesRipplewood ConsortiumCommercial International Bank National Bank of Egypt Arab Banking Corporation International Suez Canal BankSociete Generale National Societe Generale Bank Banque MisrNational Societe Generale Bank Misr International BankBLOM BankEgypt Romania BankArab African International BankMisr America International Bank Banque du CaireAudi Cairo Far EastUnion National BankAlexandria Commercial and Maritime Bank of Alexandria Barclays Cairo BarclaysPiraeusEgypt Commercial BankCredit AgricoleEgypt American BankShareholders in Delta International Bank Delta International BankNational Investment Bank Misr Iran Development Bank Source: Ministry of Finance, Global ResearchIn 2005, Non-performing Loans NPLs owed by public enterprises to public banks amountedto LE 26bn. The government paid as fractional settlements for these loans LE6.9bn in January2006 and LE9.1bn in December 2006, with the remaining amount to be finalized by 2009,according to the governments plan. Moreover, the government has appointed skilled management and staff, along with improvinginternal processes of state-owned banks, in order to raise their competitiveness.September 2008Egypt Banking Sector 9 13. Global Research - EgyptGlobal Investment House Notable Reforms to the Whole System Aiming at enhancing the banking systems competitiveness in terms of adequate capital together with improving the capabilities of banks to meet default on their loans, the government has set regulations for increasing the minimum required paid-in capital and capital adequacy ratio. Additionally, the government enhanced the role of the CBE in regulating the sector and assigned it more responsibilities.As an additional attempt to control NPLs for the whole banking system, the CBE issued a decree in September 2004 to establish a unit in the CBE to monitor the banks NPLs books and asked banks to establish a similar internal unit. The role of the CBE would be to continuously monitor these units to make sure that they are well implemented and well performing to deal with NPLs. The efforts performed by this unit resulted in the settlement of 67% of NPLs in private banks over the period from 2004 to March 2007.Recently, a credit bureau, under the supervision of the CBE, has been established with the aim of providing information to banks regarding personal and financial information on borrowers, as well as their financial history, including loans defaults, bankruptcies, court judgments and late payments. Other positive information such as timely settlements is also included. The objective of establishing this bureau was to facilitate time saving procedures. According to this process, borrowers will not have to wait for a long time until the bank investigates their financial position and approves loans requests. Furthermore the risk of default will diminish by providing banks with accurate information that will help them in their decision making.Moreover, the government motivated the consolidation of the sector through privatization, mergers and acquisitions to get rid of disturbed banks.Consolidation Dominated the Sector The Government aimed at consolidating the banking sector in order to increase the players competitiveness and eliminate lowly performers. An important factor contributing to the consolidation of the banking sector was the amendments of regulations by the CBE.According to the Unified Banking Law of 2003, the minimum required paid-in capital was raised to LE500mn from LE100mn. In addition, the capital adequacy ratio was raised from 8% to 10% of the risk-weighted assets. It is worthy to note that this law gave the CBE more responsibilities as a regulatory organization, where the governor directly reports to the countrys President.Meanwhile, these amended regulations spurred local banks, especially small ones and poor performers to opt for mergers and acquisitions in order to conform to the new laws. 10Egypt Banking Sector September 2008 14. Global Research - Egypt Global Investment HouseTable 04: Banks Mergers during the Period from 2004 to 2007 First Bank Second Bank New EntityDate American Express Bank (Branches inEgyptian American BankEgyptian American BankSep-04 Egypt) Misr Exterior Bank Banque Misr Banque Misr Sep-04 Credit Lyonnais Branch Credit Agricole IndosuezCalyonMar-05 Misr America International BankArab African International Bank Arab African International Bank Sep-05 Mohandes BankNational Bank of EgyptNational Bank of EgyptOct-05 Bank of Commerce and Development National Bank of EgyptNational Bank of EgyptDec-05 Nile Bank with Islamic InternationalUnited Bank of EgyptUnited Bank of EgyptJun-06 Bank for Investment and Development Egyptian American Bank CalyonCredit Agricole Egypt Sep-06 Misr International BankNational Societe Generale BankNational Societe Generale Bank Nov-06 Banque du CaireBanque Misr Banque Misr Feb-07 Source: Ministry of Finance, Global ResearchForeigners Chasing Opportunities in the SectorForeign banks have shown continuous interest in the booming banking sector in Egyptin the last few years. This was due to a number of reasons, the majority of which were apure result of the economic reforms, as well as the banking reforms that Egypt is currentlywitnessing. Such reforms helped boost the banks profitability over the last few years, alongwith decreasing NPLs gradually and entailing good lending prospects. The major inducement for the foreign interest was the escalating demographics in Egypt andits resulting potential for the retail segment, as the population rose at a CAGR of 2% overthe last 5 years, reaching 75mn in 2006/07, with a high percentage of youth, almost in theworking age group. We believe that a wide range of the population in Egypt has a low oreven zero banking penetration. This could be attributed to the low income levels, the lack ofawareness of the importance of participation in banking activities, in addition to the informaljob market. Foreign attention was thus stimulated by the short of saturation of the retailsegment in an attempt to capitalize on the huge unfulfilled demand. In addition, foreign players were enticed to participate in mergers and acquisitions, especiallyafter the Governments announcement regarding not granting any new banking licenses. The foreign interest was divulged by the flow of international foreign and Arab banksacquisitions of local lenders since the banking sector reforms were initiated in 2004. It beganwhen the British bank Barclays acquired from banque du Caire its 40% remaining stake inCairo Barclays. Other foreign banks that acquired stakes in the sector over the last few yearswere Credit Agricole, Societe Generale, Piraeus, BLOM Bank, Abu Dhabi Islamic Bank andNational Bank of Kuwait. Yet there was a larger range of foreign banks that revealed theirinterest in the Egyptian banking sector and strived to obtain stakes in it, but they did not reachtheir target to win the related bids.September 2008 Egypt Banking Sector11 15. Global Research - Egypt Global Investment House Table 05: Most important Acquisitions over the Period from 2005 to 2007 DealAcquisitionAcquisition BV per BV P/BV Acquired BankAcquirer%Value DatePrice (LE) share Weights *(LEmn) Misr America Arab African May-05 100.0239.5 239.5 146.0 18.2% 1.6 International Bank International Egyptian CommercialPiraeus Jun-0588.020.0 169.018.0 2.2%1.1 Bank**Arab International Suez Canal BankAug-0516.810.048.229.4 3.7%0.3Bank Misr InternationalNSGBSep-0590.743.22,204.0 21.4 2.7%2.0 Bank Misr Romania *** BLOM Bank Dec-0599.411.8 590.013.7 1.7%0.9 Egyptian AmericanCredit Agricole Feb-0674.645.02,176.6 11.8 1.5%3.8 BankA consortium led by CIB****Feb-0618.753.51,302.5 16.3 2.0%3.3Ripplewood Holdings Cairo Far East Audi Bank Mar-0699.7 205.3 540.170.6 8.8%2.9 Misr IranNational InvestmentApr-0629.9 223.4 107.7 411.8 51.4% 0.5 Development Bank Bank Delta InternationalA consortium led byAug-0689.337.01,652.0 11.5 1.4%3.2 Bank Ahli United Bank AlexandriaUnion National Bank Aug-0694.823.0 244.515.3 1.9%1.5 Commercial Maritime Bank of Alexandria San Paolo Dec-0680.072.09,215.0 10.4 1.3%6.2 National Development Abu Dabi IslamicJul-0751.311.0 159.111.2 1.4%1.0 Bank BankA consortium led Al Watany Bank ofby National Bank of Dec-0798.177.05,660.2 13.8 1.7%5.6 EgyptKuwait Total 801.3 100% Average P/BV (Simple) 2.3 Average P/BV (Weighted) 1.3Source: News Announcements, Global Research * P/BV Calculation (Equity less net profit of the year /outstanding number of shares). **In June 2005, Piraeus acquired around 69% of the Egyptian Commercial Bank, bringing its total stake to 88.0%. ***In December 2005, Blom Bank acquired around 84% of Misr Romania Bank, in which it originally owned 12.5%, bringing its total stake to 96.7%.Later on, it raised its stake to 99.4%. ****Currently, the Consortiums stake in CIB is 5.6% Two Major Acquisition Bids in 2007 The year 2007 witnessed two acquisitions of local lenders by Arab banks mainly from the GCC countries, attracted by the positive sentiment on the Egyptian banking sector. In June 2007, the CBE announced its approval for three foreign banks to conduct due diligence on Al Watany Bank of Egypt. The three banks were National Bank of Kuwait NBK, Commercial Bank of Kuwait and the Greek EFG Eurobank. NBK won the bid and acquired 70.3mn shares of Al Watany Bank of Egypt at LE77.0 per share in November 2007, implying a P/BV of 5.6x. In addition, NBK acquired a 2.1% additional stake in the Bank in December 2007, where its total stake reached 98.1%.12 Egypt Banking SectorSeptember 2008 16. Global Research - EgyptGlobal Investment House In July 2007, a consortium led by Abu Dhabi Islamic Bank acquired 51.3% of the National Development Bank at LE11 per share, which was close to the shares book value. The National Development Bank had NPLs of LE2bn, exceeding 50% of the Banks total loans, which- according to the acquirer- will be covered over a 5-year period, during which no cash dividends will be distributed.It is worth mentioning that the Egyptian Gulf Bank and the Arab Investment Bank are potential acquisition targets, due to their relatively low market shares, low capital base and modest performance, compared to large peers in the market.One of the Big Four Privatized The foreign appetite in the Egyptian banking sector was again revealed in the privatization deal of BoA. In February 2006, the government announced its intention to privatize BoA, the smallest bank of the large four public banks, through selling a stake of 75-80% of the Banks shares to a strategic investor, 15-20% to the general public through an IPO and 5% to be allocated to the Banks employees. There were 13 banks that submitted requests to purchase the announced stake, comprising international, regional and local banks, of which 8 banks presented preliminary offers. The CBE allowed 6 of these banks to perform due diligence on BoA, among which were Mashreq Bank, Intesa San Paolo Bank, Arab Bank, CIB and BNP Paribas. The final purchase offers presented were from 4 European and Arab banks not including any local bank. Finally, in October 2006, the Italian Bank Intesa San Paolo won the bid and acquired after 2 months, 80% of the Banks shares at a total of LE9.2bn (US$1.6bn), representing US$12.6 per share, which was more than 5.5 times the shares book value. The second highest premium was presented by the Arab Bank, which offered LE7.9bn (US$1.4bn).The government is currently awaiting the right time to offer the remaining 15% of BoA shares through an IPO.The privatization of BoA revealed the foreign players will to acquire a local bank at a high premium, just to ensure a seat in an under-banked country with robust growth potential.Privatization of BdC Postponed Surprisingly Still attracting foreign lenders, the government was about to privatize the third largest public bank BdC. The story began in May 2007 when the government announced the merge of BdC with BM. Three months later, it was announced that BdC, which captures a 6% market share in terms of total deposits and also of total assets of the banking sector, would be privatized. The privatization would have occurred through selling a maximum stake of 67% to a strategic investor, offering a 28% stake through an IPO in the stock exchange, with the 5% remaining stake to be distributed among the Banks employees. Among 14 financial advisory institutions, JP Morgan was assigned responsible for the sale. The preliminary offers presented, amounting to 12 offers illustrated the flow of foreign interest to gain presence in the market. These offers were represented by the Arab Bank Consortium, Deutsch Bank, Mashreq Bank, Kuwaits Noor Financial Investment Company, Commercial Bank of Kuwait and other foreign and Arab banks. In March 2008, the CBE announced the short-list consisting of 5 banks that were allowed to make the due diligence on BdC, these banks were the Saudi Samba Bank, the National Bank of Greece, the British Standard Chartered Bank, a consortium composed of the Jordanian Arab Bank group and the Saudi Arab National Bank, and another consortium led by Mashreq Bank. September 2008Egypt Banking Sector 13 17. Global Research - EgyptGlobal Investment House Surprisingly, the deal was cancelled in June 2008 and it was announced that the privatization of the Bank would be postponed, as the bids presented were below the minimum price set for acquisition.Two of the competing banks, Saudi Samba Bank and the British Standard Chartered Bank, were disqualified and did not participate in the bid. National Bank of Greece presented the highest bid, at US$1.4bn, followed by Mashreq Bank and the consortium composed of the Jordanian Arab Bank group and the Saudi Arab National Bank, presenting a price of US$0.9bn and US$0.8bn, respectively.Though the cancellation of the deal was surprising and raised questions regarding the reasons for not undergoing the privatization procedures, this event ensures the existence of inherent opportunities in the Banking sector, as the government viewed that the presented bids did not meet the real value of the Bank.Furthermore, the government announced that it was not planning to privatize the two remaining public banks (NBE and BM) in the coming five years to let the banks strengthen their institutional performance. 14 Egypt Banking Sector September 2008 18. Global Research - Egypt Global Investment HouseFinancial Performance of the Banking Sector Performance Positively Affected by Reforms The reforms taking place in the Egyptian banking sector since 2004 had positively influenced the performance of the banks in terms of improved consolidated assets and liabilities and resulting performance ratios. The period under analysis in our report is from 2002/03 to 2006/07 to show how the adopted reforms positively affected the banks performance. We will analyze the development of the consolidated assets, liabilities, deposits, loans of the banking sector, along with some performance indicators.Increased Money Supply The acceleration of the Egyptian economy, accompanied by the banking sector reform program, stimulated investments in various business sectors leading to an increase in the money supply in the market, which was translated into the incline of the consolidated assets and liabilities of the banking system.Domestic Liquidity (M2) increased by 18.3% y-o-y in 2006/07, reaching LE662.7bn, compared to LE560.4bn in 2005/06. Narrow Money Supply (M1), represented by currency in circulation and demand deposits in local currency, rose by 20.1%, reaching LE131.3bn, while Quasi Money, which consisted of time and saving accounts in local currency along with demand, time and saving deposits in foreign currency, moved up by 17.8% reaching LE531.4bn in the same year.Chart 02: Domestic Liquidity Development LEmn700,000 600,000 500,000 400,000 300,000 200,000 100,000 -2002/032003/04 2004/05 2005/06 2006/07M1Quasi MoneySource: CBE, Global Research Vast Funding Base The increased money supply in the banking system was reflected in rising figures of the aggregate assets and liabilities. The funding base, representing the key driver for the banks good performance has ameliorated in 2006/07 by 23.2% y-o-y, reaching LE937.9bn, compared to LE761.6bn in 2006. September 2008Egypt Banking Sector15 19. Global Research - EgyptGlobal Investment House Table 06: Aggregate Systems Liabilities In LEmn2002/03 2003/04 2004/052005/062006/07Capital18,155 20,346 22,949 27,112 33,037Reserves 11,805 11,454 12,419 13,418 12,552Provisions 40,099 44,584 49,541 54,950 53,469Long-term loans and bonds14,866 15,012 14,254 17,526 26,351Obligations to banks in Egypt35,579 29,933 22,671 21,488 82,619Obligations to banks abroad16,247 10,332 12,2628,770 10,006Total deposits403,144 461,697 519,649568,841649,953Other liabilities38,043 40,078 49,883 49,457 69,936 Total Liabilities577,938 633,436 703,628761,562937,923 Source: CBE, Global Research Since 2002/03, total deposits have been the major component of the banking system liabilities, reaching around LE650bn in 2006/07 and representing 69.3% of total liabilities.Chart 03: Composition of Aggregate Liabilities-2006/07 Capital 3.5% Other liabilities 7.5% Reserves 1.3% Provisions 5.7% Long-term loans and bonds 2.8% Obligations to banks in Egypt 8.8% Obligations to banks abroad 1.1%Total deposits 69.3%Source: CBE, Global Research Deposits Moving Up The aggregate deposits balance of the banking system, including government deposits, grew at a 15.2% y-o-y in 2006/07. The main driver behind the increase in total deposits was the escalating non-government deposits, which grew by 18.8% y-o-y in 2006/07, reaching approximately LE581.3bn and representing 88.3% of the total deposits. 16 Egypt Banking Sector September 2008 20. Global Research - Egypt Global Investment House Chart 04: Government and Non-Government Deposits Growth LEbn700 600 500 400 300 200 1000 2002/03 2003/042004/05 2005/06 2006/07 Total Government DepositsTotal Non-Government DepositsSource: CBE, Global Research It is worth mentioning that deposits in local currency represented 71.6% of total deposits in the banking system in 2006/07, while deposits in foreign currency represented 28.4% in the same year. The household sector contributes to 75.5% of total non-government deposits in local currency and 62.9% in foreign currency. The private sector comes second with 18.2% in local currency and 31.4% in foreign currency.Chart 05: Non-Government Deposits in LocalChart 06: Non-Government Deposits in Foreign Currency in 2006/2007 (Including cheques andCurrency in 2006/2007 (Including cheques and drafts) drafts) Non-ResidentsPublic Sector Non-ResidentsPublic Sector 0.8%5.5% 1.4%4.3% PrivateSector Private18.2%Sector 31.4% HouseholdHouseholdSector Sector75.5% 62.9%Source: CBE, Global Research Rise in Deposits Reflected on Total Assets The aggregate banking system figures in 2006/07 illustrate remarkable growth in total assets on the back of the realized incline in the sources of funds, namely deposits. Total assets grew by 23.2% y-o-y, reaching LE937.9bn. Looking at the components of assets, we realize that the securities and investments in treasury bills declined by 9.2% in 2006/07 and the loans and discount balances went up by the same percentage, which can be explained by the decrease in treasury bills yields, which was compensated by the increase in lending rates. September 2008Egypt Banking Sector17 21. Global Research - Egypt Global Investment HouseTable 07: Aggregate Systems Assets In LEmn 2002/032003/042004/052005/06 2006/07 Cash5,5575,412 6,594 6,813 7,705 Securities and investments in treasury bills111,337137,431170,659193,965 176,098 Balances with banks in Egypt110,874116,290124,986121,695 217,363 Balances with banks abroad 29,798 43,29051,20472,554 124,366 Loans and discount balances 284,722296,199308,195324,041 353,746 Other assets 35,650 34,81441,99042,49458,645 Total Assets577,938633,436703,628761,562 937,923 Source: CBE, Global ResearchLoans and advances have always captured the lions share of the banking systems total assets.The growth in total assets in 2006/07 was mainly driven by the acceleration of the loans anddiscount balances, constituting 37.7% of the total aggregate asset base of the sector. Chart 07: Composition of Aggregate Assets-2006/07Other assets 6.3% Cash 0.8% Securities and investments in treasury bills 18.8% Loans and discountbalances 37.7%Balances with banksin Egypt 23.2%Balances with banksabroad 13.3% Source: CBE, Global ResearchGrowing Loans BooksEgyptian banks benefited strongly from the large available funding base to expand theirlending capabilities in 2006/07. Loans books witnessed a y-o-y growth of 9.1%, which wasstimulated by the reforms that have been occurring in Egypt over the past few years, impactingvarious sectors, where the need rose for loans to fund necessary investments. Alternatively,the reforms that took place in the banking system positively affected the banks performanceand enhanced their ability to fulfill required loans.18Egypt Banking SectorSeptember 2008 22. Global Research - EgyptGlobal Investment House Chart 08: Loans Growth LEbn360350340330320310300290280 2002/032003/042004/052005/062006/07Source: CBE, Global ResearchGovernment loans in 2006/07 accounted for a minor fraction of the total loans in the banking system, representing only 7.6% and amounting to LE26.7bn, while the major component, consisting of 92.4% of total loans consisted of non-government loans reaching LE325.8bn. On the other hand, loans denominated in local currency represented 70.3% of the total loans in the same year.Most of the non-government loans in 2006/07 went to the industrial sector, as this sector contributed to 31.3% of the non-government loans in local currency and 41.1% in foreign currency. Then comes the services sector with 26.3% of loans in local currency and 36.7% in foreign currency. It is worthy to note that the retail lending represented only 17.0% of the total loans in 2006/07, which could be explained by the huge risk associated with lending to individuals compared to institutions, as probability of default is much higher. Besides, information on the financial position of borrowers was not yet available, but should be accessible shortly, as the credit bureau that will be responsible for gathering data on the financial position of the banks clients has been recently established. When such information will be available, retail lending is expected to ameliorate, especially with the huge unfulfilled demand for loans in the household sector.Chart 09: Non-Government Loans in Local Currency- Chart 10: Non-Government Loans in Foreign Currency- 2006/07 2006/07Agriculture SectorHousehold & ExternalAgriculture Sector2.9% Sector 8.1%1.0%Household & External Sector23.7%Industry Sector31.3%Industry SectorServices Sector41.1% 36.7% Services Sector26.3% Trade Sector15.8% Trade Sector 13.2%Source: CBE, Global Research September 2008 Egypt Banking Sector 19 23. Global Research - EgyptGlobal Investment House Projected Banking Figures We assumed future figures of the Egyptian banking system based on the forecasted figures of GDP by the International Monetary Fund. We took the average of the annual M2 as a % of GDP to project future balances of M2. We also projected future deposits balances based on the annual average of deposits/M2. It is worth mentioning that we have added a slight premium to this ratio to take into account the expected increase in deposits balances, as a result of the amendments on the corridor range. In addition, we projected future loans based on the average of the annual loans/deposits ratio, with a minor incline to reflect the increase that is expected to occur in loans balances as well.Table 08: Projected Figures of the Banking System In LEmnJun-05Jun-06Jun-07Jun-08 E Jun-09 E Jun-10 EJun-11 E GDP538,528.0617,676.4731,201.6 857,633.0 1,005,339.0 1,161,365.0 1,337,537.0 M2 493,884.0560,356.0662,688.0 780,617.6 915,059.6 1,057,074.4 1,217,426.2 % of GDP91.7% 90.7% 90.6% 91.0% 91.0% 91.0%91.0% % change y-o-y13.5% 18.3% 17.8% 17.2% 15.5%15.2% Deposits (including521,745.0571,461.0658,215.0 819,648.4 960,812.5 1,109,928.1 1,278,297.5 government deposits) % of M2105.6%102.0% 99.3%105.0%105.0%105.0% 105.0% % change y-o-y 9.5% 15.2% 24.5% 17.2% 15.5%15.2% Loans308,195.0324,041.0353,746.0 463,148.4 576,487.5 665,956.9 766,978.5 Loans/Deposits59.1% 56.7% 53.7% 56.5% 60.0% 60.0%60.0% % change y-o-y 5.1%9.2% 30.9% 24.5% 15.5%15.2% Source: International Monetary Fund, CBE and Global Research Performance Indicators As illustrated in the previous section, the banking reforms have positively influenced the performance of the banking sector, which was shown by the acceleration of the aggregate banking system figures over the period from 2002/03 to 2006/07. To highlight the effect of these reforms, we will present some performance indicators, including interest rate spread, a couple of profitability ratios and loans/deposits ratio.Interest Rate Spread The interest rate spread is the best indicator to show banks performance, as it illustrates the income generated from core banking activities.This income is generated through realizing a spread between the lending rate and the cost of funds, represented by interest rates on different deposits. The spread has been relatively stable over the last 4 years, as the rates are more or less moving together in the same direction.Banks generate additional income through other sources, one of which is reaping fees and commissions from lending activities and contingent liabilities offered to clients, in addition to fees from investment banking activities. Banks have other sources of income, but these are volatile. These sources encompass dividend income, gains on sale of financial investments, profits realized from foreign exchange operations, financial investments valuation differences and other items. 20Egypt Banking Sector September 2008 24. Global Research - EgyptGlobal Investment House Chart 11: Interest Rate Spread % 1413121110987652003/042004/052005/062006/07 Less than three-months depositsLess than six-months deposits Less than one year depositsLoans of one year or less Source: CBE, Global ResearchROAA and ROAE Moving Positively Profitability of the banking sector, measured by Return on Average Equity (ROAE) and Return on Average Assets (ROAA), have been positively affected by the reforms in the sector and the economy as a whole. ROAE and ROAA moved in an upward trend since 2003/04, reaching 14.3% and 0.8% in 2006/07, up from 9.8% and 0.5%, respectively.Chart 12: Profitability Indicators (2003/04-2006/07)%% 15.00.9 14.00.8 0.7 13.0 0.6 12.00.5 11.00.4 0.3 10.0 0.29.00.18.002003/042004/05 2005/06 2006/07ROAE ROAA (right scale)Source: CBE, Global ResearchA Significantly Unleveraged Sector Total loans witnessed a modest CAGR of 5.6% over the period from 2003/04 to 2006/07, compared to a CAGR of 14.6% in total deposits. As a result, the loans/deposits ratio declined from 64.2% to 54.4%. This implies that banks are still reluctant to use great portions of deposits in providing loans and having to bear the risk of default. Alternatively, banks prefer to invest more of their funds in less risky assets like treasury bills and other investments, while they have to abide by the minimum required liquidity ratio. They have to keep a minimum of 20% in liquid assets denominated in local currency and 25% in foreign currency. Meanwhile, the tax exemption previously exerted on treasury bills pushed banks to augment their investments in these instruments and put a break on their lending activity. This was another reason leading to the decline of the loans/deposits ratio. September 2008 Egypt Banking Sector 21 25. Global Research - EgyptGlobal Investment House As these practices were far away from the core banking activities, the government decided in May 2008 to remove the tax exemption shield on treasury bills gains, in an attempt to push banks to expand their lending facilities and restrain from investing their funds in a way that deviates from their core business. The tax exemption on treasury bonds was also cancelled afterwards.In the meantime, the relatively low loans/deposits ratio indicates that banks have enough room if they decide to direct more of their funds to lending opportunities.Chart 13: Loans/Deposits Ratio Development %66.0 64.0 62.0 60.0 58.0 56.0 54.0 52.0 2003/04 2004/052005/06 2006/07Source: CBE, Global ResearchCBE and Regulatory InterventionInflation on the Rise As described earlier, the growth in the Egyptian economy since 2004 led to an enhanced investment climate and increased money supply. This in turn led to a rise in aggregate demand and consumption, uncoupled with local production, resulting in soaring commodity prices. Simultaneously, the improvements achieved in many sectors resulted in increased raw material prices. Meanwhile, economic growth decreased the rate of unemployment and raised demand for labor, shifting wages upward. In addition, the increase in food and energy prices internationally was reflected on domestic prices. All these factors combined attributed to hiking prices and inflation reaching 23.6% in August 2008, compared to 6.9% in December 2007.Tight Monetary Policy Targeting Inflation The Unified Banking Law of 2003, which identified the various functions of the CBE, gave it a free-hand to implement the appropriate monetary policy. The policy adopted by the CBE is a tight one aiming at decreasing inflation, which if not adjusted would harm the economy.Counteracting Inflation through the Corridor Range In 2005, the CBE decided that its main tool to adjust inflation would be the overnight deposit and lending rates at the CBE, which is the corridor range that is adjusted every six weeks according to the MPC meeting. In 2005, deposit and lending rates at the CBE were set at 9.5% and 11.5%, respectively. In June 2006, rates were readjusted to be 8% and 10%. The MPC continuously amended the corridor range, in response to the accelerating inflation. Of late, precisely in September 2008, the deposit and lending rates stood at 11.5% and 13.5%, respectively, as the inflation reached 23.6% in August 2008. 22 Egypt Banking SectorSeptember 2008 26. Global Research - Egypt Global Investment House Chart 14: Development of the Inflation and Corridor Range % 2923.6 2422.1 19.7 20.2 19 16.414.4 14 12.1 10.58.6 9 7.2 6.9 4.7 4June-05June-06 June-07December-07 January-08 February-08March-08 April-08May-08June-08 July-08 August-08 September-08Deposit Rate at the CBE Lending Rate at the CBEInation RateSource: CBE, Global Research Will the Tight Monetary Policy Succeed in Targeting Inflation? It is not certain whether the restrictive monetary policy will succeed to decrease the inflation rate, especially in the short run, as the government plans to expand the growth of the economy could alternatively lead to higher levels of inflation. Besides, the fiscal policy is contradicting with the monetary policy, where the governments plan to decrease its expenditures through cutting subsidies, especially those concerning the energy intensive industries, in addition to removing some tax exemptions, could have a significant impact on rising prices and thus increasing inflation. Nevertheless, if inflation continues to rise, which will mostly be the case, the CBE is expected to further raise interest rates gradually.Combined Effect on Interest Rate Spread Not surprisingly, many banks have raised the interest rates on their deposits, following the consecutive climbs of the corridor range. This is expected to be followed by a similar or greater increase in rates posed on the banks loans. Albeit the banks will be able to widen their spread in 2008 and 2009, as a result of these practices, it is plausible that spreads will contract thereafter, as a result of the intensifying competition in the sector. This competition will push banks to decrease the rates on loans, while posing higher rates on deposits to be able to maintain their market shares, which will be negatively reflected on the banks interest rate spread.The same goes for treasury bills yields, as they are expected to grow higher till 2009, compensating for the removed tax shield, then to decline afterwards, as banks will probably be less relying on these instruments in their investment portfolios. September 2008Egypt Banking Sector23 27. Global Research - Egypt Global Investment House Chart 15: Lending Rates vs. Treasury Bills Rates %14 13.4 13.1 12.512.7 12.513 12.012111099.4 9.088.78.58.57 6.9620072008 E 2009 E 2010 E 2011 E 2012 E Commercial banks lending rate (average) 3-month Treasury-bill rate (year-end)Source: Economic Intelligence Unit, Global Research Other CBE Tools of Regulatory Intervention The most important regulations of the CBE governing the banking sector are those related to liquidity, reserves, extended credit, capital adequacy and provisions. These are presented in more details below.Capital Adequacy The Unified Banking Law of 2003 requires banks in Egypt to raise the ratio of capital adequacy from 8% to 10%.Minimum Paid-In Capital The Unified Banking Law of 2003 also obligated banks to raise their minimum paid-in capital from LE100mn to LE500mn, which was the main motive for small local banks and poor performers to opt for the mergers and acquisitions in the last few years.Reserve Requirement Banks are required to keep 14% of their deposits denominated in local currency as reserves with the CBE to provide enough liquidity in case deposits are withdrawn by customers. It is worthy to note that these reserves are not interest earning.This explains why banks seek to invest their excess liquidity in interest earning instruments like treasury bills and other government securities to decrease their cost of unused funds. Though banks should focus on exerting more lending activity and orienting fewer funds to investments in treasury bills, this has not been the case for several years, due to the banks unwillingness to get exposed to the risk of default.It is worth mentioning that banks should also keep 10% of their deposits denominated in foreign currency as reserves with the CBE, but these reserves earn interest related to LIBOR.Liquidity Ratio Banks must keep at least 20% liquid assets denominated in local currency and 25% of assets denominated in foreign currency. 24 Egypt Banking SectorSeptember 2008 28. Global Research - Egypt Global Investment House Extending Credit Banks must not extend credit to a single borrower in excess of 20% of the banks book value. In addition, banks are not allowed to extend credit to one particular borrower and his affiliates in excess of 25% of the banks total equity.Provisions Banks are required to keep provisions according to the credit risk level associated with each loan. Loans are classified into two categories related to regular and irregular settlements. For regular settlements, loans are categorized under many risk levels ranging from low to watch list risk, where each level has a corresponding provision required rate ranging from 0% to 5%. For irregular loans, they are classified into three types, substandard debt, for which a 20% provision must be kept, doubtful debt, with a required 50% provision. Finally, loss debt must have a 100% provision. More conservative banks usually keep higher provision rates than required.Untapped Segments as Key Prospects Retail Segment The retail banking activities in Egypt are considered an unexploited segment, promising high potentials for the banking sector. There is a great unfulfilled demand for banking activities in this sector. This comes from the fact that large percent of the population, which amounted to 75mn in 2006/07, after a 2% y-o-y increase, still does not participate in banking activities or even have a slight participation, which could be a result of low income levels or not enough understanding of the importance of banking activities. Moreover, 61.1% of the population is in the working age, which implies further increase of demand of the retail segment in the future. From the banks side, they have always been reluctant to direct great portions of their loans to individuals fearing of the risk of default, but this is expected to change in the future, especially after the establishment of the credit bureau that should facilitate the flow of necessary information to banks concerning clients history and would therefore minimize the risk of default. Lending to individuals is only provided according to salaries and usually not exceeding 20% of the monthly salary.Currently, a large number of banks are expanding their branch networks to fulfill unsatisfied needs from the retail segment. As of March 2008, there were 3,252 branches in Egypt with each branch serving an average of 23.1 thousand people.As for branch network, it is important to note that around 65% of the existing branches in Egypt are owned by the public banks. Some of the private banks that announced their intention to expand their branches were Commercial International Bank, National Societe Generale Bank, BoA, Audi, HSBC, Piraeus, Blom, Barclays, Export Development Bank of Egypt, BNP Paribas and Credit Agricole.SMEs Segment Small and Medium Enterprises SMEs are defined as companies whose revenues do not exceed LE1mn. Banks are usually hesitant to lend to SMEs due to the high risk associated with these companies, in terms of lack of adequate capital and assets, in addition to the fact that they are usually not registered. As for the SMEs, interest rates could be high, making the cost of finance through banks higher. These factors explain the low banking penetration of this segment.September 2008 Egypt Banking Sector25 29. Global Research - Egypt Global Investment House Recently, the government encouraged the registration of SMEs, which could reduce the reluctance of banks to SMEs lending, through the provision of collateral. If this happens, along with the presence of the credit bureau and its role in minimizing default risk, growth potential in this segment is expected to be high, as banks will be able to expand their banking activities for this sector and hence increase their client base, enabling them to realize higher margins.Mortgage Segment The Mortgage Financing Law was launched in Egypt in 2001. Mortgage loans represent a small fraction of banks loans due to many factors. The fact that most properties were not registered due to high registration fees, made banks hesitant to extend mortgage loans, fearing of loans default, especially that unregistered properties could not be used as collateral. Another factor can be attributed to the high rates on mortgage loans reaching 14%, coupled with low purchasing power and low wages.In 2005, the government reduced the registration fees on properties to 3% down from 12% of the propertys price or a maximum fee of LE2,000. Also, property taxes were cut from 46% to 10% of the annual rental value. Such regulations should facilitate property registration and thereby would give more confidence to banks or mortgage finance companies to extend mortgage loans now that they can rely on registered properties as collateral. Moreover, developers are now targeting middle and upper-middle class level, which may facilitate mortgage lending in the coming few years.Mortgage lending opportunities are expected to boost, after the establishment of the governmental institution the Egyptian Company for Mortgage Refinancing, along with the emergence of new lending mortgage companies, in addition to the newly established credit bureau.The potential growth expected in the mortgage segment induced the CBE to allow banks increasing the share of loans allocated to the real estate sector from 5% to 15% of their total loan books, to be equally distributed among real estate developers, mortgage borrowers and touristic development companies.An Additional Key Prospect The restructuring that occurred following the banking sector reform program, resulted in a reduction of the number of banks from 61 banks in 2004 to 41 banks in 2007 and raising the number of branches from 2,783 branches to a current number of 3,252 branches.The major influence on the sector was the heating competition among lenders, which accelerated substantially in the last few years, especially with the emergence of foreign expertise. To boost competency, most banks currently provide a wide range of products and services including house and car loans, credit and ATM cards services, automated machines and 24-hour services, capital markets and investment banking activities, along with the traditional banking activities. This intense competition is expected to enhance the banks profitability by attracting greater client base through providing better quality of products and services to the public. 26 Egypt Banking Sector September 2008 30. Global Research - Egypt Global Investment House Issues to be Considered As the Egyptian banking sector was ruled by the public sector banks for decades, the service was never an issue. These banks were serving the government in financing mainly public enterprises. Now that most of the banks became private, ameliorating the service became a must in order to boost, or at least maintain their market shares.Another important issue is the dissemination of information to the public. As most of the banks are publicly traded now, there is a need for a minimum of disclosure for shareholders about the banks operations and performance in any given period. Still the fear of fierce competition stops banks from operating liberally.The sector is shaping and these issues will improve with competition, which pours at the end in the clients interests. September 2008 Egypt Banking Sector27 31. Global Research - EgyptGlobal Investment HousePeer Group Comparison Banks Current Market Shares of The Total Branching Network As of March 2008. The banking system branch network encompassed 3,252 branches. It is worthy to note that public banks and other private banks outside our coverage universe, account for 90% of the branching network, approximately.As for our covered banks, Commercial International Bank CIB captures the highest market share, represented by 4.2%, which is explained by the long presence of the Bank in the market, relative to the other banks. National Societe Generale Bank NSGB followed, with a market share of 3.6%.Chart 16: Banks Branches Market SharesCIB 4.2%NSGB 3.6%CAE 1.6%EGBE 0.3% EDBE 0.3% Public & other Private Banks 89.9% Source: Global Research Balance Sheet PerformanceMajor Source of Funds In terms of deposits market share, also CIB was able to make the highest contribution to the total deposits of the banking system, 6.0%, followed by NSGB, contributing to 4.8% of total deposits.On the other hand, the highest growth realized in deposits over 2007, was performed by Credit Agricole Egypt CAE, which witnessed a 36.5% increase. This stems from the banks intention to increase its market share, as it stood at 2.6% in H1 2008, lagging far behind the two major players, CIB and NSGB. 28 Egypt Banking Sector September 2008 32. Global Research - Egypt Global Investment HouseChart 17: Deposits market shares-H1 2008Chart 18: Deposits Growth (2006-2007) CIB 6.0%LEmnNSGB 4.8% 45,00036.5%40%CAE 2.6%EGBE 1.1%40,000 35% EDBE 0.5% 35,000 30%25.1% 30,000 21.4%25% 25,000 18.0%20% 20,00013.0% 15% 15,000 10,000 10% 5,000 5%Public & other Private - 0% Banks 85.0%CIBNSGBCAEEDBEEGBEDeposits-2006 Deposits-2007 % change y-o-y (right scale) Source: Banks financials, Global ResearchComparative Growth in Balance SheetNot surprisingly, the major contribution to total assets came from the two largest banks,CIB and NSGB, contributing to 5.2% and 4.1% of the total assets of the banking system,respectively. This was attributed to the large funding base of these banks, which was foundedon the relatively immense deposits balances. In the mean time, the highest y-o-y growth in deposits that CAE was able to realize in 2007,was translated into the highest growth realized in total assets in the same year, as well. Thatsaid, total assets of CAE swelled by the same growth of deposits realized in 2007. Chart 19: Total Assets Market Shares-H1 2008Chart 20: Total Assets Growth (2006-2007) CIB 5.2%NSGB 4.1%CAE 2.1%LEmn EDBE 1.2% 60,00036.5%40%EGBE 0.5%35% 50,00027.2% 30% 40,00025%19.8%19.7% 30,000 20%`11.9% 15% 20,00010% 10,0005%-0% Public & other Private CIB NSGBCAE EDBE EGBE Banks 87.0%Total assets-2006Total assets-2007 % change y-o-y (right scale)Source: Banks financials, Global ResearchResulting Acceleration in Lending ActivityAs for loans, major share went to the two large players, as well. CIB and NSGB contributedto 6.4% and 6.1% of the total loans in the banking system, respectively. The major growth in loans over the year was realized by NSGB and CAE, realizing 22.8%and 22.5%, respectively. This illustrates the two banks target of expanding their marketshares, relative to their peers.September 2008 Egypt Banking Sector29 33. Global Research - Egypt Global Investment HouseChart 21: Loans Market Shares-H1 2008 Chart 22: Loans Growth (2006-2007) CIB 6.4%NSGB 6.1%LEmnCAE 1.8%25,00045%39.3%EDBE 1.9% 40%EGBE 0.7%20,00035% 30%15,000 22.8%22.5% 25% 20.8%16.7% 20%10,00015%5,00010% 5% Public & other Private0% Banks 83.1%-CIBNSGB CAE EDBEEGBELoans-2006 Loans-2007% change y-o-y (right scale) Source: Banks financials, Global ResearchMost Conservative While Having Lowest NPLs Ratio Although CIB has the lowest NPLs ratio, 3%, it adopts the most conservative provisioning policy, as its coverage ratio stood at 166% in 2007. It is worth mentioning that the NPLs ratios of NSGB and CAE are magnified, as they inherited bad debts from the acquisitions of MIBank and EAB, respectively. Nevertheless, they are performing well, as their coverage ratios are close to 100%.Chart 23: Provisioning Policies Adopted-2007180% 160% 140% 120% 100%80%60%40% 24.2%19.6% 9.0% 20% 9.6%3.0% 0% CIBNSGBCAE EDBEEGBE Coverge RatioNPLs/Gross LoansSource: Banks financials, Global ResearchIncome Statement PerformanceSpreads were suppressed over the year Net spread, representing the core income of banking activity, has narrowed for almost all banks under coverage in 2007, except for CAE and Export Development Bank of Egypt (EDBE), as it inclined from 2.7% to 2.8% and from 1.5% to 1.6%, respectively. The decline in spreads could be a result of the intensifying competition. Nevertheless, we expect spreads to rise until 2009, as a response to the successive jumps in the corridor range. Beyond 2009, the spreads are projected to decline, as a result of the foreseen competition. 30Egypt Banking Sector September 2008 34. Global Research - EgyptGlobal Investment House As a consequence, net interest margin decelerated over the year for almost all banks, except for EDBE, which was able to raise its margin from 2.2% in 2006 to 2.5% in 2007.Table 09: Net Interest Margin and Net Spread Net Interest Margin Net Spread2006200720062007 CIB3.5%3.5%3.9%3.9% NSGB 4.1%3.3%4.3%3.3% CAE3.0%3.0%2.7%2.8% EDBE*2.2%2.5%1.5%1.6% EGBE 3.3%2.8%2.8%2.3% Source: Banks Financials, Global Research * EDBEs fiscal year ends in June.Growing Profits Looking at net profit, we realize that all banks witnessed increases in their net income, except for EGBE, as its income grew at lower pace than the previous year, as a result of higher added provisions. On the other hand, the highest growth was realized by EDBE, which income rose by 104.6% in 2007. This growth was amplified, as the Bank realized losses the previous year. These losses were due to the large amount of provisions added that year, as required by the CBE. It is worth mentioning that growth in net income is calculated after adjusting for extraordinary items and goodwill amortization.Chart 24: Net Profit Growth (2006-2007) LEmn1400 120%1200 104.6% 100%1000 80%80060.7%60%600 36.6% 40%`400 20%2002.8% 0% 0 CIBNSGBCAEEDBEEGBE-200-17.3% -20% -400 -40% 20062007 % change y-o-y (right scale)Source: Banks Financials, Global Research Profitability Ratios Regarding profitability ratios, the best performers were the two largest banks along with CAE. In terms of ROAA, CAE was the best performer followed by CIB then NSGB, where each one realized a ratio of 3%, 2.7% and 2.5% respectively.Concerning ROAE, NSGB realized the highest ratio, which stood at 40.5%, followed by CAE and CIB, with 38.1% and 30%, respectively. It is worthy to note that these ratios are adjusted for extraordinary items and goodwill amortization.September 2008Egypt Banking Sector31 35. Global Research - EgyptGlobal Investment House Chart 25: Profitability Ratios-200745%40%35%40.5% 38.1% 30%25% 30.0% 20%15%10% 5%2.7% 2.5%3.0%10.7%1.4% 0.1% 1.0%0% CIBNSGBCAE EDBEEGBEROAA ROAESource: Banks Financials, Global Research Capital Adequacy Ratios The Egyptian Gulf Bank EGBE was able to realize the highest equity/total assets ratio in 2007, as it stood at 13.4%. This could be explained by the fact that the Bank has the lowest market share of total assets, compared to its peers, reaching 0.5%.In the mean time, equity/gross loans ratio was the highest in CAE, as it reached 30.4%. This in turn can be explained by the relatively low market share of the Bank, in terms of the loans of the total banking system relative to other players, as it ranked fourth in 2007, with a market share of 1.5%.Chart 26: Capital Adequacy Ratios-2007 35% 30% 25% 20% 13.4% 15%9.8%9.2% 9.1% 10%7.3% 5%0% CIB NSGB CAEEDBEEGBEEquity/Gross LoansEquity/Total AssetsSource: Banks Financials, Global Research Banks Performance in H1 2008 The following table summarizes the performance of the banks under coverage during H1 2008, in terms of growth in assets and in net profit. 32 Egypt Banking Sector September 2008 36. Global Research - EgyptGlobal Investment House Table 10: H1 2008 PerformanceAssets (LEmn) Net Profit (LEmn)2007H1 2008 q-o-q change H1 2007H1 2008 y-o-y change CIB 47,763.256,342.718.0%663.4961.7 45.0% NSGB47,256.744,233.3 -6.4% 339.3549.4 61.9% CAE 21,521.122,253.23.4% 211.5215.51.9% EDBE*8,782.913,376.152.3%7.5310.74026.9% EGBE 5,135.0 4,917.2 -4.2%65.2 67.02.7% Source: Banks Financials, Global Research * EDBE results are for the FYE June 2008, compared to the FYE June 2007. Banking Sector Outlook With the banking sector being primarily influenced by the economic status of the country, we maintain a positive outlook for the sector in Egypt. As GDP is expected to reach 7.4% in 2008, compared to 7.1% in June 2007, we believe the banking industry in Egypt will be significantly enhanced. An accelerated growth of GDP will tempt investors to explore investment prospects, which represent potential lending opportunities to the banking sector.Moreover, improvements in several business sectors including tourism, real estate, telecommunication and financial services, will be translated into better investments in the country, as projects will expand in such sectors and financing needs will grow and thus better lending opportunities will be available for the banking sector, especially with the current extremely low loans/deposits ratio.Meanwhile, these developments will attract foreigners to invest in the country, which will result in better Foreign Direct Investment (FDI). The latest figures support our opinion, as the FDI increased by more than 100% y-o-y from 2004/05 to 2005/06, then rose by 44%, amounting to US$13.1bn in 2006/07. This improvement came on the back of the growth experienced in the economy and the various sectors mentioned previously.Alternatively, demographics outlook support the sectors potential. With a population CAGR of 2% over the 5-year period from 2001/02 to 2006/07 and the fact that large percentage of the population is not engaged in the banking activity, the huge unfulfilled demand in the retail segment is expected to increase and sequentially be absorbed by the sector in the form of retail lending and mortgage financing. Banks will be encouraged to explore such fields together with lending to SMEs, as risk of default will be diminished, especially after the establishment of the credit bureau.In addition, most of the banks are currently updating their IT systems and expanding their branch networks to improve their competency. This is expected to have a positive impact on the quality of products and services provided to the public, which will increase the client base coverage and will therefore enhance the banks profitability.Though we believe the sector in Egypt has a promising growth, resulting from the inherent opportunities in the unexploited segments, there is a prevalent discomfited sentiment for the sector, stemming from the cancellation of the sale of Banque du Caire, in addition to the fail of the merge between CIB and AAIB. September 2008 Egypt Banking Sector 33 37. Global Research - Egypt Global Investment House The rising inflation rate in Egypt has been reflected in higher costs of equities for Egyptian banks valuations.Valuation & Recommendation For arriving at the fair value of the banks under review, we have used two valuation methods:1. Cash flow approach represented by the Dividend Discounting Model.2. P/BV target multiple approach using an adaptation of the Gordon Growth Model.Dividend Discounting Model - DDMThe DDM is based on a 4-year forecast of dividends as cash flows (2008-11), except for EDBE Bank, as the Banks fiscal year ends in June 2008. That is why we have made a projection period for the Bank from 2008/09 to 2011/12. The dividends for the forecast period and the terminal value are then discounted back at the cost of equity to arrive at the total net present value (NPV) of the company. In our calculations, we have made the following assumptions in order to arrive at the equity value of individual banks:1. Cost of Equity (COE) derived using Capital Asset Pricing Model. a. Risk free rate of 8.4% (YTM of 2011 government bonds), except for EGBE, as we used a risk free rate of 4.7% (YTM of 2011 sovereign Eurobond) and EDBE, as we used the rate of 8.8% (YTM of 2012 government bonds) b. Market risk premium of 7.8% for all banks and 6.5% for EGBE, taking into consideration that the Banks stock is traded in US dollars. c. Beta of 5 years monthly figures. If the actual beta of the bank is less than 1 or if the data available is of less than 5 years, to more appropriately reflect the market risk, we have taken it as 1.2. Terminal growth rate of 7.0%, which is close to the expected growth rate of GDP, taking into account the inherent opportunities in the banking sector, relying on the economic growth witnessed in the country, which is reflected in a stable investment climate, expected to boost lending opportunities. 34 Egypt Banking Sector September 2008 38. Global Research - Egypt Global Investment House Table 11: Value as per DDM Approach DDM based price (LE) CIB 49.1 NSGB34.3 CAE 17.0 EGBE (US$) 2.1 EDBE20.5 Source: Global Research, market prices as of September 7th, 2008 The adaptation of the Gordon Growth model uses the sustainable return on average equity (ROAE), cost of equity (COE) and expected growth in earnings (g) to calculate the target P/BV of the bank using the formula:P/BV = (ROE - g) / (COE - g)This P/BV is then multiplied with the BVPS of the bank at the next full year to arrive at the fair value of the bank over a medium term investment horizon. In our case, we calculated the BVPS at December 31, 2008, except for EDBE, as we calculated it at the end of the Banks next fiscal year in June 30th, 2009,In our calculations, we have made the following assumptions in order to arrive at the equity value of individual banks:1. Sustainable ROE calculated as the average ROAE of the forecasted 4 years for allbanks.2. Cost of Equity derived using Capital Asset Pricing Model taking the same assumptionsas in the DDM.3. Terminal growth rate of 7%, similar to the DDM.Table 12: Value as per GGM Approach P/BV based price (LE) CIB 48.7 NSGB34.6 CAE 16.9 EGBE (US$)1.8 EDBE20.8 Source: Global Research, market prices as of September 7th, 2008. September 2008Egypt Banking Sector35 39. Global Research - Egypt Global Investment HouseWeighted PriceAs the book value multiples vary with time and are dependent on several factors such asmarket sentiment and other qualitative factors, we have provided 20% weight to the P/BVmultiple and 80% to the DDM method.Table 13: ValuationWeighted DDM Price (LE) Weighted P/BV Price (LE) Weighted Final Price (LE) CIB39.39.749.0 NSGB 27.46.934.3 CAE13.63.417.0 EGBE (US$)1.70.4 2.0 EDBE 16.44.220.6Source: Global Research, market prices as of September 7th, 2008. Table 14: Global Valuation Matrix Price Target UpsideBVPS* EPS*P/BV*P/E*Reco. (LE) (LE) Potential (LE) (LE)(x) (x) CIB 46.9 49.0Hold4.514.65.03.2 9.5 NSGB 30.034.3 Buy14.4 13.2 4.0 2.37.5 CAE15.217.0 Buy11.85.8 1.7 2.68.7 EGBE (US$) 2.62.0 Sell-22.50.9 0.1 2.823.0 EDBE 21.120.6Hold-2.2 12.8 2.9 1.67.2Source: Global Research, Market prices as of September 7th, 2008* Based on 2008E for all banks and 2008/09E for EDBE, adjusted for goodwill and extraordinary items, if any.36 Egypt Banking SectorSeptember 2008 40. Global Research - EgyptGlobal Investment House Commercial International BankTickers: Recommendation COMI.CA (Reuters) COMI EY (Bloomberg) HOLD Listing: The Egyptian Exchange Abu Dhabi Securities Exchange Kuwait Stock Exchange London Stock ExchangeCMP: LE46.9 (September 7th, 2008)Key Data EPS* (LE) 5.0 Avg. daily vol. (000)842.4 BVPS** (LE)14.6 52 week Hi/Lo (LE)66.0/ 43.3 P/E* (x)9.5 Market Cap (LE mn) 13,715.3 P/BV** (x)3.2 Target Price (LE) 49.0 Source: Mubasher, Global Research, market prices as of September 7th, 2008 *Estimated (2008), earnings are adjusted for extraordinary items, goodwill amortization, number of shares and before minority interest. ** Estimated (2008), book value represents the book value for equity shareholders, adjusted for goodwill and number of shares. Background Commercial International Bank CIB was established in 1975 under the name of Chase National Bank of Egypt, as a joint venture between NBE and the Chase Manhattan Bank, owning 51% and 49% of the Banks shares, respectively. In 1987, Chase Manhattan sold its share to NBE, where the latters share reached 99.9% and the Banks name became Commercial International Bank. The Bank went public for the first time in 1993, through an IPO, resulting in a decline of NBEs share to 43%. NBEs shares in CIB declined furthermore by 20% in 1996, through the listing of its Global Depository Receipts GDRs on the London Stock Exchange. It is worthy to note that the Bank is currently listed in Egyptian, Kuwait and Abu Dhabi stock exchanges. Meanwhile, the Bank is traded internationally through GDRs in London and American Depository Receipts ADRs in the USA. As part of the program set by the government for selling public stakes in joint ventures, NBE sold a stake of 18.7% in the Bank to a consortium led by Ripplewood Holdings in February 2006. Currently the consortiums stake constitutes 5.6% of the Banks capital, while NBEs stake is only 0.3%.As of June 30th, 2008, the consortium led by Ripplewood Holdings, owns a stake of 5.6% in the Bank, while the free float constitutes 91.4% of the Banks shares.It is worth mentioning that CIB announced that Dubai Capital Group acquired 5.2% of the Banks capital on July 31st, 2008.September 2008 Egypt Banking Sector 37 41. Global Research - EgyptGlobal Investment House Chart 01: Shareholders structure Ripplewood Consortium 5.6% Others 3.1%Free-Float 91.4%Source: EGID, as of June 30th, 2008, Global ResearchHigh Quality Services The Banks long presence in the Egyptian market and its exposure to International expertise through its start with Chase Manhattan, allowed it to gain extensive experience in providing a variety of products and services with high quality, satisfying clients of different classes. Services cover all segments including corporations, retail, mortgage finance and SMEs.Corporate Segment Prioritized The corporate segment captures the lions share of activities covered by the CIB. This stems from the Banks focus on realizing higher profits, while ensuring low risk of default, which was realized through serving big corporations, with sound business performance. This is illustrated through the orientation of 90% of the Banks loan book to big corporations.The CIB extends loans to corporations of good reputation in sectors like tourism, petroleum and telecommunication, as they are all experiencing successful growth, which is expected to further boost lending to these sectors.Services offered to the corporate segment include funding projects and capital expenditures, investment banking services, syndicated loans, letters of credit, letters of guarantee, along with various other services.Growing Attention to Retail The Bank plans to approach retail services more aggressively by 2010, responding to the huge unfulfilled demand arising from this segment. Currently, retail lending is executed through the corporate sector by offering payroll system -ATM cards for employees salaries- to corporations, in line with the Banks policy of lowering its exposure to risk of default.Other retail services include ATM cards, electronic banking services, car loans, life insurance services, current and saving accounts, in addition to student cards, which provide discounts to students abroad in their visits to museums and their hotel accommodation.In addition, new services will be provided through a new segment for high net worth individuals, by offering them priority service in branches, and later on, investment products in Egypt and abroad. 38 Egypt Banking Sector September 2008 42. Global Research - Egypt Global Investment House Minor Focus on Mortgage Finance and SMEs Due to the high risk associated with mortgage lending, the Bank extends a minor percentage of its loans to finance housing units.In July 2008, the Bank announced that it will be granted a loan, worth LE1.3bn from Overseas Private Investment Corporation (OPIC) and US government agency. CIB will use this loan in its mortgage finance activity, as it will direct 80% of it to other banks and companies operating in the mortgage finance field, whereas the rest of the loan will be used in the same field, according to the management discretion.Concerning SMEs, the Bank established an SME business line in 2006, since this division is considered a potential segment for profitable lending opportunities.Highest Market Shares CIB is the largest private bank in Egypt. As of June 2008, it captured the highest market shares of the aggregate banking system, in terms of total assets, customer deposits and gross loans, at 5.2%, 6.0% and 6.4%, respectively.Meanwhile, the number of branches reached 137 branches, implying a market share of 4.2%, as the total number of branches in the banking system amounted to 3,252 branches in March 2008.Investments in Affiliates As of June 30th, 2008, CIB owns a stake of 50.09% in CI Capital Holding, which was reduced from 66.98% after the Bank sold 9.3mn shares of its stake in 2007. It is worth mentioning that CI Capital Holding obtained its license to begin activities in 2006. It was formed through a strategic alliance between CIB and an investment group led by Naguib Sawiris to combine their investment activities through the formation of CI Capital holding.Table 01: Stakes of CI Capital Holding in Other Companies Company NameNumber of Shares CI Capital Stake (%) CIBC Co.539,88090.0 CI Assets Management445,49989.1 Concept Co. 448,50089.7 In Search Co. 448,50089.7 Dynamic Brokerage Co.3,392,000 99.9 Blue Nile Co. for Consultant*50,000 100.0 United Brokerage Co.-Dubai 5,000,000 49.0 Source: CIB Financials, Global Research *CI Capital sold Blue Nile Co. in July 2008In July 2008, CIB fully acquired CI Capital Holding, in a deal worth LE768.2mn, where it acquired 27.4mn shares of CI Capital, at a price of LE28/share. The transaction was executed through a swap between CIB and Sawiris, where the latter used the proceeds from selling its shares in CI Capital Holding to acquire shares in CIB.CI Capital Holding is considered a leading investment bank. Bringing it under the control of CIB is expected to boost the Banks performance in the investment banking domain.September 2008Egypt Banking Sector 39 43. Global Research - EgyptGlobal Investment HouseCIB has also investments in several associated Companies. It is worth mentioning that theBank sold its stake in Contact for Cars Trading Company during Q1 2008. Table 02: Investments in Affiliates 2007June 2008 Company Name Stake StakeAmount (000LE) Amount (000LE)(%) (%) Contact for Cars Trading 31,000.0 38.40.0 0.0 Commercial International Life Insurance Co. 32,000.0 40.0 32,000.040.0 Corplease Co. 18,400.0 40.0 21,600.040.0 Cotecna Trade Support 48.8 39.048.8 39.0 Haykala for Investment601.347.5 601.3 47.5 Egypt Factors3,763.6 39.0 10,399.539.0 International Co. for Appraisal & Collection400.040.01,000.040.0 International Co. for Security & Services4,500.9 45.04,500.945.0 Source: CIB Financials, Global ResearchRecent Developments Capital StructureThe CIB has an authorized capital of LE5bn, while its issued and paid-in capital amounted toLE1.95bn, distributed over 195mn shares, at a par value of LE10/share. In July 2008, the Bank increased its capital by LE 975mn to reach LE2.93bn through a 1:2stock dividend distribution, financed from reserves. This capital increase will provide furthergrowth to the Banks operations, as it will further enhance its lending activity after expandingequity. Expected Regional ExposureCIB has a 51% stake in its Algerian subsidiary Commercial International Bank-Algeria,which is expected to start operations during 2008, according to the Banks announcement in2007. The new entity, which is a joint venture between the Bank and the Sawiris family, is expectedto present promising opportunities to the Bank in Algeria, as the Bank aims at benefiting fromthe Sawiris operations in Algeria by providing the necessary funding to its infrastructure andconstruction projects. It is worthy to mention that the Algerian market is seen as a promising location for banks,with significant lending opportunities for the booming industrial sector, mainly oil and gas. Long Awaited Merge FailedFollowing the announcements of studying the possibility of a