Profit Boon Makes Egypt’s Banks Ripe for M&A. But Who’s Selling?

(Bloomberg) -- A profit bonanza for Egyptian banks is ripening the industry for acquisitions. If only there were more willing sellers.

One buyer found a way in. First Abu Dhabi Bank PSJC is in talks for the Cairo-based unit of Lebanon’s Bank Audi SAL, which needs cash to cope with an economic crisis back home. The bid is the first for an Egyptian bank by a Gulf lender in seven years, as companies seek new markets because of lower oil prices and rising geopolitical tensions.

Read more: First Abu Dhabi Bank Said to Hire UBS for Egypt Acquisition

Egyptian banks “have excessively strong balance sheets, they have very strong amounts of cash,” said Allen Sandeep, director of research at Naeem Brokerage in Cairo. “It’s more of a question of who’s willing to sell than who’s willing to buy. They’re rarely up for sale.”

The nation’s central bank is no longer issuing licenses, making an acquisition the only way of gaining a foothold in the Middle East’s fastest growing economy, according to data compiled by Bloomberg.

The only other banks in play among the nation’s 38 registered lenders are both state-owned institutions. United Bank, which has been involved in a years-long process of being sold, and Banque du Caire, which plans to complete an initial public offering by the end of this quarter for as much as 30% of its stock.

Reforms undertaken by President Abdel-Fattah El-Sisi since his election in 2014 helped revive economic growth that had stalled in the wake of the 2011 uprising. Soaring interest rates after the devaluation of the currency prompted an inflow of money into the local debt market, with heavy buying by banks in Treasury bills and bonds sending their profitability to record highs.

Profit Boon Makes Egypt’s Banks Ripe for M&A. But Who’s Selling?

Still, there is reason to be cautious even though the outlook for the banking industry over next 12 to 18 months is stable, Moody’s Investors Services said in a note dated Jan. 22. In large part, that caution is linked to four interest rate cuts by the central bank last year that have lowered borrowing rates and spurred consumer lending.

Untested new loans and “a borrower-friendly legal framework will leave banks vulnerable to a future economic downturn,” Moody’s said. Rising costs and higher taxes may also eventually erode profit margins.

Also fueling demand for loans is the central bank’s decision to raise the percentage of monthly income that can be allocated for consumer loans to 50% in December. There’s been a 41% increase in total non-governmental loans in the three years through June 2019, according to the Central Bank of Egypt.

Profit Boon Makes Egypt’s Banks Ripe for M&A. But Who’s Selling?

Egyptian banks “have been generating all-time high profits every year on the back of the high interest-rate environment and the high yield on government securities,” said Monsef Morsy, the head of financial analysis at CI Capital in Cairo. “We have a very high conviction about banks sustaining the level of profitability for the coming two years.”

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