In this interview, Tarek Fayed discusses the health of the Egyptian banking sector, Banque du Caire’s new five-year strategy and its move to go public with its IPO on the Egyptian stock exchange.
What is your expectation of growth for the Egyptian economy and do you believe the financial sector will lead the growth in the coming years?
Basically, the government and the central bank reforms that have been undertaken during the last couple of years in terms of liberalization of the foreign exchange regime as well as fiscal consolidation had a very positive impact on the economy. I think these measures were fundamental for the economy because Egypt basically has very strong potential and we had to resolve all these chronic issues that we were facing going decades back, so we were very keen to do these types of reform.
The economy has been witnessing large amounts of foreign currency coming from diversified sources. Basically, the portfolio investment and FDIs increased tremendously in the last year. Also, we have seen a sizeable increase in the amount of exports. Worker remittances also increased heavily because basically the worker remittances and the foreign currency inflows were not channeled through the official channels of the economy.
It used to be a very big parallel market. I believe all of this has been because of irregularities. We have also started to see a very strong inflow into the market, and this was reflected on the foreign currency reserves at the central bank, which increased from $15-16 billion to $44 billion. So, all these aspects have a positive implication on Egypt in general. This could pave the way for a further boost.
This has been witnessed in the last fiscal year. The GDP growth level increased and reached more or less 5.5%. The potential for next year will be above 5%. Definitely the banking sector, I consider it as a backbone for the economy. This is basically thanks to the reforms that the central bank of Egypt has undertaken for around one decade in terms of reforming this sector.
The banking sector in Egypt is very solid and strong in terms of solvency and liquidity levels. So, we believe that the banking sector will play an instrumental role in the economy in the next period because the Egyptian banking sector is flushed with liquidity. We have very strong liquidity in the system, whereby the loans-to-deposit ratio is more or less 50%, which gives a very strong role for financing lots of projects in the next phase. The banking sector also had very strong inflows of foreign currency coming from different values, basically exports and also worker remittances.
The banking sector has been playing a very strong role in diversifying its sources of liquidity because of its very solid financial status that it managed to also grab and solicit funds from external financial institutions. All these aspects would help the economy a lot. The banking sector and the central bank are very conscious about the importance of the roles of the banks in terms of financial intermediation, so the banks basically have to play an important role in this aspect. This is why we are always talking about financial inclusion – adding more people to the banking sector because this is very important.
There have been lots of initiatives set by the central bank of Egypt during the last couple of years in terms of encouraging the banks to tap into specific sectors like the SME sector, giving its important role to the economy because it accounts for more than 70% of the labor force. It plays an important role as a supplier for large corporates in terms of raw materials and semi-finished products. So, we’re working on all these aspects as a bank and during the last period, if you look at the increase of the loans in the banking sector, they increased tremendously, whereby the total loans right now that have been extended from the banking sector are smaller than 1.6 trillion EGP, maybe with a 30% increase vis-à-vis the last 3 years. So, the banks are playing an important role in these aspects. There are also other avenues for lending, which are used to finance energy, infrastructure and other industry-related projects to deepen industry in various aspects.
What is the strategy behind Banque Du Caire’s IPO?
Basically, the IPO of Banque Du Caire is sort of a national program for privatization or for an IPO listing in the stock exchange. The banking sector in general is very appealing for any investor, especially the banking sector in Egypt, as it is characterized by having a very solid status. The IPO will basically help the bank a lot in achieving its medium and long-term objectives because this IPO will entail a capital increase which will help the bank in terms of solvency and capital adequacy ratios, whereby, we will be able to meet our medium and long-term objectives.
We have to tap all business venues. So, we have very strong plans for growth in the next phase and we believe that the IPO will greatly help us to achieve these objectives by increasing our capital base.
Here is also an important factor for the country in general: the need to see a very active capital market. We have to have lots of papers traded in the stock exchange, and basically, we have to benefit from the reforms that the government and central bank have been undertaking during the last couple of years.
The floatation of the currency, we have seen lots of foreign investors wanting to invest in the Egyptian stock exchange. The issue, however, is that you didn’t have enough papers to trade. If you’re talking about asset management and funds, they have to have a very diversified portfolio; the ticket size is very big. Once you have a large capital market, you will help attract lots of foreign currency inflows from abroad.
What are the main challenges that you would like to highlight to change these corporate cultures for the employees and the whole institution?
Currently, Banque Du Caire is perceived as a private institution because in the past lots of people used to see us a state-owned institution; though with our legal status now, it is totally different. The bank is managed through a new board. We have nine board members that are independent directors. We have six non-executives board members, totally independent. We have three executive directors: myself and two deputies.
Definitely when you are talking about challenges, we see that the Egyptian banking sector has really strong potential. So once we took charge, we were very keen, to put the proper infrastructure in place.
We have set a five-year business strategy that has been approved by our board, and we are working right now in the implementation of this strategy. The good thing is that the people in the bank were very receptive about this directional change in this strategy. The result was very good, whereby the financial results of the bank in the first quarter really exceeded our expectations and increased our budget basically.
So, we achieved a 48% increase in net profits vis-à-vis the same period last year. I don’t want to only talk about numbers here, but I am very keen to talk about the qualitative aspects in the strategy and in building the right infrastructure and the upgrading of the overall infrastructure of the bank. We have set the strategy and we are exceeding our milestones in terms of implementation. We have several projects. We are undergoing several of them right now. I will just give a quick brief about two or three aspects of this strategy. Basically, upgrading our total technological platform, we have hired one of the top IT companies to upgrade our core banking system, this is on one hand. On the other hand, we are undergoing a big project to upgrade our branch network through a total rebranding process, whereby we have to upgrade our branch network to have a modern-look, using digital services like mobile banking, as well as expanding our ATM network across all governorates in Egypt.
So, we are working heavily on all these aspects in the qualitative side. We also have a strong challenge that we have lots of capital expenditure in the next phase in order to achieve all these objectives. The good thing that we realize that it is a very strong profitability stream that will enable us to continue and achieve these milestones.
Can you tell us about the strategy to expand business to other countries?
Our primary focus will be on the Gulf region as well as Africa. So, I’ll talk about the Gulf. We are basically in the process of establishing a representative office in the UAE which will not only serve the UAE but also the whole region. We have a strong mandate for this office by having increased the level of foreign direct investments coming from the Gulf region.
We have appointed senior bankers to take care of the office there, which has a very strong client network in the Gulf. Egypt has strong bilateral trade with the Gulf counties. We, therefore, want to use the UAE office in order to open new opportunities for our top-tier local corporates in Egypt who have potential to export goods and services to the UAE and the Gulf region. We have really managed to build a strong banking platform during the past 10 months that has the expertise to open new doors and new opportunities for our clients.
The third pillar is basically adding more or soliciting more work remittances. Banque Du Caire is one of the leading banks in working remittances in the Gulf region among the two state-owned banks. We have a market share of around 12%, so we want to expand our business in this area by using digital financial services for the worker remittances abroad, and to deepen our relationships with our banks and exchange abroad in order to get more business. This is very important to us.
We also have another venue for expanding regionally: Africa. We have a full fledged subsidiary there called Cairo International Bank in Uganda. We have undergone a total restructuring of the bank there; with a totally new board of directors. We have also appointed a new CEO for the bank who has finalized a five-year business plan right now in order to use the bank in Uganda as a hub for opening new business opportunities in east Africa, because this is basically COMESA.
We have lots of agreements there with COMESA countries. So, we want to use our subsidiary in Uganda as a hub for Africa basically, and to also improve the bank position in the next 3-5 years to be among the top 10 banks in the Ugandan market. This will not only stop here, but when we are talking about long-term or medium-term objectives, we are thinking of having a expansionary strategy in Africa by maybe having a sort of acquisition of one of the banks that has a very strong network in the African market in order to increase our outreach in that market. Egypt has very strong potential to be in Africa and without using the banks as an enabler; we will not be able to achieve our objectives. So as part of our bank strategy, we don’t want to only rely on the profit generations that come from the local market. On the contrary, we want to diversify streams of revenues so that they come from different regions.