By Khaled Habib By Courtesy AAIB “Golden Basket” won the grand prize in the AAIB Award on June 21st.

By Hadia Mostafa

The banking sector seems to be refuting the second law of thermodynamics these days. Though the shards of broken loans still litter the financial field, the looming July 14 deadline to satisfy the Central Bank of Egypt’s LE 500 million capital adequacy requirement is encouraging institutions to join forces and walk the treacherous ground of corporate lending.

Two months ago, the market was buzzing about the first private sector acquisition in the banking industry.

On May 23rd, the Arab-African International Bank (AAIB) announced that it had purchased 100% of Misr America International Bank’s (MAIB) shares for a total of LE 239.5 million. Not bad for a bank that just three years ago was a lackluster organization in desperate need of a new and innovative growth strategy.

MAIB was primarily owned by Misr Insurance, Banque du Caire and the Industrial Development Bank.

Hassan Abdalla, who became vice-chairman and managing director of AAIB two years ago, has aggressively spear-headed a bold strategy for organic growth crafted by the bank’s board that has turned AAIB into one of the fastest growing banks in the country. By the middle of 2004, AAIB’s growth rate was unparalleled on the Egyptian market.

Modest and down to earth, Abdalla is reluctant to take sole credit for the turnaround, citing the vision of the board and a series of prudent moves and well-received products that helped catapult AAIB to its current position.

“Rapid growth coupled with a clever re-positioning and re-branding strategy have transformed AAIB into one of the country’s leading financial institutions,” Abdalla says.

AAIB was established in 1964 as a joint venture between the Kuwaiti Investment Authority and the Central Bank of Egypt (CBE); each continues to own an equal share (49.37%). The bank’s core competence and focus had always been in corporate banking until management realized that without expanding AAIB’s retail banking arm, it would never achieve the growth necessary to compete with multidisciplinary competitors.

“We are a dollar-based bank with a lot of big corporate clients, while MAIB is more tilted towards Egyptian pounds and retail customers.”

The bank’s net deposits have since grown from $500 million in 2002 to $1.4 billion in 2004, an 180% rise, while net profits leapt from $11 million to $28.5 million in the same period, a 159% increase. Total lending grew 56% to $420 million from $270 million in the same period, leading to an increase in the return on dollar-based equity to 17% in 2004, compared to 11% in 2003. Total assets increased by 53% in 2004 to reach around $1.8 billion. As of April 2005, the bank’s total assets were worth $2.1 billion, Abdalla says.

“During the previous period, the bank was building the infrastructure to allow for focused growth,” says Abdalla. That said, AAIB did relatively little in the way of nurturing the local market. With branches in New York, London, the Emirates, Tunis and Beirut, AAIB was more focused on international and corporate clients than expanding on the ground in Egypt.

“For the past two years now, we have been growing organically and further focusing on the human resources that would carry us forward,” says Abdalla. In the past two years, AAIB has more than doubled its number of branches inside Egypt from just six to the current 14 while reducing its overseas activities; Dubai, Abu Dhabi and Beirut are now its only international branches.

“While we were orchestrating this organic growth, we were also keeping our eye out for a good acquisition. Essentially, this deal [MAIB] has been 18 months in the making. We carefully screened the market for legitimate candidates and found MAIB to be a good fit for Arab-African,” says Abdalla. “There are several synergies that should make the merger of the two banks work. We are a dollar-based bank with a lot of big corporate clients, while MAIB is more tilted towards Egyptian pounds and retail customers. They have a relatively clean [loan] portfolio, good human resources — which we will aim to make even better — and a product range that is complementary to ours.”

By the end of 2005, when the acquisition will be formally completed, MAIB’s nine branches will become AAIB branches. Until then, however, MAIB’s branches will function as part of AAIB but will continue to retain their own identity as part of a program to gradually improve them ahead of the switchover early next year.

According to Abdalla, the success of any merger is ultimately measured by how well corporate cultures integrate to follow and share a unified vision of future success —a lesson international giants such as Time Warner learned after its merger with internet service provider America Online.

“Neither good accounting nor tax benefits can make a bad merger good,” Abdalla says. “The only thing that makes a successful merger is the existence of proper synergies and the ability of teams to integrate. The acquisition or the merger in itself is not the goal, but rather the benefit that comes out of it. In order to generate this benefit, you have to start by implementing a well thought-out integration plan that includes everything from HR to IT. This is the most challenging and exciting part of the whole deal.”

Since day one of the acquisition, AAIB has been conducting orientation sessions for all the employees of Misr America to familiarize them with the inner workings of the bank and brief them on their roles and what is expected of them in the interim transition phase.

With one of the best reputations for customer service on the market, AAIB will have a formidable task ahead as it works to transfer its client-oriented culture to a bank that has been less focused on customer care.

“I wouldn’t say MAIB’s customer service is bad, but they have in a sense been sleeping,” says Abdalla. “This is not necessarily a bad thing for us. It provides the potential and an opportunity for us to grow with this bank.” He explains that many of MAIB’s 15,000 clients have been banking with the institution since it was founded in 1977 as Bank of America.

“We believe that human resources can be retrained,” Abdalla says. “If the employees have the ability and willingness to readapt, then we should provide them with the proper solutions in order to move forward.”

AAIB currently has 600 employees, while MAIB has 300.

“Even with its current level of service, MAIB has managed to slightly increase its client base over the years,” Abdalla concludes. “It is our plan to upgrade the quality of service as well as the number of products being sold so that we can easily cross-sell on the existing clients. The value in this deal for us isn’t just what is currently there, but rather in the potential. It’s a completely different strategy from acquiring a well-run bank. We chose to go for the potential value. We are confident that we will get a good return on our investment and generate value for our shareholders through this acquisition.”

Mergers and acquisitions are the future of the Egyptian banking sector. “The process has already started as we have seen with some of the public sector banks” — Misr Exterior merged with Bank Misr in September 2004 — “I think mergers will become much more prevalent in the coming period,” says Abdalla.

With the new banking law raising the minimum capital adequacy requirement for banks from LE 100 million to LE 500 million on July 14th, many banks now have no choice but to merge or be acquired. As one of the largest private-sector banks in Egypt, AAIB’s capital exceeds the LE 1 billion mark. Abdalla feels that they are now very well positioned to absorb some of the smaller banks.

“We are documenting each and every step of this acquisition process,” he says. “It is our first such exercise, so it’s very much a learning phase for us. Having gone through this experience, we will be much better prepared for further acquisitions — whether local or regional — should other opportunities arise.”

The long-heralded privatization of the banking sector also seems to be on track, as two major players, Barclays and Société Général, both recently bought out the state’s shares in their local joint-venture banks Barclays Bank Egypt and National Société Générale Bank (NSGB), respectively.

“A fragmented banking sector is one of the worst things you can have,” Abdalla says. “Both the consolidation and privatization efforts that are going on right now are very healthy. Our banking sector in Egypt and in the region as a whole is still very small. The entire region’s banking sector is equivalent to the assets of the world’s largest bank. We definitely need to work on growing, and the only way we can do that is by consolidating.”

Before the wave of consolidations began, Egypt had 54 banks, including six state-owned banks (56% of total assets), 35 joint-venture banks (38%) and 13 foreign banks (6 %). Abdalla predicts the figure will be cut in half within two years, a prediction in line with the Nazif government’s suggestion that 22-25 institutions should be left standing when all is said and done in 24 months’ time. (For more on capital adequacy requirements and consolidation, see News Focus, page 44.)

“We will have a maximum of 25-30 banks, all of them much stronger than what we see today,” he predicts. “It just makes no sense for the smallest 14 or so banks to have a 1% market share. How can these banks continue to exist?”

A well-respected figure in the banking industry, Abdalla is a member of the boards of both the CBE and the Cairo and Alexandria Stock Exchange (CASE). His list of accomplishments on the financial scene is impressive, but he instead prefers to speak about the ways he and the bank uses their financial might for social achievements. He says that out of all his responsibilities outside Arab-African, the one dearest to his heart is his part-time faculty position at the American University in Cairo, where he has been teaching finance for the past 10 years.

“This is one thing that I really cherish and would like to keep doing for as long as I can,” says Abdalla, who is himself an AUC alumni (he earned both his BA and his MBA there). “I try to stimulate my students’ abilities to think. Rather than relying on conventional teaching methods I focus more on case studies. As a result, my students tell me that my classes are the most practical thing they get,” he adds.

As part of AAIB’s philanthropic efforts, Abdalla initiated a university-level banking contest called the AAIB Award. The contest was piloted last year at AUC, when students teamed up in groups of three and competed to invent and professionally present a new financial product. It was so successful that the bank opened it this year to include students at the faculties of Commerce and Economics at Cairo University. A total of 251 students participated in the contest this year and gathered to celebrate their achievements at AUC’s Ewart Hall on June 21st.

“During the six-month period that they are given to work on the project, students learn negotiating, marketing and presentation skills. They learn how to think analytically and get first-hand experience in structuring a product program,” says Abdalla. Each team received help and guidance from two advisory councils of academic and professional volunteers through a structured extracurricular training program.

On June 21st, a team of four Cairo University Economics students won the grand prize for what they called the Golden Basket, their concept for a mutual fund based on the CASE 30 Index. After the ceremony, Abdalla said he believed the team came out ‘golden’ because of “their determination and hard work: [their idea] was presented properly. The idea is not applied in this country, but it is abroad.”

The three winning teams received a total of LE 30,000 in academic scholarships.

“Rather than offering traditional scholarship programs, we thought this might be a better way to benefit more students not only financially, but also academically and professionally,” he concludes. Abdalla hopes the program’s continuing popularity will attract the attention of other universities including Sixth of October and the German University in Cairo.

Abdalla’s goals for the bank’s corporate citizenship extend into other areas as well. “At AAIB we have been very involved in health care. We began a project to renovate one floor of the Abu El-Reesh Pediatric Hospital. It wasn’t only about donating money and letting it go at that,” explains Abdalla. “We had our engineering consultants and our employees involved in every step of the program.”

The results of the renovation were so stunningly positive that AAIB decided to take things a step further and is now working to refurbish the rest of the hospital and train its nursing staff.

“We realized that there is a huge problem with nursing. You can have a beautiful playroom, but if the staff is not qualified, it has all gone to waste. This is why we decided that training had to go hand in hand with the renovation. We have even decided to put the nursing staff on AAIB’s payroll. We will pay them well and see if their performance improves. If it doesn’t, they will be replaced,” says Abdalla.

He hopes that other businesses might copy AAIB’s Abu El-Reesh model. “We want other corporations to be jealous when all this is complete [in 12-18 months]. It is definitely something that we ourselves will want to replicate in other places,” he says.

While bankers traditionally have a pet philanthropic project, it is rare to find leaders such as Abdalla, who has managed to combine the financial and business acumen to take their institution down a path of growth and excellence, yet also have the ability to actively participate and contribute to the welfare of the community. bt