Egypt, new dimensions, new frontiers

Mr James D. Vaughn, Managing Director of EAB

Egypt -

Interview with:

Mr. James D. Vaughn
Managing Director

March 1st, 2000
EAB offers a wide array of corporate and retail banking services. Nevertheless, corporate is EAB's core segment and primary asset generator. Most of your clients are local but you also provide services to multinationals such as General Motors, Siemens or Daewoo. Is the enlargement of your multinationals segment one of your priorities, and if so, what are your geographical markets and type of clients you are targeting?

The multinationals are one of our targets as they are generally well run businesses that possess the technology, the software and business management software. We want our customers to be globally competitive. And if the company is globally competitive it is going to be a long-term good customer. So we are looking for good locally well-run companies, well-established multinationals and public sector businesses.

Our priority being quality companies and clients we do not differentiate between multinationals and local private or public sector companies

What are the corporate services and market segments you are specialized in, and what are the new products and services you are about to launch?

Historically EAB have been providers of funds, foreign exchange, trade and payment services focusing not only on lending money but also making up cash management service, providing key role services, helping with specialized trade finance, stretched finance deals, deals with international agencies, foreign exchange and foreign exchange products. The latter will be changing in this market from basic foreign exchange transactions, to other kinds of more sophisticated products.

May I have your assessment on the mounting criticism concerning the excessive lending of banks to the real estate sector rather than to the productive sectors, and do you think the local industry is sufficiently served by the banks?

This is definitely not our case. Our bank's main focus being to find good companies we are pretty well diversified across different industries. For better or worse we have a relatively low weighting on the real estate side, as we do not finance real estate developers. We finance more frequently the contractors involved in doing the construction work for those developments. As a characteristic of our bank, in fact, we are much more heavily involved in financing the manufacturing businesses and services than we are in the real estate development or in trading in general.

Does that reflect more of the banks' confidence in the local industry's potential, or is it simply that other banks are more conservative?

In fact, I think it is just the reverse. Our Bank's portfolio is a reflection of a pretty conservative credit culture that derives from our affiliation with AMERICAN EXPRESS BANK with same credit policies. I myself do not believe that lending in real estate is conservative specially given my time in other emerging markets. Our view is more as cash flow lenders. We are concerned about how much cash does the business generate because in fact that is how our bank is paid. So when we are talking about the lending business we focus on cash flows whether they are short or long term. We look at the maximum debt a company can or should bear, in other words, at the valuation of that company.

You have a vast experience in Asian markets. Do you see any parallelism between the way corporate banking evolved in those "tiger economies" and its present development in Egypt?

Both local industry and the banking sector are rapidly growing. The major opening of the market in Egypt, the privatization and the development of businesses existing today commenced only ten years ago and with it the development of the banks. This bank was started 25 years ago at the time of late president Sadat but the major change in the way we could do business happened only in 1991, a date that has marked the rapid growth of the banking business. Our customers, our bank and local capital market are changing rapidly and if we were to compare with other emerging markets it can be said that this period is very condensed and that the changes are very fast. We will see that kind of change also in the retail banking because a year ago retail banking was non-existent. Presently everybody is investing in development of retail banking, searching for new products and there will surely be an explosion.

You just mentioned that retail banking is a strategic market segment. Since your customers are changing rapidly, what sort of tailor-made products can your bank offer to your clients?

There are few banks in Egypt that offer pretty decent cash management products so the possibility to log on to our bank and view account transactions in many different ways and to carefully monitor their collections from across the country, their trade bills and so forth is new for corporate treasurers. This product has and is still rapidly changing for us since we keep spending money to develop it and so our competitors are brought in a product like that. I believe that shortly there will be in Egypt banking by mobile telephone as in Finland. Initially this kind of banking would be limited to inquiries, movement of cash from one account to another. EAB is configured to do this type of banking although we don't have it at the present time with the services provided on the mobile telephone. Today is EAB's first day of telephone banking. There are different configurations of telephone banking in Egypt and we believe ours is one of the best. The EAB and other banks are actually working on various levels of internet banking as well. If we are to compare to last year, we would witness massive changes. City Bank which is one of the best global consumer banks opened with a vengeance here in Egypt, launching a Master card last September and I personally believe that they are very well set-up and that they are providing great levels of service which will force the rest of us to meet those kinds of service levels. This will be particularly beneficial to whoever is consuming the product whether a corporate consumer or a retail consumer.

In 1998 EAB redesigned its system architecture, centralized its systems and introduced a real time, nation-wide banking service. Do you expect to implement Internet banking service soon?

Yes, we will. But there are various levels of Internet banking service. One of the things that we will have soonest, will be the ability to log on to your account and view your account activity much like a corporate client is able to do today by modem. This process will be available for consumers but that is different than having an Internet bank similar to that of American Express in the U.S.A.

Last year EAB had been providing its customers with investment banking services through its affiliate Delta EAB, and decided to sell its stake in the firm to ABM-Amro. What kind of new situation has that created?

American Express Bank is neither a brokerage nor an investment bank, therefore, as a partner to Delta we did not bring globally competitive skills to Delta either in procedures or in international client flow. The vision for the marriage with Delta EAB was the development of retail brokerage and investment banking in Egypt. In view of the fact that EAB did not have any of the above, the Chairman and myself searched for alternatives until we identified ABM-Amro. The initial plan was to bring them in as a partner, but in view of the fact that they wanted a share of more than 50% we in EAB reluctantly decided to sell our stake which finally I think is the best thing for Delta. EAB is still jointly working with Delta ABM. The vision of our Bank is that if there is a requirement for an investment banking transaction or when clients require an investment banking service we partner with one of the firms existing in the market whether it is Delta ABM, EFG or CIIC to accomplish the task. In a way we are lucky because we are free to decide.

In this case, do you think your customers are better serviced now?

Sure. Our Bank has an investment-banking department; we train our people in valuations but we do not pretend to be the investment bank in the market. We work more as an advisor and we just team up with somebody else to do the transaction in general, which is better for the customers as they will not get a secondary service from us.
What is the management philosophy behind your mutual funds?

The market in Egypt is still pretty limited. The issues that our fund looks at are those that have enough liquidity and involve decent companies. There is very little choice whether this is considered growth or income. So, if you say I am only going to do income and stick to high dividend yields, for example, you have an extremely small scope of companies. Our bank has an investment committee, which closely monitors the market place and we have the companies that we closely follow. Therefore is just a matter of re-weighting our portfolio with what we think is developing and changing in the market. The weightings don't change very dramatically. What we are working on today is adding a couple of funds to the existing thus creating a small family of funds. As a result, you will be able to switch, for instance, from a money market fund to the current mutual fund to another stock mutual fund that is also going to be created. The bank has already obtained the initial regulatory approval and shall be working on this project.

Does the fact that you are embarked in adding two new funds imply that you expect a rapid growth in this market segment?

The bank is looking towards growth and the prevailing concept is to be able to give our clients a choice, which is difficult to achieve when you have only one fund.

Would you give us some updated figures of your bank's operations?

Updated figures of the bank shall be provided on March 7th. In 1999 the bank underwent a remarkable growth in our net interest account, commissions and fees, foreign exchange; we also had interesting transactions so the end result is that we had a very good year. 1998 was not as good as expected.

Recently the Secretary General of the Union of Arab banks recommended that the minimum capital requirement for Egyptian banks should be as high as 200 million dollars compared to 30 million dollars today. Do you agree with this statement?

I believe each bank can provide good services and products without having a minimal capital requirement like that. However, the commonly accepted doctrine is that in order to improve the banking sector we are going to have to combine smaller banks that do not have the market share, financial strength or resources to grow and compete. There are smaller banks that require an action.

I would draw up a distinction between existing and new banks. If I were to make up a rule for the opening of new banks I could be tempted to say that a higher level of minimal capital should be required, while this rule may not always need to be applied to existing banks that were opened under previous laws. However the establishment of a regulation whereby a higher level of minimal capital is required exists in other markets as well.

By the year 2005 with the accomplishment of the GATT agreement, would you think that Egyptian banks are well positioned to face this enormous challenge?

Yes, they will be, at least the ones that are in general closer to the customers as by the year 2005 given the ongoing changes they will be able to take care of the retail and corporate customer. There will also be a need for international financial powerhouses, possibly for a client of capital market activities and large transactions that will have to be handled. Local banks will definitely be larger, better and able to compete by the year 2005.

The leading private sector banks are away from the public sector banks since 1990 and their rate of growth and earnings have been high. Private sector banks have returns on equity at around 25% or more.

Is the Egyptian market over- banked?

I don't think so. Our main competitors have focused on a narrow client segment, the banking, which has been provided for local consumers or for small and medium sized companies, is nil. The rate of change in our primary focus group, the good large companies is fast and high and it will continue to grow .We will be focusing also on developing this terribly under-banked segments of the market. There is a huge amount of the market that is still depending on manual payments and completely un-banked.

Mr. Coutry, the chairman of the United Bank of Egypt, told us recently that in order to survive and be able to compete, small banks in Egypt need either to merge, either to acquire, or to be acquired. Do you agree with this statement?

There are a few banks that need to be drastically changed whether they are closed, whether they merge or are taken over. United Bank was a vivid example of a non-competitive bank. Credit management came in and dramatically changed the bank into a successful operation with no need for a merger or a take-over by another bank. All it required was a complete change in the management philosophy of doing business. Moreover, I do not think they have to take over somebody else to survive. Therefore all they need to do is to focus on what they are presently doing well and they will be able to grow rapidly. There is the possibility of growing more rapidly by taking over somebody else but it means taking over their problems as well. EAB does not want to take a premium for somebody else's problems in an attempt to gain market share. We do not need a banking license and in tomorrow's world the need of a huge branch network is questionable.

Do you think that the recently appointed Obeid's reformist cabinet along with the latest and new round of privatization will take the stock market into a new phase of development?

Probably the answer would be positive, as the key is a new phase of development. The market is still in a very young phase and there is ample room for this. A lot of steps should be taken and a lot of development should occur; yet all this is high on the top priority list. On the bond side they are now pushing in the right direction and this is promising. There is need for more issues on the equity side, as well as the need of liquidity, but it will come.

Egypt is a country with strong macro-economic fundamentals, a diversified economy, strategic location, as well as being on excellent terms with the most powerful nations in the world. Yet the country is still carrying burdens such as the traditional balance of trade deficit, unemployment, bureaucracy and a rather low performance both in exports and foreign direct investment. What would you recommend as a solution to relieve these burdens?

Many things are already happening. There were many changes that had to be made and remain to be made whether in the legal structure, in the tax structure, or in the human resources side of the country both in terms of education and training. And similarly to what happens with the capital market these issues can not be taken care of in just 10 or 20 years. The change is prevailing even though sometimes it is two steps forward and one step back or vice-versa. Because of Egypt's great location, the decent pace and the large population I expect Egypt to play a major role in the region and be a regional power-house while strengthening its trading position with Europe, Middle East and Africa.

You seem to be very well integrated in Egypt. Do you find all you need and all you had expected in this country?

Yes, I got easily integrated and found Egypt to be the easiest country I have ever moved to. My family and children are not only well integrated but they are in love with it. Materially it is good enough and there is room for a lot of action. The things to do and see here are fabulous. And, in general, Egyptians are very warm without demanding something in return.

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© World INvestment NEws, 2000.
This is the electronic edition of the special country report on Egypt published in Forbes Global Magazine.
August 7th 2000 Issue.
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