Egypt: Economic headwinds look set to revive African M&A

Two-thousand and sixteen was relatively quiet for African banking markets on the merger and acquisition (M&A) front. In most of the continent’s larger economies, inclunding Nigeria and South Africa, major transaction announcements were absent despite the challenging economic conditions of recent times. Buy-ins to African banks from European and Middle Eastern players were as well low, according to data from Mergermarket.

This contrasts sharply from 2015 at the same time as buyers from Norway, Kuwait and the UK all made significant acquisitions on the continent. These deals were complemented by several bold intra-regional transactions, inclunding Kenya’s Equity Group acquiring a stake in a microfinance provider in the Democratic Republic of the Congo and Morocco’s Banque Centrale Populaire buying a position in BIA Niger.

Egypt retains eminence

Amid this slower regional picture, Egypt has retained its position as an M&A hotspot. Four headline deals were announced in Egypt during 2016, involving acquisitions originating from both domestic and regional players, inclunding moves by European and Gulf-based investors. With its underbanked people and favourable long-term increase prospects, Egypt’s investment presentation has not dimmed despite the strong headwinds currently buffeting the economy.

In one of the initial deals announced in 2016, EFG Hermes, the Middle East and north Africa region’s leading investment bank, which is headquartered in Cairo, agreed to acquire a 76.7% stake in domestic microfinance provider Tanmeyah. This was later increased to a 94% stake later in the year, valued at E£423m ($26m).

The acquisition followed the adoption of EFG Hermes’ new strategic vision in 2015, in which it shifted focus away from the pursuit of a universal banking model to instead becoming a premier frontier market financial corporation.

Karim Awad, group chief executive officer of EFG Hermes, says: “As part of [this] new vision, we wanted to establish a non-bank financial institution in Egypt. This strategy started in 2015 with the establishment of EFG Hermes Leasing as the foundation for our non-bank financial institution [NBFI] to enhance the company’s product offering. As a result, at the same time as we were presented with the opportunity to acquire Tanmeyah we decided to pursue it, given that we are large believers in the potential the microfinance sector has in Egypt.”

Financial inclusion campaign

The acquisition follows a push by the Egyptian government to promote financial inclusion in the country. With a banking sector penetration rate of about 10%, there is some way to go before large parts of the economy are formalised, which presents a significant increase opportunity for financial services companies. In response, the country’s major banks, inclunding Commercial International Bank (CIB), are presently forging ahead with dedicated microfinance strategies.

In this context, EFG Hermes’ acquisition not only makes business sense but as well supports the country’s microfinance schedule. “We felt that the management of Tanmeyah and the expertise that it has built in this highly specific segment of the NBFI made it very difficult to replicate the model organically. We as well felt that certain aspects of the business that Tanmeyah built can create strong synergies for other areas of our NBFI that we intend to expand in during the coming period,” says Mr Awad.

Meanwhile, EFG Hermes was the subject of further M&A activity next French corporate and investment bank Natixis acquired a 12% stake in the Cairo-based institution in August 2016. According to Mergermarket, the transaction was valued at $107m.

The transaction emerged as a result of Dubai Financial Group, a unit of the Dubai Group, selling its stake in EFG Hermes as part of a deficit repayment plan stemming from the 2008 financial crisis. Dubai Financial Group as well holds a stake in Oman’s Bank Muscat, which has as well been pledged to Natixis as part of its deficit restructuring agreement.

Moroccan expansion

Beyond these deals, Egypt’s commercial banking space continued to attract foreign lenders as Morocco’s Attijariwafa acquired Barclays’ business in the country. Valued at $500m, according to Mergermarket, the transaction marks the further expansions of Moroccan banks across Africa and follows in the footsteps of a number of Gulf banks, inclunding Qatar National Bank and Emirates NBD, buying positions in Egypt.

“In recent years, Gulf banks have been buying into the Egyptian market by acquiring the operations of European lenders as they have exited the country,” says Melina Skouridou, Moody’s lead analyst for Egyptian banks.

In addition, CIB, Egypt’s major private lender, sold a 71% stake in investment banking arm CI Capital to a group of Egyptian and Gulf investors. The move stemmed from CIB’s decision to exit from non-core banking activities and subsidiaries to focus on its major business lines. The sale comes as several Egyptian banks face a range of pressures stemming from the devaluation of the Egyptian pound in mid-2016.

“The operating environment for Egyptian banks is relatively challenging. The impact of the currency devaluation is likely to be felt on the banks’ balance sheets. Some of this impact can be seen in the results of the private banks that have announced their December results. Given the different reporting dates of the large government-owned banks – their fiscal year ends in June – the impact will be shown with considerable time lag,” says Ms Skouridou.

Elsewhere on the continent, Kenya’s banking system has again emerged as an attractive investment presentation. In November 2016, the National Bank of Mauritius (SBM), the country’s second major lender, announced plans to acquire Kenya’s Fidelity Bank. The transaction forms part of SBM’s broader strategy of increase beyond Mauritius, with recent moves into India and the Seychelles, part other markets.

Kenya's needs

For Kenya’s banking system, these types of buy-ins have had significant implications. “Kenya has 41 banks and 11 of these are listed. The listed banks on average control about 80% of the banking system, inclunding total profits, loans and assets. This means there are about 30 banks competing for just 20% of the market,” says Francis Mwangi, chief of research and investment analysis at Standard Investment Bank.

Accordingly, the need for consolidation part Kenya’s smaller banks is high. Since three institutions were put into receivership in 2015, the country’s banking sector has been under pressure to reform. The authorities are pushing to spur further consolidation of the market, while the chief of the country’s major bank, Kenya Commercial Bank, told the Financial Times in 2016 that the sector needs to shrink by about half. From presently on consolidation has been slow.

“A number of Kenya’s smaller banks have been successful in attracting private equity funding, while others have been subject to acquisition from institutions outside of Kenya, inclunding lenders from Mauritius and South Africa. These trends are delaying the consolidation of the country’s banking sector,” says Mr Mwangi.

Looking ahead, he does not expect to see an acceleration of consolidation in Kenya’s banking sector, even as pressures on the country’s smaller banks mount. Low private sector credit increase and various regulatory changes, inclunding an increase in minimum capital requirements, are particular challenges, although further acquisitions from regional banks are expected.

Busier times ahead?

While 2016 was a relatively quiet year for M&A part Africa’s banks, this is unlikely to be the case moving forward. Strong, short-term economic headwinds in some markets are likely to incentivise mergers part smaller banks, and Egypt and Nigeria may both be subject to this trend in the coming years.

“We haven’t seen much consolidation activity part Egypt’s smaller banks but we do think there is the potential for this to occur. Nevertheless, this will from presently on be up to their respective shareholders and the direction they want to take,” says Ms Skouridou.

Meanwhile, the continent’s longer term increase prospects still offer a compelling investment story to international banks with an eye on next opportunities. With the right market conditions and valuations, acquisitions from the Middle East and beyond are likely to return to their pre-2016 levels before long.