Finance: After its acquisition, Attijariwafa Bank is struggling in Egypt
Two years after the acquisition of Barclays' Egypt subsidiary, the Moroccan firm Attijariwafa Bank recorded very disappointing results.
Its management team is putting this into perspective, ensuring that its strategy will work in the long term and that the group’s financial stability is not threatened.
After paying Dh4.9bn ($505m) to set up in Egypt two years ago, the Attijariwafa Bank group is strengthening its local team. Halla Sakr, appointed by the British group in 2016 and said to be close to the current governor of the Egyptian central bank, is now chairman of the board of directors, replacing Mohamed El Kettani, the current CEO of the Moroccan group.
At the same time, with the backing of El Kettani, Hicham Seffa is in operational control. A former manager of the Tunisian branch of Crédit du Maroc for eight years, he doubled its revenue and quadrupled its profits.
These decisions reflect a clear ambition. Attijari, whose net banking income reached Dh22.4bn ($2.3bn) in 2018 (+3.4%), wants to prevent its largest acquisition from turning into a disappointment.
Poor performance in Egypt
“The group, with the appointment of Hicham Seffa, expects to repeat what it achieved in Tunisia, particularly in the field of digital services (the fourth-largest contributor to the group’s net income, with Dh300m), even if the Egyptian market is different and probably more complicated,” according to analysts at the Tunisian firm AlphaMena.
While in the first eight months of the year in 2017 under the Attijariwafa Egypt banner, the group ended with excellent results, the following year was much more difficult. And 2019 does not promise better results.
After having been the group’s second-best contributor behind Morocco the year of its acquisition, Attijariwafa Egypt saw its profits drop by more than a quarter last year from Dh400m (7.4% of the overall total) to less than Dh288m. It represents 5.1% of the group net income (+5.8% to Dh5.7bn), which is less than Senegal, Côte d’Ivoire and Tunisia.
Analysts are worried by the drop in its profitability. While the return on assets was 4% in 2017, it has decreased to 2.2% twelve months later. Although this figure is still higher than the group average (1.3%), this drop is significant.
“This level of profitability positions our bank at the level of its most efficient local competitors, but obviously at a lower level than the international banks established in Egypt,” concedes Ismail Douiri, deputy managing director of Attijariwafa Bank.
Taking into account the expectations and forecasts of the bank’s managers, these results appear to be an underperformance. “The situation on the ground is distressing for the group’s senior managers, despite the serenity they are trying to show. They showed excessive optimism at the beginning based on the conclusions of a study conducted by a major consulting firm,” says a well-informed source.
The first year brought a major investment to replace Barclays’ information systems. “This project is one of the most complex and risky we have faced since the BCM-Wafabank merger in 2004. It had to succeed in thirteen months, because Barclays was divesting at the same time from Barclays Africa, on which some of our systems depended,” recalls Douiri.
The rolling out of these tools and the start of the activity were carried out under less than ideal conditions. “We had some non-recurring expenses related to the IT project and rebranding marketing expenses, and we suffered, like all banks, from the effect of inflation that was still above 14% on average,” says another source at Attijariwafa Bank.
Attijariwafa’s plan is to make the new subsidiary one of the ten largest local banks by 2023 by reaching a market share of 2%, compared to 0.7% at the the time of its purchase. The Egyptian banking sector consists of 38 banks, 27 of which have foreign capital, and the National Bank of Egypt is the largest, with a market share of more than 25% in deposits.
With the desire to boost credit and the economy, the Egyptian central bank decided in 2018 to lower the key interest rate by 2%. The authorities have maintained the same level until now, which has negatively affected the profitability of local banks.
In the case of Attijariwafa Egypt, these difficulties were compounded by the departure of several key clients. “These multinationals prefer the rating agencies’ rating of their banks to other selection criteria, such as deposit remuneration,” explains Douiri, who ensures that their deposits have been replaced.
The Egyptian banking market is highly competitive and volatile, with large companies not hesitating to switch from one institution to another according to the rates offered. “This is the first time that Attijariwafa Bank has faced such tough competition. And it is the only market where the Moroccan establishment is not among the leaders. It is difficult for this bank, which is reputed to be inflexible on its prices and interest margins, to adapt,” says a source. In particular, some Egyptian companies reportedly turned their backs on Attijari because no negotiations were possible.
In 2019, Attijari expects to reverse this trend by attracting 70 major companies from the agribuisness, health, renewable energy and tourism sectors. “The outstanding total loans granted to companies should exceed €800m ($898m) at the end of this year, compared with €600m at the same time last year,” says Tamer Yousri Ragheb, head of corporate and investment banking at Attijariwafa Egypt.
To attract them, the Moroccan bank is leveraging its African footprint. “The Egyptian industrial environment is diversified and dynamic, and sees Attijariwafa Bank as a means of accessing markets that were relatively unknown and difficult to access, particularly in French-speaking Africa,” says Douiri.
The group has also very recently launched banking products for exporting companies, mainly those that want to venture into West Africa. Attijariwafa Bank focuses in particular on SMEs which, unlike large companies, cannot easily obtain loans from other banking groups.
Branch network, mobile banking and online services
The situation is no better for individual customers, who numbered 120,000 at the end of 2018. They do not hesitate to use social networks to express their dissatisfaction, complaining that the service they received was better when Barclays managed the bank. The bank has submitted requests to launch mobile banking and an online banking service. The Moroccan group has also begun to develop its branch network, which is due to increase from 61 to 150 by 2023.
“Egypt is for the long term. If the group has to lose money in the early years, it would not be a big surprise or a problem. The implementation of processes and adaptation to the market takes time. It will take well over five years for this subsidiary to find a balance,” says the head of a consulting firm familiar with Attijariwafa’s operations.
Douiri shares the same view and confirms that the transformation and integration of the Egyptian assets is still ongoing. “We are convinced that the results will confirm the relevance of our choices over time. On the other hand, the rigorous work done so far will continue, be refined and will pay off as well as it has in all our other markets,” the chief executive explains.
Looking to the long term becomes all the more necessary for the managers as a new law could very soon oblige Egyptian banks to increase their capital. A law under discussion could raise the minimum capital required from $30m to $300m within three years, five times the current capital of Attijariwafa Bank Egypt. “Mergers and acquisitions are also expected, which should increase competition in the sector,” AlphaMena analysts predict.
However, none of this should undermine the stability of the Moroccan group, which has limited exposure to Egypt. “The decision to make this investment was preceded by an in-depth strategic analysis. […] Our objective is to build a diversified portfolio of investments that will help with the cyclicality of some of our markets,” says Douiri. However, 66.4% of Attijariwafa Bank’s risks outside Morocco are located in countries with a sovereign rating lower than that of Morocco (BBB-).
In countries such as Senegal, Côte d’Ivoire and Tunisia (all rated B+), Attijariwafa Bank has reached a cruising speed that offers it some comfort. In these markets, the time has come to consolidate the gains made.
“We are acting dynamically with a horizon of eighteen to twenty-four months and a close coordination with all the regulators. […] This approach allows us today, in the current state of regulation and without any significant acquisition, not to have to proceed with an additional capital increase,” Douiri says.
The new Egyptian subsidiary took up almost all the attention of the leaders of the group headed by Mohamed El Kettani, but expansion ambitions are not off the table. “They scrupulously monitor what is happening on the continent and, if an opportunity arises, they will be able to seize it,” explains a source at a consulting firm familiar with Attijariwafa Bank, in which the state investment firm Al Mada has a stake.
In addition to the group’s geographical expansion, the teams are also working to diversify its businesses. In markets where Attijariwafa Bank is well established, the group plans to open subsidiaries to sell consumer loans and insurance products through Wafa Assurance. “Al Mada wants to make its bank a powerful pan-African institution. This policy will not be revised, cancelled or even curtailed today,” says the source from the consulting firm.
However, since the acquisition of Barclays Egypt in May 2017 and the failure to establish a presence in Rwanda, where its offer for Cogebanque last year was considered too low, Attijari has put its expansion on hold. Many observers argue that this wait-and-see attitude augurs well for changes in governance. The 60-year-old current president, Mohamed El Kettani, in office since 2007, could continue for a few months or even years, but his succession is being prepared, says a consulting specialist close to the group.
Many people turned their attention to Ismail Douiri, 47, the youngest of the deputy general managers who surround the current president. Competitors Banque Centrale Populaire and CIH Bank have just drawn from their own pools of executives to pick a new boss, but recruitment from outside the Al Mada holding company cannot be ruled out. Personalities with a background in banking, such as Abdelmjid Tazlaoui, chief executive of Fenie Brossette and board member of Attijariwafa Bank, could be a contender.
This article first appeared in Jeune Afrique.