Dubai - Go back a few months and the disposal of Egyptian assets seemed like a good option for European banks desperate to raise funds by selling non-core operations.
Flash forward and Egypt's deteriorating political situation, together with the resultant sharp drop in its currency, threaten to hamper further selloffs, with international banks unwilling to accept the fire-sale prices that are increasingly on offer.
For investment bankers on the hunt for fees, it threatens to be a lengthy wait for dealmaking to revive. And last year's flurry of activity may start to look like no more than a blip.
“People who sold last year appear a lot smarter now than those who waited,” said one financial institutions group banker, asking not to be quoted because of the sensitivity of his position advising clients.
“Clearly, the current situation in Egypt does not look like it would lure even the most bullish of investors,” the banker said. “Clients are not asking about buying opportunities now but want to know how (much) worse the situation may get.”
European banks, under pressure to cut costs and bolster their capital levels in the post-credit crunch regulatory clampdown, have been looking to sell Egyptian operations to regional banks more familiar with the country's politics and bullish on its long-term prospects.
French banks Societe Generale and larger rival BNP Paribas agreed to sell their banking arms in Egypt to Qatar National Bank and Dubai's Emirates NBD respectively in 2012.
Some had expected other deals to follow.
Those at the top of the list were France's Credit Agricole , which holds a 61 percent stake in Credit Agricole Egypt, and Italy's Intesa Sanpaolo, which has a 70 percent stake in Bank of Alexandria.
But neither has yet raised a “for sale” sign.
Intesa Sanpaolo Chief Executive Enrico Cucchiani said at the World Economic Forum in Davos, Switzerland, two weeks ago: “Egypt is a country to be monitored. However at the moment Bank of Alexandria is having positive results. We look at it carefully.”
A Credit Agricole spokeswoman in Paris declined comment.
Already at least one mooted deal has not gone ahead.
Piraeus Bank, Greece's fifth-largest lender by market value, halted the sale of its Egyptian subsidiary valued at more than $200 million in July last year.
And a dramatic worsening of Egypt's political situation in recent weeks has hurt investor sentiment, making disposals increasingly difficult, bankers say.
Protests marking the second anniversary of the uprising that toppled Hosni Mubarak have led to nearly 60 deaths since Jan. 25, prompting the head of the army to warn that the state was on the verge of collapse if immediate action was not taken.
“The government has not done as well as most expected and the transition to democracy has not been smooth,” Jaap Meijer, an equity research director at Dubai-based Arqaam Capital, said.
Meanwhile, the Egyptian pound has dropped sharply and the central bank stepped in this week with measures to protect the currency.
The currency's weakness creates uncertainties for any acquisitions in Egypt.
“In the short term, a drop in the value of the pound makes it cheaper for the buyer, especially on the public equities side,” said one Egyptian banking source, speaking on condition of anonymity. “But if the situation continues and the pound continues to fall, then it impacts your profitability in the long-term. You have to view it from either side.”
Another potential concern for European banks is the shrinking pool of potential regional buyers.
Qatar National Bank for instance has been on an acquisition drive but now has its sights set on Turkey, having paid $2.2 billion for the majority stake in Societe Generale Egypt.
Emirates NBD probably has its hands full after shelling out $500 million for BNP's business in Egypt, a deal which marks a major strategy shift for the bank which has been hard hit by exposure to Dubai's state entities.
KEEN ON EXPOSURE
Other regional banks, such as Dubai's Mashreq, Morocco's Attijariwafabank and Lebanon's Audi Bank , are keen on gaining exposure to Egypt, bankers say, but most are looking for mid-sized transactions and not big-ticket ones.
All three looked at BNP's business and Attijari hired UBS as an advisor before losing out to ENBD, a Dubai-based banking source said, speaking on condition of anonymity.
“Yes, there are two to three potential buyers, but it's not like they need to buy in the country and they are really cautious on valuation,” the banker said.
Another barrier to deals is the frequently significant valuation discrepancy that separates buyers and sellers of Egyptian assets.
“Prior to the revolution, you would not see any banking deals in Egypt at less than three times book (value). There have been bids at one time book for some of these assets,” the Dubai-based banker said, referring to a common valuation measure for banks.
“Yes, valuations have fallen, but people are looking at the political situation and saying, 'we want it to be even cheaper'.”
BNP sold its business in Egypt at 1.6 times book value, while the Qatari purchase of SocGen assets was at nearly 2 times.
National Bank of Abu Dhabi would be keen to buy the Egyptian units of French banks, its chief executive said in July, but it has been relying more on organic growth.
International banks, on the other hand, are staying away as they still consider the risks to be not worth taking.
Standard Chartered for example held talks with Piraeus for its Egyptian business in 2011 but backed out as the political situation worsened.
“The recent bout of instability is but a reminder that the transition is rocky,” said Rachel Zeimba, a senior analyst at Roubini Global Economics in London. “And that political, policy and regulatory risk is stifling the economy.” - Reuters