State-owned Banque Misr, Egypt's second-biggest commercial bank by assets, expects government firms to repay 5.5 billion Egyptian pounds ($984 million) in overdue debts within weeks, slashing its stock of bad loans.

Egypt has been cleaning up bad debts in state banks as part of financial reforms that have included selling one big bank and the attempted sale of another, although Banque Misr is not listed as a privatisation candidate any time soon.

Even if the banks are not sold, analysts say cleaning up balance sheets should help them maintain lending levels and help the government prop up growth amid a global downturn.

The repayment of 5.5 billion pounds means all remaining bad loans at Banque Misr will be covered by provisions.

"For a bank which was virtually bankrupt, once we settle that, we will have no provision gap," said vice-chairman Mohamed Ozalp, who joined the bank in 2003 as part of a shake-up that introduced private sector managers to state banks.

On future lending by the bank, he told Reuters in an interview: "There has been no retrenchment in lending by public sector banks, but perhaps by private sector banks."    

Banque Misr had assets of 153.8 billion pounds as of June 2008 and loans of 59.90 billion pounds. The bank's balance sheet for June 2009 is not expected to be released until September.

The 5.5 billion pounds repayment to Banque Misr is part of an operation to settle 25 billion pounds of bad loans to both private and government borrowers. About 15 billion pounds had been settled before this latest payment, Ozalp said.

As part of the government reforms, Banque Misr took control of another state bank, Banque du Caire, in 2005. That bank was put up for sale last year but an offer was rejected as too low.

But Ozalp said efforts to clean up Banque du Caire's balance sheet were making progress.

Banque du Caire has bad loans of just under 20 billion pounds, of which 10 billion are now covered by provisions. "The remaining 10 billion, we are quite confident that we can settle, just like we succeeded in settling loans here (at Banque Misr)," he said.

Had the sale of Banque du Caire gone through, Ozalp said proceeds would have allowed the government to clean out all non-performing loans to both banks.

As a result of restructuring, Banque Misr was regaining share in a market where state banks still hold almost 50 percent of all deposits, although private banks have been growing.

"Banque Misr has regained market share on deposits for the first time in many, many years," Ozalp said, adding it held 16.2 percent of deposits, up from 15.7 percent at the start of 2009. "It's only half a percent, but it's still quite significant that we are recuperating market share for the first time." - Reuters