UNITED BANK LIMITED

The close of a difficult year

By: Naween A. Mangi
Jul 06 - 12, 1996 

This past week, the United Bank finally announced their results for the year ending December 31, 1995 and this was followed by news at the end of the week that the Ministry of Finance had approved the financial deal for the transfer of the Bank to the Saudi group Basharahill.

The $ 17 million deal ( for a 26% stake) was reportedly pushed through by the legal advisor to the Basharahill group who has worked consistently with the State Bank of Pakistan to reach this stage. The $ 17 million was already deposited with the government of Pakistan three months ago.

According to the report, the issue of the capital adequacy of UBL has been addressed as the buyers will inject $ 150 million of deposits in UBL to increase the Bank's liquidity followed by an additional $ 100 million in equity 2 months later, and a final deposit of another $ 150 million.

Concerns over the financial stability of Basharahill, a company incorporated in Gibraltar with a paid-up capital of some 2000 pounds, would appear to be alleviated as the company has been entirely taken over by Prince Nawaf Bin Abdul-Aziz Al Saud, who will now provide the $ 400 million. The SBP has sought adequate legal cover for the deal as well as guarantees for the new management team to be professional and well-equipped.

The year was tumultuous for the Bank though as its sale to the Basharahill group had previously been averted at the last moment as the State Bank seized control and took over management. After staggering from one problem to another, a difficult year for the Bank ended with few surprises, as they posted a Rs 514.5 million pre-tax loss.

Deposits

The failure to sell UBL left the Privatization Commission with a sizeable problem of credibility and led to some concern in the minds of depositors who were calmed with reassurances from the Bank itself and from the government.

A crucial area of focus for the Bank now, has to be on restoring depositor confidence. According to some reports during a three-week period in April, depositors, in their panic and confusion withdrew some Rs 26 billion.

The bank registered a negligible 0.9% increase in total deposits from Rs 108.3 billion in 1994 to Rs 109.3 billion in this past year.

The new management led by A. R. Khan as Chairman and Shafi Arshad as President has focused some attention on deposit mobilization; their advertising has been prominent, although their ads have consistently contained the statement - deposits 100% guaranteed by the government of Pakistan.

The UBL Unisona scheme, a rupee account which promises to triple deposits after seven-and-a-half years and double them after five years seems to have met with success. An announcement in the middle of last month showed this scheme to have attracted Rs 3.5 billion in recent days.

Their Overseas Saver Account, an effort to attract expatriates to deposit home remittances offers a return 3 % higher than any other bank and is offered to all Pakistani nationals working abroad. The Bank's home remittances business rose 3.12% from Rs 5.3 billion to Rs 5.48 billion in 1995.

Defaulted loans

Possibly the largest problem the Bank has to combat now is the recovery of defaulted loans which amount to some Rs 27 billion. With a large percentage of the loan portfolio comprising bad and overdue loans, advanced largely under political influence, the Bank faces major problems of both credibility and depositor confidence.

In the Annual General Meeting held here in Karachi earlier this week, the chairman M.R.Khan said that the recovery process had been reorganized and they hoped to recover Rs 4 billion by the end of the current year. A Special Assets Management Committee has been formed to work exclusively on loan recovery and has been organized on a regional basis.

In the last month, Rs 2 billion have been recovered including Rs 400 million in cash.

During the last year, fresh advances worth Rs 70.6 billion were made, just 7.3% up from the 1994 figure of Rs 68.85 billion.

The bank handled foreign trade business to the tune of Rs 93.5 billion, including import business of Rs 53.97 billion and export business worth Rs 39.56 billion Their trade business was down by 15% from the 1994 level of Rs 109.96 billion.

In addition to recovering loans, the Bank also needs to concentrate efforts on reducing administrative expenses. While interest expenditure was marginally lower than last year from Rs 5.935 billion to Rs 5.93 billion this year, non-interest expenditure at Rs 5.45 billion was 9% up from last year's Rs 5.014 billion. A large increase came from a 14% jump in depreciation on and repairs to the Bank's property to Rs 1.97 billion from Rs 1.7 billion in the previous year; other contributors were a 8% climb in the salary bill , and an 11% rise in "other expenditure."

According to the chairman of the board, expenses in the current year have so far been reduced by Rs 200 million and it is estimated that a further reduction of Rs 450 million will be in place by the end of the year.

On the income side, interest income flowing from advances rose 6% from Rs 8.06 billion in 1994 to Rs 8.55 billion last year. Non-interest income dropped almost 4% fro Rs 2.4 billion to Rs 2.3 billion. The largest contributor to non-interest income came from commission, exchange and brokerage which rose 8.2% from almost Rs 1.7 billion in 1994 to over Rs 1.8 billion last year. The 48% fall in the net profit on the sale of investments, gold, silver, land and other premises was the main reason for the reduction in non-interest income.

Key ratios suffered dramatically; after tax return on total assets dipped from 0.2 to negative 0.4 as total assets fell by 0.4% as profits tumbled. After tax profits as a proportion of deposits also fell from 0.03 to negative 0.66.

Conclusions

UBL continues to suffer a barrage of problems; in addition to those we have already discussed, loan recovery and high administrative expenditure, they also have an estimated 10000 excessive employees of their total of some 22000. Retrenchment, although necessary, may not be so easy; between 1200 and 2000 daily wage earners had their jobs confirmed as a result of pressure from their powerful union just before the SBP took over the management of the Bank.

Furthermore, they still face the threat of a cancellation of their operating license in the UK by the Bank of England, most likely to be followed by similar action by other regulators like the UAE, since there has been no confirmation of the final sale and its implications. Needless to say, UBL cannot afford such a move as they operate a lucrative overseas business of 28 branches; one of their few strengths; another being their existing local branch network.