Foreign banks, operating in the
country, have posted destitute results for the period ending December 31, 1998 after a
long time. Slow pace of economic activities, declining lending rates, shrinking spread and
increasing competition for resource mobilization are expected to continue to keep their
profit margins under pressure. Foreign exchange deposits, a strong base for these banks in
the past, is no longer available. Declining yield on T-Bills is another reason for
reduction in the profit. The year 1999 will be even more difficult. None of these banks is
expected to take an exit from Pakistan but further expansion in branch network may not
take place in near future. However, the edge attained by these banks in the past through
heavy investment in technology and improvised standard of service will compensate for
smaller branch network.
A closer look at the annual report of these banks for 1998 indicates
divergent trend. While some of the banks have succeeded in increasing deposits many have
registered considerable decline. Profit margin has reduced and some of the banks have
posted loss for the year. However, one can say with confidence that these losses were not
the result of any sluggishness on the part of management. Working conditions changed due
to shift in government policies. Recessionary trend of the economy and freezing of foreign
currency accounts abated their deposit base. Declining repayment ability of borrowers
disrupted their cash flow. Heavy provisioning against non-performing loans was a factor
responsible for the reduction in the profitability of these banks. Dearth of quality
borrowers, reduction in the quantum of foreign trade business and hardly any investment
activity in the country had an adverse impact on their fee-based income.
Foreign banks which were prompt in redefining their strategy for
operation in Pakistan, after the nuclear test, succeeded in maintaining their share in
total deposits and retaining their profit margin levels. However, listed private domestic
banks have successfully intruded into the market segment previously considered to be an
exclusive domain of foreign banks. This dent was made by the local banks by making huge
investment in technology and offering superior quality service.
Before making any analysis of the performance of foreign banks during
1998, it is necessary to recap the economic situation of the country. The improved
economic performance witnessed during the first half of 1998 was marred by the imposition
of economic sanctions. The GDP growth rate declined, external trade volume shrank, balance
of payment situation remained precarious, debts accumulated and foreign exchange reserves
position remained extremely critical.
The subdued economic activity, reduced trade volume, meager foreign
exchange reserves and reduced spending on developmental work had a negative impact on the
business of banking sector. The freezing of foreign currency accounts (FCAs) and
consequent erosion of deposit base added further to the problems of the sector. This
resulted into intense competition for resource mobilization thereby raising rate of return
on deposits and shrinking spread .
While the fallout of FCAs freezing was not significant in case of local
banks, foreign banks suffered the most. At an average, over 50 per cent of their deposits
were in foreign currency. In certain cases the share of forex deposits was as high as 90
per cent. With the run for encashment of dollars they faced serious liquidity problem. The
strength of the banks, in the past, was mainly due to swap dollar deposits. When the
central bank asked the borrowers to settle borrowing against dollar deposits these banks
also lost a handsome percentage of forex deposits.
Although there are nearly two dozen foreign banks operating in
Pakistan, our review is based on 13 banks only, which control the largest market share.
The key factor of profitability of commercial banks is dependent on the
spread the difference between the borrowing and the lending rates. According to
banking sector analysts, only four banks have spread above the Peer Average of 1998. These
were ANZ Grindlays, Citibank, Emirates Bank International and Bank of America. Whereas the
spread of other nine banks was below Peer average of 1998.
Provisioning against non-performing loans affect the profitability of
banks directly. Citibank made the highest provision amounting to Rs 512 million followed
by Standard Chartered Bank, Rs 225 million and ANZ Grindlays Bank, Rs 174 million.
However, the sector analysts say, "It is the strength of a financial institutions to
do the maximum hedging and no analysts should get up set with the absolute number of
rupees." These provisions are written back in case of recovery. Annual accounts for
1998 substantiate their point of view. Mashreq Bank and Emirates Bank have written back
the provisions in 1997 and 1998. Similarly Hong Kong Shanghai and ABN Amro have also
written back the provisions in 1998.
Citibank, despite 12.6 per cent decline in deposits as compared to
1997, has once again emerged to be controlling the largest share. With total deposits of
Rs 49,304 million it controls 27 per cent of the total deposits. The other banks holding
above 10 per cent of total deposits are ANZ Grindlays (15%), ABN Amro (10%) and Standard
Chartered Bank (10%). Looking at the composition of deposits, Citibank controls the
highest percentage of foreign currency deposits of 24 per cent followed by ANZ Grindlays
(14%), Standard Chartered (13%) and ABN Amro (11%).
While Standard Chartered registered the highest growth in deposit of
24.6 per cent, the banks experiencing major decline in deposits were American Express
(36.5%) and Deutsche Bank (35.3%).
Five banks out of 13 have registered decline in advances. The banks,
registering the highest growth in advances, are The Hong Kong and Shanghai Banking
Corporation and ANZ Grindlays. Despite 16 per cent decline in advances as compared to
previous year, Citibank has the highest amount of Rs 21, 855 million.
PROFIT BEFORE TAX
However, when one looks at the profit before tax figures of these
banks, ANZ Grindlays has earned the highest operating profit amounting to Rs 1,358
million. Whereas the second highest profit was posted by Bank of America amounting to Rs
688 million. It is interesting that while ANZ Grindlays profit declined by 5.6 per cent
the profit earned by Bank of America improved by 6.2 per cent. The banks registering
significant reduction in profit are Deutsche Bank (163.9%) American Express (91%),
Citibank (66.5%) and Standard Chartered Bank ((47.5%).
Another important feature is that Citibank posted highest non-fund
based revenue of Rs 1,211 million, followed by ANZ Grindlays (Rs 774 million), Bank of
America (Rs 622 million) and ABN Amro (Rs 584 million).
The growth of assets in case of Standard Chartered Bank was the highest
with 21.1 per cent. Societe Generale registered 17.2 per cent growth whereas it had
registered 36.6 per cent decline in 1997 as compared to 1996. While Citibank posted 12 per
cent decline in assets, the other banks registering above 30 per cent decline were
Deutsche Bank (36%) and American Express (32.6%)
The investment figures reveal a very interesting story. Citibank
continued to hold the largest investment portfolio. Despite reduction in assets by 12 per
cent the investment portfolio registered 6 per cent growth. Citibank had posted over 54
per cent increase in investment in 1997 over 1996. The investment by Societe Generale
which took a nose dive from Rs 2,974 million in 1996 to Rs 352 million 1997, once again
jumped to Rs 1,556 million in 1998 an increase of 342.5 per cent. Credit Agricole
had also registered nearly 80 per cent in 1997 as compared to 1996 but posted about 9 per
cent increase in 1998. The banks registering above 50 per cent reduction in investments
are Deutsche Bank (67.1%), American Express (65.3%) and Bank of America (58.8%).
RETURN ON ASSETS
One of the criteria for evaluating the performance of commercial banks
is return on average earning assets. On the basis of this, ANZ Grindlays emerged to be the
best for the year 1998. It improved from 5th position in 1997 to 1st in 1998. Bank of
America moved from 9th position in 1997 to 2nd in 1998. Citibank, however, went down from
4th position in 1997 to 9th in 1998. American Express also came down from 7th position to
12th during this period.
RETURN ON EQUITY
Return on average equity is important for the head offices of these
banks. Citibank has the largest equity of Rs 3,370 million followed by ANZ Grindlays Bank,
Rs 3,055 million and Standard Chartered Bank, Rs 2,196 million. Among the three banks,
while Citibank registered reduction in equity, the other two witnessed increase in 1998 as
compared to previous year. Deutsche Bank registered the highest erosion as the equity came
down from Rs 853 million in 1997 to Rs 485 million. The return of average equity for six
banks was above the Peer average of 1998 fixed at 8.2 per cent.
While evaluating the performance and effectiveness, the sector analysts
review the operating cost as a percentage of operating income. During 1998 operating cost
of all the banks has increased as compared to last year. Habib Bank AG Zurich appears to
be the most efficient, followed by ANZ Grindlays, Bank of America and Standard Chartered
It is clear that reduction in profit margin of foreign banks for the
year 1998 was not due to any sluggishness on the part but result of the shift in GoP
policies. However, economic slowdown and downturn in Pakistan's external trade made an
impact on their operation. Trade finance was a key area of strength for these banks. It is
expected that once the economic activities become normal their profitability will also
In some cases there was shrinkage in balance sheet footing. The sector
experts say that a sharp shrinkage in this footing is expected over the next couple of
years. This shrinkage is not due to economic conditions but mainly due to shift in the
strategy of these banks. It should be a matter of concern for the GoP and its policy
planners. The sale of loan assets by foreign banks to NCBs and listed banks may allow them
to maintain capital adequacy ratio above minimum required level. However, the natural
fallout of this move would be the down-grading of Pakistani banks. This would further
dampen the prospects of privatization of NCBs.
The GoP should also take a cue from this strategy of foreign banks.
Their strategy highlights the apprehension that Pakistan will not be able to meet its
external debt servicing obligations in the post 2000 period and the country will be, once
again, forced to demand rescheduling. The central bank has been, so far, able to control
exchange rate volatility in the recent months. However, it may not be able to continue its
endeavor for a long period in the absence of significant increase in the inflow of foreign
exchange. Forex demand for trade-related activities and repayment of commercial debts
cannot be capped for a long time. If the GoP wishes to accelerate the GDP growth rate, the
central banks needs more and more forex reserves to maintain exchange rate at a realistic
At the same time one should not take any cue of future prospects for
these banks from the results posted by Citibank. The case is termed by the banking sector
analysts as 'big bath'. It was one time effort to clean the slate. Profitability of the
Bank is expected to become 'normal' in the following years. This conviction is arrived at
while looking at the results of Emirate Bank. There was a clear message that the banks are
able to redefine their strategy to changed environment and ready to play proactive role
have better prospects for turnaround.
To sum up, there are tremendous opportunities for these banks for
turnaround if they use their technological advantage. On line and tele-banking and ATM
facilities have helped them in overcoming the inherent disadvantage of limited number of
branches. Using their existing base and by upgrading their present facilities, these banks
can introduce e-commerce by creating a global database on Pakistan's external trade and
initiating trade transactions and credit rating of foreign trade partners. All these
activities will help in increasing their international trade financing activities in
The most interesting aspect while preparing this report was that no
foreign bank head was available for interview unlike previous years. Be that as it may be,
it is understandable due to the sensitive nature of negotiations between the GoP and these
banks for the rescheduling of commercial debts
According to suggestions, made by Bank for International Settlement in
Switzerland (BIS), commercial banks will have to risk-weight each loan in order to assess
their risk-weighted capital requirement. Obviously, loans to GoP controlled entities will
be weighed according to sovereign risk rating. Therefore, in Pakistan's case, if banks
rating is like near default, it means foreign banks will need to have additional capital
put aside against loans to Pakistan's public sector companies.