The process of consolidation continues to face the growing competition
By SHABBIR H. KAZMI
May 29 - June 06, 2004
The GoP made a policy decision to privatize state-owned commercial banks and also allowed the private sector to establish twelve banks in early nineties. At that time five state-owned banks and about two-dozen foreign banks were operating in the country. Some of the critics doubted the capability of the private sector to effectively and efficiently manage banks. However, the time has proved that not only the private sector had come up to the expectations but also the paid-up capital of private banks increased by five-folds of the initial requirement. The success story is incomplete without recognizing the proactive role being played by the central bank.
The most striking feature of nearly fourteen-year history is that the number of foreign banks operating in the country has reduced almost one-forth. This reduction in number is because of any deterioration in economic fundamentals and/or working environment, clearly evident from the growing strength of local banks. It is said that most of the foreign banks decided to take an exit from Pakistan after May 1998. However, most of the banking sector experts strongly believe that the largest number of exits have been made after the 9/11. The Pakistan operations have been taken mostly by those financial institutions or business groups, which had missed the opportunity to acquire the license initially.
The number of listed banks has gone up to 17 in year 2004 as a result of mergers and acquisition, despite closure of Indus Bank. Five banks are still not listed, which are Habib Bank, United Bank, Allied Bank of Pakistan, Bank Alfalah, Dawood Bank. The leading foreign banks having the intention to stay in Pakistan in the long-run are Standard Chartered Bank, Citibank, Deutsche Bank and ABN AMRO Bank. Therefore, it may be said that in nearly one and a half decade the proportion has virtually reversed. However, it is also a fact that these four banks continue to enjoy a significant share in the market, both in terms of deposits and advances.
The forecast of these banks staying in the country is based on the fact that the managements have been not only expressing their intentions to stay in Pakistan but also supporting the words by acts. They have been investing heavily in technology to overcome branch limitation as well as launching new products and services and often emerge as the market leaders. Their strength is evident in credit card business, consumer finance and housing finance.
Saying this, the sector experts cannot resist from expressing that the listed banks are getting closer to the hallmark of 'quality service' of foreign banks. Some of them are even making the efforts to surpass the standard of foreign banks by getting closer to the clients (increasing number of branches) and personalized services to blue chip clients. The positive impact of this is the overall improvement in the quality standards and prompt service. However, those critics, who are still critical of the quality of services of local banks, must not forget the huge difference in 'client traffic' in the branches of these banks.
In order to contain and further reduce the number of clients to 'bricks and mortar' branch network the banks have started offering Internet-based services and are constantly increasing the number of ATM machines, either by installing their own machines or making arrangements with other networks. The number of Debit Cards has also been increasing at an unprecedented rate. While this helps in the banks in retaining clients' money for the longer periods, the clients are also happy because they don't have to carry cash.
Before reviewing the performance of banks for the year 2003, it may be of some interest to look at their performance during the first quarter of 2004. The general perception was that banks posted huge profits for 2003 mainly due to capital gains, which would no longer be possible in 2004. However, the data shows that venturing into consumer finance and increasing borrowing by the private sector, also supported by increasing income will result in stronger performance.
Some of the banking sector experts say that despite banks enjoying strong economic fundamentals and posting good profits are not passing the benefits neither to the depositors nor the shareholders. However, some of the banking sector experts don't agree with this. They say, "We must look at the banking scenario in totality. Though, there has been a constant and substantial increase in deposits banks are still not sure about sustaining the levels in the long-run. Besides, the two years experience does not allow the banks to commit the funds for medium term financing. This keeps the earnings low and in turn return to depositors and shareholders low".
However, the deposits have a genuine grudge. They say, "The rational offered by the banks that return on Treasury Bills etc. has come down is only half the truth. Firstly, why the banks are making such substantial investment in government securities? Secondly, they are not exploiting the market potential. All those banks that have come up with a better strategy have succeeded in improving their profits. Thirdly, they often strive to pay good dividend but never fail in cutting down return on deposits. It may not be wrong to say that they are no longer interested in receiving deposits".
According to a banking sector expert, "The critics often do not realize that initially the minimum paid-up capital requirement for banks was Rs 200 million. This has been enhanced to Rs 1,000 million and the ground is being prepared to further increase it Rs 2,000 million. In a bid to increase paid-up capital the banks have been retaining a large proportion of earnings for the issue of Bonus Shares and abstaining from distribution of any handsome dividend".
However, one of the experts does not accept any rationalization. He says, "Though, there is a loud talk about the paradigm shift in the banking sector, the bankers are still the same orthodox and most of them still suffer from the psyche of lending against collateral only. The reason for low lending to small and medium enterprises (SMEs) is that they are still demanding collateral, which is not the true spirit". One of the positive developments is that the Institute of Bankers of Pakistan has come up with some training programmes to enable the bankers to better understand the dynamics of lending to SMEs. There has been some progress but a lot more has to be done.
Over the last couple of years banks have been suffering from 'surplus liquidity crisis' mainly due to low demand for credit. As a make shift arrangement and taking the advantage of the bullish capital market some of the banks increased their exposure in equities. This became a cause of concern for the central bank and it issued the instructions to follow the Prudential Regulations in letter and spirit. However, some of the critics were of the view that instead of asking the banks to meet the prevailing benchmark, the central bank should have enhanced the limit.
According to a sector expert, "This was a make shift arrangement in the absence of robust credit demand. With the enhanced credit demand from the private sector and higher lending to agriculture sector the banks have already started curtailing their exposure in the equities market. Another positive development is that banks have become the major 'seed money' providers for the mutual funds. Their lending under consumer finance and housing finance has also been growing. Therefore, it is expected that the exposure of commercial banks in the equities market will be well within the stipulated limited and much before the time provided by the central bank.
One of the apprehensions has been the shrinking spread. The banks have been making huge investment in technology and expanding branch network, which hikes their administrative expenses. However, this investment has started yielding results because now them seem better poised to handle the growing volume of business. The analysis of Annual Reports of banks shows that their income from core banking activities has been growing. The other positive point is that there are growing expectations for increase in interest rates.
It is understood that the central bank wishes to contain short-term lending rates to avoid hike in inflation rate. However, some times hoarders take the undue advantage of low interest rates as was evident from recent wheat crisis. The central bank also aims at keeping long-term interest rates low to facilitate investment in new manufacturing facilities. While the private sector has succeeded in driving the benefit one of the state-owned enterprises — Sui Southern Gas Company — has benefited a lot. Its financial charges, as a percentage of sales, were 19% a few years back that are expected to come down to as low as 2% for the current financial year.
The policy to allow running Riba-free banking along with the conventional banking has started yielding results. This is evident from opening of Islamic Banking branches and desks. It is the responsibility of regulators and the players to promote and facilitate Islamic Banking and then leave it at the discretion of people to make their own choice. However, a lot more has to be done to make Islamic Banking a preferred choice.
The transition in banking sector is taking place at faster than expected rate. The growth in advances has started matching growth in deposits. The quality of asset as well liability products has been improving that is evident from declining non-performing loan portfolio. However, the real impact of enhanced consumer finance, housing finance and lending to agriculture sector is yet to be seen. The only fear is that some of the banks are not following prudent policies, which is evident from increasing provisions against non-performing loans. It may be true that for the time being the provisions may be a small percentage when compared with total advances but it is the responsibility of the central bank to ensure that banks follow the appropriate risk management policies. This can be ensured through strict monitoring and imposing heavy penalties for the lapses. It is the depositors' money and the custodians have no right to misuse it.
There has been no indication from the central bank that it has any intention of enhancing minimum paid-up requirement. However, many sector experts believe it is the most appropriate time to do this. Stock market is bullish but there is an acute shortage of quality scrips. A closer look at shareholders' equity of the listed banks also supports the idea. However, there has been a suggestion that this time the banks should be asked to increase paid-up capital through Right Issue rather than issuing Bonus Shares.
According to the GoP policy all the banks have to be listed at local stock exchanges. Bank Alfalah was the first to opt for the listing and also offer its share to general public. Two of the state-owned banks, Habib Bank and United Bank, have been privatized but the GoP still holds a substantial stake in these banks. The new management should be asked to comply with this requirement and the GoP must divest at least 5-10% shares from its holding.
Allied Bank of Pakistan was privatized in early nineties. However, it continues to suffer from some problems. It was understood that at one stage the central bank was very keen in bringing change in the management. It may be true that the bank suffers from some structural weaknesses but it would be better to bring the change at the earliest. The status quo should not be allowed to continue indefinitely.
Dawood Bank has recently emerged on the banking scenario of Pakistan. The bank has come into existence as a result of acquisition of Pakistan operations of a Sri Lankan bank by a local business group. It is also not listed at the local stock exchanges.
The Bank of Kyber is also not listed at the local stock exchanges. It is understood that the government is also considering its listing at the local stock exchanges. It is also understood that the bank is seeking a fresh license to operate as an Islamic bank for offering completely Riba-free banking operations. If this happens, it will be the second Islamic bank. The first Islmaic bank of the country is Meezan Bank, sponsored by Pak Kuwait Investment.
It is heartening to note that Pakistan's economy has entered the second phase of expansion. To further accelerate the economic growth of the country needs a more vibrant financial sector. It is duty of the players as well as the regulators to protect the interest of all the stakeholders and take the stringiest action against all those who wish to build their empire at the cost of depositor.
The performance of central bank has improved a lot lately but there is no room for complacency. It is also appreciable that central bank also consults with the players before bringing any change in regulatory framework. It is true that central bank is the watchdog but it is also the responsibility of the players to follow the self-regulatory mechanism.
EARNING PER SHARE
Askari Comm. Bank
Bank Al Habib
Bank of Punjab
Faysal Commercial Bank
PICIC Commercial Bank
Prime Commercial Bank
Saudi Pak Commercial Bank
(Rs in million)
PROFIT AFTER TAX
ASKARI COMMERCIAL BANK
BANK AL HABIB
BANK OF PUNJAB
MUSLIM COMMERCIAL BANK
NATIONAL BANK OF PAKISTAN
PICIC COMMERCIAL BANK