First Pakistani firm to be listed on the London Stock Exchange for trading on the Professional Securities Market

SHABBIR H. KAZMI, Special Correspondent
Oct 23 - Nov 05, 2006

MCB has successfully raised US$ 150 million through issuing 8,622,100 Global Depository Receipts (GDRs). The GDR issue attracted the demand in excess of US$ 700 million from over 50 investors globally. Each GDR represents four underlying equity shares and will be listed on the London Stock Exchange. The GDR was priced at US$ 17.40 or equivalent to Rs 264. The GDR was effectively priced at a 0.5% premium to 10-day VWAP and a 2.9% discount to last sale. Merrill Lynch International acted as Global Coordinator, Sole Book Runner and Sole Lead Manager for this issue, with KASB Securities acting as Financial Advisor to MCB. This landmark transaction represents the first GDR offering by a Pakistani issuer in more than 10 years. After the completion of formalities, MCB will be the first Pakistani company to be listed on the London Stock Exchange for trading on the Professional Securities Market.

MCB is controlled by Pakistan's one of the charismatic businessmen, Mian Mansha of the Nishat group, which also has interest in textiles, cement, finance and insurance industries, managed by expatriate executives also. MCB is one of the leading commercial banks in Pakistan, with an asset base of approximately US$ 5.3 billion and a deposit base of over US$ 4.3 billion. With a current market capitalization of over US$ 2.3 billion, MCB is the second largest listed bank on the Karachi Stock Exchange and is one of the most actively traded stocks in the market. MCB employs approximately 8,600 people and has a network of 959 branches servicing thousands of institutional clients and 4.3 million account holders. It has about 50% market share of the country's ATM market. Established in 1947, nationalized in 1974 and privatized in 1991, the bank has undergone a significant internal restructuring to trim costs in recent years. During six months ended 30th June this year, its net profit was up 90% to Rs 5.74 billion. Based on its market position, potential for growth, profitability and management quality, MCB has received the Euromoney Award for Excellence for the 'Best Bank in Pakistan' for six out of the past seven years, and the Asia Money Award for the 'Best Domestic Commercial Bank' for the last three years.

MCB becomes the first Pakistani bank to issue GDRs with listing on the London Stock Exchange. The pricing of the GDR was fairly close to the market price in order to prevent arbitrage opportunities. The GDR will help in raising the paid up capital by approximately 6.5%. The increase in paid up capital is expected to dilute earnings in the short term. However, since the GDR has been issued at the current market price, the price/book value ratio will go down. As each GDR comprises 4 ordinary shares at current market price, the price of one GDR comes close to US$ 18. The equity issued by the company will be fresh i.e. existing shares of the company are not on offer as is the case when public companies issue GDRs.

MCB plans to use the GDR proceeds for a variety of purposes, including: 1) acquisition of a small bank, allowing the company to meet rising credit demand, 2) opening up of branches abroad (Toronto, Kabul, Dubai and Mumbai). Kabul to be used to capture trade flows stemming from cement export, while the Dubai office will be used to solicit remittances and 3) support asset management plans of the bank. MCB continues to broaden its product portfolio, with the launch of a fixed income and equity fund planned soon while the bank is planning to introduce a credit card in collaboration with Visa International. Analysts believe that these plans would prove positive for the bank as credit demand is expected to remain strong on the back of high GDP growth in the country and the bank will also have a broader product line. Moreover, entry into consumer banking has already given a boost to MCB's interest margins.

At the current price the bank is valued at 4.6 times its forward book value, which puts it at a premium to all other banks in Asia, except for India's HDFC. According to people familiar with MCB such a lofty valuation is not undeserved. Supported by the strong growth in the loan book, the bank boasts a return on equity above 40%, compared with an average of 15-20% for Asian banks. It has the lowest non-performing loans ratio of all the Pakistani banks at 4.2%, after a decline from 10.6% in 2003. About 93% of its deposits base is made up of low-cost savings or current accounts, which enables the bank to maintain a high net interest margin of around 7% - well above the Asian average of about 2-3%.

While stocks prices often come under pressure when a company issues overseas-listed GDRs or ADRs, MCB's share price actually surged 20% from the beginning of pre-marketing in mid-September to 10th October at Rs 271.90 and it is up 50% since the GDR issue was announced in June. The gap between the prices of the two giants NBP and MCB is getting wider as MCB in recent days has outperformed. There is no doubt that NBP will not be able to fill the current price gap as it's strength based on fundamentals cannot be ignored. Besides NIT and Al-Jazira holdings, the bank benefits from a very low cost of funding generated by it's bulging deposit base of Rs 510 billion which increased 10% in the fist half of calendar year 2006. NBP's Advance to Deposit Ratio (ADR) stands at approximately 55% as compared to the sector's ratio of 76%, which provides the bank ample room to increase advances and improve core earnings.

Issue of GDRs by MCB has opened new vistas for Pakistan's capital market and paved way for flotation of another half a dozen more issues. Other companies getting ready to issue GDRs include Oil & Gas Development Company, Kot Addu Power Company, National Bank of Pakistan, Habib Bank and United Bank. The number is expected to rise further, as it offers the local blue chip companies a chance to go global and mobilize funds at optimum cost.