Pakistan gradually loosing control of its strategically important sectors

Dec 25 - 31, 2006

Ownership and management control of yet another Pakistani commercial bank goes to foreign investors. The Board of Directors of Crescent Commercial Bank (CresBank) have accepted Rs 6 billion investment proposal of SAMBA financial group of Saudi Arabia. Though both the parties have inked the deal it is yet to be approved by the State Bank of Pakistan. The acceptance of SAMBA proposal by CresBank is substantial and its ratification by the central bank is a ritual.

For quite some time there has been a loud talk about foreign banks negotiating takeover of local commercial banks. At least half a dozen local banks were said to be under the microscope of foreign banks even prior to official announcement about the takeover of Union Bank by Standard Chartered Bank of UK. For weeks, rumors about potential takeover of Faysal Bank, PICIC Commercial Bank and Bank Alfalah allowed the speculators to create the hype and let their share prices touch new highs. A prompt denial by the management of Faysal Bank of negotiating sale of the bank diverted attention to another bank, Bank Alfalah.

CresBank deal has shocked many because of the talk that its sponsors were contemplating to takeover PICIC as well as PICIC Commercial Bank. One could hardly believe that First Standard Investment Bank fiasco could lead to loosing ownership and management control of CresBank. According to an analyst linking the two deals may not be fair but rumor mills work faster than official announcement. CresBank it becomes the largest commercial bank on the basis of paid-up capital, Rs 8.8 billion, enough to conclude the much talked about deal.

If the SBP approved SAMBA deal - no one has any doubt - CresBank will be the second bank taken over by the foreign bank, the firs bank was Union Bank. Analysts still believe that couple of more banks would be acquired by foreign banks. Presence of Barclays Bank team in Pakistan clearly indicates its intention or seriousness in taking over a local bank and the formal announcement is only a matter of time.

Some of the analysts do not agree that sale of Union Bank was the first transaction. The story had started with the sale of Habib Credit & Exchange Bank (Formerly BCCI) to Abu Dhabi group. Then came privatization of United Bank and Habib Bank and acquisition of majority stake of NIB Bank by a Singaporean group. Investors from Abu Dhabi now have substantial stake in Bank Alfalah, United Bank, Al Warid, Wateen and Pakistan Telecommunication Company.

Reportedly the deal for transfer of 46% stake in PICIC has been reached between NIB Bank and a group of PICIC's shareholders. While the benefit of the merger to the buyer is more subjective and would require some time to emerge, an analysis of the sell side of the equation is appropriate at this point. The reported sellers at this stage are NIT, Crescent Group and Bashir Jan Mohammad.

The largest indirect beneficiaries are NIT unit holders. According to estimates, NIT currently holds around 60 million shares of PICIC (54 million as of 30th June 2006 and another 10% bonus announced subsequently). NIT has classified these investments as held for trading. Therefore these shares are marked to market on a daily basis and hence reflect as unrealized gains on the P&L of NIT. If the deal were to come through, the impact on the EPS would not be huge. However, the real impetus will come from the reclassification of gains to realize from unrealized, which would boost dividend paying capacity and willingness. Mutual funds are much more likely to pay out realized gains compared to unrealized gains.

However, quantum of capital gains requires sensitivity analysis, as the exact cost base of this investment is not available. The rationale for using prices in the range of Rs 5-25/share can be seen from PICIC's bonus adjusted price, which depicts how PICIC's strong history of stock dividends has brought down the effective cost for long term holders like NIT. While PICIC has also issued right shares sporadically, the subsequent dividends have brought down the effective cost on those right shares.

Given the potential quantum of realized gain (Rs 2-3/unit), NIT's dividend per unit could go up by a potential Rs 2/unit to Rs 6/unit as NIT does have a history of sharing extraordinary gains with unit holders as it did in the case of National Refinery last year. If NIT were to do the same with PICIC, Faysal and Bank of Punjab (BoP) will benefit yet again in 2007 as they have done in 2006. The base case forecast assumes Rs 4/unit dividend from NIT and if that were to increase to Rs 6/share; Faysal Bank's bottom line for 2007 could go up by 12% (Rs 0.75/sh) while NBP and BoP could see 3.7% (Rs 0.99/sh) and 8.1% (Rs 0.95/sh) jump in their bottom lines respectively.

Analysts say that in the past foreign investors mostly controlled two important sectors i.e. pharmaceutical and independent power generation. However, acquisition of United Bank, Habib Bank and Pakistan Telecommunication Company by the foreign investors is slippage of control of these strategically important entities/sectors in the hands of aliens. Foreign investors already have the largest stake in oil and gas exploration, production and marketing companies.

On the issue of transfer of majority stake and management control of state owned enterprises and other business entities government and independent analysts have two completely opposite point of views The government is never tired of talking about inflow of huge foreign direct investment including privatization proceeds, whereas analysts term it sale of family silver and creation of another East India Company.