COMMERCIAL BANKING: PARADIGM SHIFT IS FASTER THAN EXPECTED

Some of the enterprising sponsors of commercial banks are taping international markets and the experience has been more than rewarding.

By SHABBIR H. KAZMI
Jan 15 - 21, 2007

Banking sector in Pakistan is going through transition at a faster pace. There is also an effort to gradually move away from conventional banking to Islamic banking. The ownership and management is being segregated.

Manifold increase in minimum paid-up capital requirement is leading to forced mergers and acquisitions. As the local sponsors are a bit reluctant in increasing their stake for meeting the enhanced minimum paid-up capital requirement foreign banks are ready to enhance their stake, mainly because of unprecedented spreads available. Some of the enterprising sponsors of commercial banks are taping international markets and the experience has been more than rewarding.

The government had issued more than a dozen commercial banking licenses in early nineties and also faced unprecedented criticism. Then the State Bank, by its acts and policy measures, made it clear to all that a robust commercial banking sector is the need of the day. It also became evident that economic prosperity just cannot be achieved without strengthening the banking sector. The most satisfying aspect is that the process of strengthening the banking sector is going on in consultation with all the stakeholders. Consultative strategy has not only accelerated the process of restructuring but also made the transition smooth.

Lately, Pakistan's economy is moving at a very faster pace, which is also supported by vibrant commercial banking system. Banks have been growing in size as well as diversity of services. Many analysts are of the view that only a small percentage of total potential is benefiting from the banking system in the country. Some analysts are of the view that the banking sector has been given exceptional freedom in conducting business. They also say that the freedom often gives a feeling that the central bank does not intervene, be it the return on deposit or very high spread and collecting unrealistically high service charges.

UNION BANK SALE

Following the successful amalgamation with Union Bank on 30th December 2006 Standard Chartered Bank has become the 5th largest commercial bank of Pakistan, also doubling its market share. The merged entity has been named Standard Chartered Bank Pakistan (SCBP). It has been incorporated in Pakistan as a subsidiary of Standard Chartered. After re-branding of 65 Union Bank branches, SCBP has a network of 115 branches in 22 major cities with access to its own 119 ATMs in Pakistan.

Till recently Standard Chartered Bank was rightly boasting that it was the largest international bank in Pakistan. Starting with the opening of its first branch in Karachi in 1863 the bank has over 140 years history of operations in Pakistan. SCBP's core business in Pakistan is conventional banking. The bank is a leader in credit cards, personal loans and also a leading provider of transactional banking, trade finance, and treasury products and services. It also offers Islamic banking through designate branches.

Lately, on the occasion of unveiling of a re-branded branch at Karachi, SCBP Chief Executive Officer Badar Kazmi said, "Standard Chartered Bank's 140 years presence, coupled with investment for the acquisition of Union Bank is evidence of its faith in the customers, confidence in the country and above all bank's commitment towards Pakistan".

Also present at the launch, Mike DeNoma, Group Executive Director, Standard Chartered Bank, said: "The combined bank will be a key player in contributing towards the economic growth and development of Pakistan. We aim to be true to our vision of becoming the best locally embedded international bank, by delivering to our customers better products and services and, in the process, ensuring the development and professional growth of all those who are working for us."

The merger demonstrates commitment towards Pakistan as well as authenticates presence of tremendous opportunities. The merger reinforces banks strategy of being a truly 'pan-Pakistan' bank operating in all the four provinces and major cities. It enhances its ability to provide value-added, sophisticated products and services that match the customers' needs. It provides a strong platform for personal and professional development and growth to the staff.

HABIB BANK'S PRIVATIZATION

On 26th February 2004 the Privatization Commission formally approved the sale of Habib Bank to Aga Khan Fund for Economic Development (AKFED). A total of 51% shares of Habib Bank were sold for a consideration of Rs 22.409 billion, equivalent to US$ 389 million, in accordance with the statutory requirements and terms of sale approved by the Cabinet Committee on Privatization. The sale was termed an important step towards enhancing potential of Pakistan's financial services sector and towards reinvigorating investment by those with a solid and proven interest in the growing economy of the country.

Underlining the importance of this transaction Dr. Abdul Hafeez Shaikh, the then Minister for Privatization and Investment said: "Privatization of Habib Bank is a manifestation of the government policy that underscores privatization in a fair and transparent manner for the people of Pakistan in the right way, to the right people, at the right price. The transaction also highlights the professionalism and integrity of the process which has been universally lauded and appreciated by all the bidders."

Habib Bank is considered one of the strong pillars of commercial banking in Pakistan. It was incorporated in 1941 in Bombay and after independence its headquarters was shifted to Karachi and became the first commercial bank to be established in Pakistan. It has often introduced products for the first time in the country that included automated teller machines and travellers cheques. A number of salient features of Habib Bank made it an attractive investment proposition - the most significant being its extensive presence and market share. The other features included an elaborate domestic network of 1,425 branches with a market share of approximately 20% and an international network of 48 branches in 26 countries across Europe, Middle East, Far East, Asia, Africa and the United States. Its three wholly owned subsidiaries, included: 1) Habib Bank Financial Services in Pakistan; Habib Finance International in Hong Kong and Habib Finance Australia. It has two joint ventures namely Habib Nigeria Bank and Himalayan Bank. The bank also owns more than 90% shares of Habib Allied International Bank incorporated in United Kingdom.

AKFED is a for-profit international development agency that seeks to create economic capacity and opportunity in specific regions of the developing world. Its financial service include commercial banks, microfinance banks, insurance companies and property development and management companies in nine countries, some of which are listed on institutions, some of them dating back to nearly 70 years, and local stock exchanges. It is also active in the fields of industry, tourism development, infrastructure, media and aviation in 19 countries across South and Central Asia and sub-Saharan Africa.

AKFED operates as a network of affiliates with more than 90 separate project companies employing over 18,000 people and having an asset base exceeding US$ 1.5 billion. AKFED's investments in Pakistan include the Serena group of hotels and lodges, New Jubilee Insurance Company and New Jubilee Life Insurance Company and The First MicroFinance Bank.

PICIC TAKEOVER

Acceptance of Rs 6 billion investment proposal of SAMBA financial group of Saudi Arabia by the Board of Directors of Crescent Commercial Bank (CresBank) paved the way for the transfer of ownership and management control of CresBank to foreign investors. Both the parties have inked the deal and its ratification by the central bank is only a ritual. CresBank deal shocked many because its sponsors were contemplating to takeover Pakistan Industrial Credit & Investment Corporation (PICIC) as well as PICIC Commercial Bank. One could hardly believe that First Standard Investment Bank fiasco could lead to losing ownership and management control of CresBank.

Similarly, the deal for transfer of 46% stake in PICIC to a Singapore based company has also hit the headlines of newspapers. The deal has been reached between NIB Bank and some of the strategic shareholders of PICIC. Reportedly the sellers were 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. After the completion of this deal, the impact on the EPS would not be huge. However, the real impetus would come from the reclassification of gains to realize from unrealized, which would boost dividend paying capacity and willingness.

IMPROVING CREDIT RATING

Three of Pakistan's largest commercial banks - National Bank of Pakistan, Habib Bank and United Bank - are getting ready to float their Global Depository Receipts. Two of these (National and United) are already listed at local stock exchanges whereas Habib is still not listed. If these banks wish to access global markets they have to get themselves rated by some international rating agency. Lately, Fitch Rating has affirmed rating of these entities. National Bank, the country's biggest lender, had its D-rating
affirmed. Habib Bank, the second biggest, and United Bank had their individual D/E ratings reaffirmed. Earlier, MCB Bank, Pakistan's fourth-biggest lender, had its individual evaluation raised to D from D/E by Fitch, which cited the lender's improved finances.

National Bank's rating reflects its strong market position as its profit during nine months period - ended 30th September - increased by 61% to Rs 14 billion. United Bank's net income in the quarter ended 30th September rose by 29% to Rs 2.2 billion. Habib Bank's rating reflects its improved financial strength, but is constrained by its weak asset quality and high cost structure. The lender has experienced substantial growth in recent years while maintaining the largest loan book amongst Pakistani banks.

Profits of local banks have improved due to fast growing economy as corporates and individuals are taking advantage of greater credit availability and attractive interest rates. Prime Minister Shaukat Aziz, forecasts that $129 billion economy will expand at an average annual growth rate of 8% over next five years.

For quite some time there has been a loud talk about takeover of local commercial banks by the foreign banks. At least half a dozen local banks are said to be under the microscope of foreign banks.

HIGH PROFITABILITY

BANK

INCREASE (%)

UBL

125

ABL

117

Bank

Lost (%)

Meezan Bank

112

NIB

69

KASB

41

Saudi Pak Commercial Bank

15

Source: State Bank of Pakistan

For weeks, rumors about takeover of Faysal Bank and Bank Alfalah allowed the speculators to create the hype and push the share prices to new highs. A prompt denial by the management of Faysal Bank of negotiating sale of the bank diverted attention to another bank, Bank Alfalah. Now people are talking about the takeover of Mybank and Prime Commercial Bank. It is yet to be seen who would be the ultimate buyer.

On the issue of transfer of majority stake and management control of commercial banks and other strategic entities, government and independent analysts have two completely opposite points of view. The government terms it strength of Pakistan's economy and the confidence of foreign investors in Pakistan, whereas independent analysts term it sale of family silver to foreigners and creation of another East India Company.

They also say that the government must remember that after imposition of economic sanctions on Pakistan many foreign banks chose to sell their Pakistan operations at whatever price they could get. The renewed interest is only because of availability of 7.5% spread. It is feared that when competition will become fierce they would again sell their stake. This would be much easier because now making investment in listed entities and getting rid of it would be the ready option.