FDI CHANGING COMPLEXION OF BANKING SECTOR

High return and potential acquisitions have caught the attention of international players

SHABBIR H. KAZMI
Mar 26 - Apr 01, 2007

The current financial year seems to be a unique period in the history of Pakistan because of record foreign inflows and completion of some high profile transactions in finance and telecommunication sectors. Foreign private investment inflow into the country during July 2006 to March 2007 almost doubled compared to the corresponding period last year. Both foreign direct investment and portfolio investment witnessed almost the similar phenomenon.

Figures show that the country received total private foreign investment of US$ 3.952 billion during this period as against US$ 1.992 billion received the same period last year. The telecommunications sector received record inflow of US$ 1.234 billion which was three times more than last year and highest investment so far in any sector of the national economy. The mobile phone technology generated a boom and foreign inflows rushed to capture the untapped market of 160 million people.

Foreign direct investment (FDI) during the period rose to US$ 2.970 billion as against US$ 1.521 billion during the same period last year. Similarly, portfolio investment rose to US$ 981 million as compared to US$ 471 million last year. Sector-wise details of foreign investment show that the financial sector remained the second biggest beneficiary of current high inflows as it received US$ 572 million during the eight months of current financial compared to US$ 243 million received last year during the same period.

BANKING SECTOR

Banking sector reforms introduced by the central bank are yielding very positive results. Aside from impacting depth and efficiency of financial intermediation, the profitability of banks has improved, attracting foreign interest and encouraging the existing owners to expand and/or strengthen their businesses. Banks have not only cleaned up their own balance sheets but have impacted real sector development in a number of ways.

The strong performance of the banking sector has attracted the attention of internal players. Some mergers and acquisitions have already taken place, some are in the finalization stage and talks about a few more are going on. The first one occurred in 2004, when Bank of Ceylon merged with Dawood Commercial Bank - now Atlas Bank. The second one also took place in 2004 when Credit Agricole merged with NDLC-IFIC Bank. The most recent one is Standard Chartered Bank acquiring Union Bank for a consideration of US$ 487 million.

The compliance with the Basel-II framework, the central bank has raised the minimum paid-up capital requirement for the commercials banks to Rs 6 billion to be achieved in a phased manner by December 2009. Out of all scheduled banks only 22 are listed on the local stock exchanges. This has fueled the process of merger and acquisition. Three banks are already busy in finalizing the details and awaiting formal approval of the central bank. Samba Financial Group of Saudi Arabia has entered into an agreement with the management of Crescent Commercial Bank to inject additional capital of Rs 6 billion. Tamasek Group of Singapore is busy in due diligence for acquiring PICIC. The latest news is about ABN Amro Bank going through due diligence for acquiring Prime Bank. All these transactions seem certain due to the financial strength of acquirers and the urgent need to meet the enhanced capital requirement.

Credit diversification has helped in achieving higher degree of economic diversification. Of the total outstanding, agriculture credit constituted 6.4% but more phenomenally, it grew by almost 4-5 times. Credit was also made available to non-crop sector by laying down guidelines for promoting credit access to livestock, fisheries and dairy sector. Improved access to SMEs was also possible and its share in total outstanding grew significantly. Consumer financing, which was not available in the past, rose to above 14% of the total outstanding. Companies' access to required level of financing, foreign loans, swaps and derivatives etc. have all been accommodated to allow market to innovate and expand. There is considerable scope for banks to enhance their business through extending financial penetration and outreach both across country and sectors.

Banking sector has grown both in size and strength and is positioned well to meet economy's requirements as it grows. Ownership and structural changes in banking system are facilitating this process. Foreign interest and presence has grown and at present foreign stake comes to 47% of total paid-up capital of all the financial institutions regulated by State Bank of Pakistan. Structural changes have been significant. Besides higher standards of corporate governance at management and board level, the banks are adhering to SBP prudential regulations which are consistent with BIS standards. Technology is being fast adopted and over 45% of bank branches are connected with head office, along side growth in ATMs, debit and credit cards.

Banking sector has to position itself to extend its outreach, which will play a key role in sustainability and diversifying risks. Besides bringing in much needed capital, increased foreign presence is expected to help Pakistan integrate better globally and regionally, enhance skills and techniques and transfer and increase usage of technology.

Private sector participation and foreign investment are the cornerstone of Pakistan's future economic strategy. During last two financial years Pakistan has cumulatively attracted US$ 8 billion foreign investment flows - 26.5% was sale proceeds of privatization and 49.2% from FDI, with remaining coming from foreign portfolio investment. Prospects are that Pakistan will attract about US$ 6 billion during current financial year. Going forward, foreign investment is expected to be more diversified and will support infrastructure development, manufacturing, tourism and hotel industry etc.

S.No

Months

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1

July

133.2

119.6

52.2

32.0

42.4

24.4

-13.0

2

August

242.2

106.2

56.6

40.4

30.4

26.4

26.0

3

September

653.6

102.9

72.3

44.5

97.4

21.9

22.3

4

October

207.3

137.0

94.2

53.4

228.9

46.9

20.3

5

November

239.7

268.4

52.4

46.6

63.0

42.0

46.8

6

December

393.6

369.2

117.3

60.2

78.3

43.5

44.7

7

January

226.4

123.4

70.0

62.4

53.1

20.0

23.3

8

February

 

276.9

82.6

45.3

37.2

29.4

28.7

9

March

 

721.1

195.0

247.5

27.5

32.9

33.2

10

April

 

795.5

98.9

128.1

37.7

20.2

26.7

11

May

 

191.8

138.2

142.4

48.8

22.1

28.1

12

June

 

309.0

494.3

46.6

53.3

155.0

35.3

 

Total

2,096.0

3,521.0

1524.0

949.4

798.0

484.7

322.4

ANALYSIS OF FOREIGN DIRECT INVESTMENT 2006-07

FDI Inflow during July - January 2007 $2,096 million compared to $ 1,244.7 million during the corresponding period last year (68.4%)

TOP INVESTING COUNTRIES:

COUNTRY

MILLION $

% AGE

U.S.A.

512.9

24.5

U.K.

488.2

23.3

U.A.E.

295.9

14.1

Switzerland

129.1

6.2

Netherlands

62.5

3.0

Mauritius

44.7

2.1

Others

562.7

26.8

Total

2,096.0

100.0

 


LEADING SECTORS:

SECTOR

MILLION $

% AGE

Financial Business

553.6

26.4

Communication (IT&T)

546.4

26.1

Oil & Gas Exploration

328.5

15.7

Trade

104.6

5.0

Power

102.4

4.9

Construction

86.2

4.1

Others

374.3

17.9

Total

2,096.0

100.0

 


COUNTRY WISE FOREIGN DIRECT & PORTFOLIO INVESTMENT IN DETAIL

(Million US$)11

COUNTRY

JULY - JANUARY 2007

JULY - JANUARY 2006

 

DIRECT

PORTFOLIO

TOTAL

DIRECT

PORTFOLIO

TOTAL

USA

512.9

404.7

917.6

291.0

298.2

589.2

UK

488.2

246

734.2

100.3

-0.3

100.0

UAE

295.9

14.9

310.8

43.2

50.7

93.9

Germany

21.6

0.4

22.0

25.1

-3.3

21.8

France

-1.5

0

-1.5

1.9

0

1.9

Hong Kong

26.2

-78.9

-52.7

14.8

46.2

61.0

Norway

24.9

0

24.9

139.7

0

139.7

Japan

34.3

0.2

34.5

26.6

-5.4

21.2

Saudi Arabia

9.5

0

9.5

268.8

1

269.8

Cananda

1.6

0.2

1.8

2.9

0.2

3.1

Netherlands

62.5

-2.1

60.4

72.6

7

79.6

Korea

1

0

1.0

0.9

0

0.9

Singapore

13.1

113.4

126.5

4.6

9.9

14.5

China

3

0

3.0

1.5

0

1.5

Australia

43.4

0

43.4

18.4

0

18.4

Switzerland

129.1

-37.4

91.7

50.9

9.4

60.3

Luxembourg

13.2

-0.2

13.0

5.8

-1

4.8

Others

417.1

36.2

453.3

175.7

-12.1

163.6

Total

2,096.0

697.4

2,793.4

1244.7

400.5

1,645.2

Source : State Bank of Pakistan

 


68.4 % INCREASE IN FDI AS COMPARED TO JULY - JANUARY 2006

Country

2001-2002

2002 - 2003

2003 - 2004

2004 - 2005

2005 - 06

July-2006-
Jan-2007

 

D

P

T

D

P T D P T D P T D P T D P

USA

326.4

-1.7

324.7

211.5

15.1

226.6

238.4

21.4

259.8

326.0

47.0

373.0

516.7

303.8

820.5

512.9

404.7

U.K

30.3

-32.4

-2.1

219.4

-34.6

184.8

64.9

-23.0

41.9

181.5

17.6

199.1

244.0

-19.5

224.5

488.2

246.0

UAE

21.5

-4.2

17.3

119.7

0.7

120.4

134.6

11.9

146.5

367.5

49.8

417.3

1424.5

63.3

1487.8

295.9

14.9

Germany

11.2

0.0

11.2

3.7

0.1

3.8

7.0

-3.0

4.0

13.1

2.1

15.2

28.6

-3.5

25.1

21.6

0.4

France

-6.9

0.3

-6.6

2.6

0.0

2.6

-5.6

0.0

-5.6

-3.6

0.1

-3.5

3.2

0.0

3.2

-1.5

0.0

Hong 
Kong

2.8

20.6

23.4

5.6

-0.4

5.2

6.3

-1.3

5.0

32.3

28.9

61.2

24.0

31.2

55.2

26.2

-78.9

Italy

0.1

0.0

0.1

0.2

0.2

0.4

1.9

-1.9

0.0

0.4

0.0

0.4

0.0

0.0

0.0

0.0

0.0

Japan

6.4

0.2

6.6

14.1

0.0

14.1

15.1

-3.5

11.6

45.2

-3.5

41.7

57.0

-8.7

48.3

34.3

0.2

Saudi Arabia

1.3

0.1

1.4

43.5

0.1

43.6

7.2

-1.9

5.3

18.4

-0.2

18.2

277.8

0.8

278.6

9.5

0.0

Canada

3.5

2.7

6.2

0.5

0.0

0.5

0.5

0.0

0.5

1.9

0.1

2.0

4.8

0.2

5.0

1.6

0.2

Nethe-
rlands

-5.1

-0.8

-5.9

3.0

0.0

3.0

14.0

-1.9

12.1

36.7

23.2

59.9

121.1

-0.7

120.4

62.5

-2.1

Korea

0.4

0.0

0.4

0.2

-6.8

-6.6

1.0

-9.4

-8.4

1.4

0.0

1.4

1.6

0.0

1.6

1.0

0.0

Other

92.8

5.1

97.9

174.0

47.7

221.7

464.1

-15.1

449.0

503.2

-12.5

490.7

817.7

-15.4

802.3

643.8

112.0

Total

484.7

-10.1

474.6

798.0

22.1

820.1

949.4

-27.7

921.7

1,524.0

152.6

1,676.6

3,521.0

351.5

3,872.5

2.096.0

697.4

D: Direct, P: Portfolio, T: Total