HIGH PREMIUM OF HBL IPO MAY KEEP AWAY THE A VERAGE INVESTORS

Government justifies the premium

AMANULLAH BASHAR
July 30 - Aug 05, 2007

The Public Offering of 5 percent HBL shares at the rate of Rs235 per share will earn an amount of Rs12.16 billion to the government. It is interesting to note that the total consideration paid for 51% of HBL was RS 22.4 billion and the present offer for 5% is valued at Rs.12.16 billion.

Market players feel that the heavy premium being asked for HBL IPO is contrary to the spirit of the government's privatization agenda of 'privatization for the people' as this price may enhance value but reduce the volume of the investors especially from grass root level.

The premium being asked in the current HBL IPO is the highest in the history of IPO's as the Privatization Commission has never charged such a heavy premium before. It may be recalled that the first NBP (IPO) was floated at par value without Premium which Rs.10.

The second NBP IPO was launched with a premium @ Rs. 21 per share + Rs.10 (Par Value) = Issue Price Rs.31, while the third NBP IPO was offered at with a premium @Rs.36 per share + Rs.10 (Par Value) = Issue Price Rs.46.

The Privatization Commission while launching OGDCL' IPO had asked a premium @Rs. 22 per share + Rs.10 (Par Value) = Issue Price Rs.32 while the second OGDCL IPO was launched at a premium of Rs. 100 per share + Rs.10 (Par Value) = Issue Price Rs.110. Similarly, UBL IPO had fetched a premium @Rs 40 per share+ Rs.10 (Par Value) = Issue Price Rs. 50. However in the present scenario the asking price of HBL IPO is Rs235 which is the highest premium in IPO history.

The capital market pundits feel that the Privatization Commission has a figure of $ 4 per share in mind while considering the price level of HBL share at Rs. 235. The target seems to be the foreign investors as $ 4 is an eventual benchmark GDR price.

The financial experts say that in view of such a high price it must be realized that domestic institutions are flush with cash and the issue will be subscribed by the cash rich local and foreign institutions. However, the possible over-subscription of the issue will not be evidence of success, as the average Pakistani investors for whom this offer has been designed may not benefit because their participation in this IPO seems remote in the face of high price.

In a way, the Privatization Commission has done well to propose the disinvestment of 5% of the HBL shares with the green shoe option of 2.5%. Being a blue chip company with excellent record the HBL offering is certain to deepen the market and bring new investors into its fold.

JUSTIFICATION FOR HIGH PREMIUM

The Cabinet Committee on Privatization(CCOP) has decided that the offer price for the divestment of 34,500,000 ordinary shares (5 percent of Paid Up Capital) of the bank by the offerer out of its shareholding in the bank being offered to the general public with a green shoe option of an additional 17,250,000 ordinary shares (2.5 percent of paid up capital) on a best effort basis, be fixed at Rs235 per share. The premium of Rs225 per share on Rs10 per share is adequately justified which based on the following considerations.

a- HBL has the largest branch network and highest advances amongst the banks in Pakistan. HBL also ranks second largest in terms of asset and deposit base.

b- HBL underwent capital restructuring in 2004. the bank issued right shares amounting to Rs8000 million and subsequently reduced accumulated losses up to Rs13,278,495 million against its paid up capital of Rs20,178, 495 million. The bank also reduced its authorized share capital from Rs30,000 million to Rs13,800 million.

c- HBL is the only Pakistan based bank with significant international operations. The bank has 39 branches, 2 subsidiaries, 2 affiliates and 2 representative offices in 23 countries.

d- In February 2004, the government made a strategic sale of 51 percent of the shareholding in the bank at a price of Rs63.68 per share and handed the management to the successful/bidder(AKFED) since then, the bank has shown exceptional progress as evident from its increasing deposit base, growth in advances and improving net profits.

e- Advances have increased at CAGR of 23.37 percent from Rs178,917 million in the financial year 2003 to Rs335,958 million in financial year 2006.

f- Deposit base increased at a CAGR of 8.38 percent from Rs345,436 million in financial year 2003 to Rs439,724 million in financial 2006.

g- Total equity has grown at CAGR of 31.26 percent from Rs23,485 million in 2003 to Rs53,112 million in 2006.

h- Despite increasing competition, profits increased at a CAGR of 52.66 percent from Rs4,013 million in 2003 to Rs14,276 million in financial year 2006.

The above outstanding performance of the bank justified the premium fixed for the present IPO during July 26 to July 31.

SHAREHOLDING STRUCTURE OF HBL

The Bank was privatized in 2004 with 51 percent of its shares sold to Aga Khan Fund for Economic Development S.A. (Switzerland). Furthermore, State Bank of Pakistan holds 48.047 percent of the total Paid up Capital, and the remaining 0.953 percent is held by National Bank of Pakistan (Trustee Department), Privatization Commission, Government of Pakistan and Security & Exchange Commission of Pakistan (SECP).

INVESTMENT

During 2005 the bank disposed off its investment in the joint venture, Habib Nigeria Bank Limited pursuant to a scheme of merger' entered into between Habib Nigeria Bank and Platinum Bank Plc, whereby the entire share capital of the joint venture has been cancelled and all its assets, Liabilities and undertakings have been transferred to Platinum Habib Bank. The arrangement had an exchange ratio of 13 shares of Habib Nigeria Bank to 17 shares in Platinum Habib Bank. The disposal resulted in recognition of a gain of Rs968.829 million in the unconsolidated accounts and a gain of Rs1, 208.186 million in the consolidated accounts.

The bank has changed its accounting policy in respect of accounting for investment in subsidiaries and jointly controlled entities from equity basis of accounting to the fair value basis (through profit and loss account) in its unconsolidated financial statement. In cases where the investments are not quoted in an active market and whose fair value cannot be reliably measured, the investments are carried at cost in accordance with the treatment specified in international Accounting Standards.