MERGERS AND ACQUISITIONS IN BANKING SECTOR

SHABBIR H. KAZMI AND MUHAMMAD SHARIQ
June 8 - 14, 2009

Banking sector performance is showing declining trend because overall economy of Pakistan is in turmoil situation. The hardest time for the banking industry which has gone away was the period of CY08 (Jan to Dec). In this period banking industry suffered huge losses due to several factors i.e. liquidity crunch, losses on investments due to bearish stock market, provisions against non-performing loans and increasing administrative expenses. Due to huge losses, banks were not able to meet conditions of the State Bank of Pakistan for minimum capital requirement (MCR) and capital adequacy ratio (CAR).

Many banks met the criteria by bonus or right shares but some banks could not issue bonus or right shares so they had to explore merger and acquisition options

As compared to CY08 performance, the performance of 1QCY09 the banking industry is still in depression but the potential and threshold level as compared to previous year is showing improvement. Capital adequacy is also improving, reduction in risk weighted assets, and improvement in capital markets are leading to appreciation in the value of available for sale investments and satisfactory earnings.

Previously, all banks had to increased their MCR free of losses to Rs23 billion at the end of 2013 in phase manner but SBP realized that this target is not easily achievable by bonus and right shares due to unfavorable economic factors, subsequently central bank revised MCR target. Now all banks will have to increase MCR free of losses to Rs10 billion at the end of 2013 in different phases. It is still difficult for many banks to meet revised MCR requirement. Therefore, probability of mergers and acquisition is still present. All banks are required to meet Rs6 billion paid up capital requirement by at end December 2009. Many banks are not likely to meet the criteria of MCR requirement for CY09, which make it vivid that CY09 is also the era of mergers and acquisitions. According to market experts this revised criteria will provide same level to all banks to expand their operations. Moreover, branch expansion plans relates with MCR increment. Therefore, in coming period administrative expenses are expected to show a declining trend.

As far as stock market perspective is concerned, it will boost the prices of the stocks of the banks. Moreover, return on equity will increase and earning per share will not be diluted in the coming period. As far as capital adequacy ratio is concerned all banks/DFI shall be of 10% as on December 31, 2009.

Mergers and Acquisitions normally are beneficial as it broaden customer relation ships, improve management positions, drive operational efficiency and effectiveness, implant a high performance culture, and build corporate reputation. Following are the mergers and acquisitions, which have been executed in the banking industry. NIB Bank, the holding of Temasek group of Singapore, acquired PICIC commercial bank.

In addition, SAMBA Bank also acquired Crescent Commercial Bank by injecting new equity to fulfill the requirement of MCR. Furthermore, in year 2006, Standard Chartered Bank has acquired locally operated Union Bank. After completion of the merger, the new banking entity listed on the three stock exchanges of the Pakistan. The foreign bank after having been converted into local scheduled bank started trading in all stock exchanges of Pakistan.

The deal of acquisition of Royal Bank of Scotland Pakistan operations formerly known as ABN AMRO and subsidiary of ABN AMRO Amsterdam NV has yet not finalized. The two giant of the banking industry Muslim Commercial Bank and Habib Bank Limited received due diligence from SBP and both have been qualified for bidding process. Moreover, JS Bank also interested to acquire RBS Pakistan operations and gotten due diligence and participating in the bidding. After the acquisition of RBS (Pakistan) the total deposits size, advances portfolio, investments and branch network would be increased and will help the banks to increase their customer's band.

Surprisingly, Orascom Telecommunication Holding with Rojhan Capital showed keen interest in the buyout. Their application has been accepted by SBP and they would participate in the bidding process. Previously, Orascom Telecom request was rejected by the SBP to conduct due diligence for the acquisition of RBS due to its no banking background.

Orascom Telecom Holding is a leading mobile telecommunication company with GSM operations in seven emerging markets in the Middle East, Africa, and South Asia, having a total population under license of approximately 460 million with an average mobile telephony penetration of approximately 8 per cent. Moreover, total subscriber exceeded 80 million in the world, an increase of 90 per cent over March 2008. Company has total assets worth US$9.8 billion. Furthermore, total equity of US$1.18 billion and OTH has a market share of 30 per cent in the telecommunication industry of Pakistan.

New trend emerged out when Saudi Pak Commercial Bank neither was merged nor acquired but changed its name to Silk Bank effective from June 01, 2009. Well, if you recall, earlier on April 9th 2009, SPCB and Atlas Bank Limited (ATBL) informed that both had agreed for a potential merger as SPCB's majority shareholders entered into a Memorandum of Understanding with the sponsors of Atlas Bank. The merger was aimed at meeting the stringent minimum capital requirement (MCR) and capital adequacy ratios set by the SBP. In this light, banking sources are saying that the changing of the name is signaling that merger might not be happen.

Usually banks invest in equities market and fixed income securities like market treasury bills (T-Bills) and Pakistan Investment Bonds (PIB's). In the previous year (CY08) equity market and fixed income securities did not play aggressive role to support the earnings for the said period. Moreover, the immense issue of CY08 i.e. impairment against forced sales value also worsen the profitability of the banking industry.

The data issued by the State Bank of Pakistan contain information about balance sheet position of all banks on weekly basis and that reflect that investments are on the rising trend. The total investments stood at Rs1.14 trillion as on 28 March 09 as compared to 0.98 trillion, up by 17 per cent YoY basis. Investment to deposits ratio rested at 30 per cent at end March 2009 as compared to 26 per cent over the same period of last year. It is evident that banks are moving towards investments in government papers instead of advancing their money because government securities are relatively risk free but more liquid.