Research Analyst
15 - 21, 2010

Pakistan's banking sector has progressed rapidly in the last few years. The trend of consolidation in the sector, which began in the US and later spread to Europe, Middle East, and South East Asia, has lately appeared in the subcontinent.

A process of consolidation as a viable solution was kick-started following crisis in the banking sector. In the aftermath of the crisis in South East Asia in 1997, when capital outflow hit the banking sector, central banks of the states found consolidation as one of the crucial remedies.

Since Pakistan was following the South East Asian model of financial liberalization, it also adopted consolidation under the supervision of the International Monetary Fund (IMF). As a result, banks had to take the consolidation route. State Bank of Pakistan became powerful regulator after an amendment in 1997 Act.


To restore macroeconomic stability and improve credit supply, SBP took a number of measures in phases and relaxed the Statutory Cash and Liquidity Reserves Requirements. In 2008, the State bank announced new MCR for next five years. In Dec 2008 the bank required Rs 5 bn, In Dec 2009 Rs 6 bn, Dec 2010 Rs 7 bn, Dec 2011 Rs 8 bn, Dec 2012 Rs 9 bn, and Dec 2013 Rs 10 bn.


. CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08
CAR 9.7 8.8 8.8 8.5 10.5 11.3 12.5 13.2 12.2
Tier 1 Capital to RWA 8.3 7.3 6.2 6.5 7.6 8.3 9.9 10.5 10.2
NPLs to Loan Ratio 23.5 23.4 21.8 17.0 11.6 8.3 6.9 7.2 9.1
Provisions to NPLs 55.0 54.7 60.6 63.9 70.4 76.8 77.9 85.1 74.7
Net NPLs to Capital Ratio 131.3 150.5 85.5 54.4 29.2 14.1 9.7 5.6 13.6
ROA (after tax) -0.2 -0.5 0.1 1.0 1.2 1.8 2.1 1.5 1.2
ROE (after tax) -3.5 -12.6 3.2 20.0 20.3 25.0 24.2 15.5 11.3

Analysis of MCR shows that 28 banks including five foreign banks are fully compliant with the criteria. Remaining banks are in the process of meeting the MCR through either fresh capital injection or merger and acquisition with other banks. Most of the local private banks are expected to comply with the Capital Adequacy and MCR in coming quarter. Four other banks with major public sector share are under the process of restructuring/privatization.


Arif Habib Bank Group had decided to purchase majority shares of the Mybank, and the group had also finalised details for purchase of the bank. The Mybank has been facing serious problems as it failed to raise fresh deposits. It also failed to meet the criteria of MCR. Buyers thrice rejected the bank while they were close to sign a deal. Earlier, in August 2009, the Askari Bank refused to buy the bank. Mybank's paid-up capital was about Rs 4.243 billion which was much below the SBP criteria for MCR. In 2008, banks were required to raise MCR at Rs 5 billion which the Mybank failed to meet.



31-12-2008 5.0 5.0
31-12-2009 6.0 6.0
31-12-2010 10.0 7.0
31-12-2011 15.0 8.0
31-12-2012 19.0 9.0
31-12-2013 23.0 10.0

The State bank has power to liquidate, acquire, or carry out forced sale if a bank fails to meet the SBP criteria. However, so far no action has been taken by the SBP against any bank on failure to meet the MCR criteria.

The MCB had also signed on August 12, 2009 an agreement with the Royal Bank of Scotland Group plc to acquire 99.37 per cent of ordinary share capital in RBS Pakistan at a cost of Rs 7.2 billion ($85 million). Now this deal stands cancelled, as the central bank, allegedly toeing the government line, did not accord approval to the MCB, saying the bank was non-compliant of circular 4, 2008.

The Soneri Bank Limited (SBL) has expressed interest for acquisition of shares of RBS operation in Pakistan.

The decision was taken in pursuant to the announcement of the Royal Bank of Scotland Group plc that RBS has resolved to divest its interest from its operations in the certain businesses in the Asian region, which include all the assets and undertaking of the RBS Pakistan.

Accordingly, SBL will be seeking the approval of the State Bank of Pakistan to proceed with the due diligence of RBS Pakistan once RBS has submitted the requisite application to the SBP in this regard.

In the previous deals, the Union Bank was sold at a price of Rs 93 per share by Standard Chartered bank for $ 487 million while Prime Bank was acquired by ABN AMRO (now RBS Pakistan) at the rate of Rs54 per share i.e $288 million. PICIC DFI got Rs78 per share, Saudi Pak Bank got Rs 29.3 per share, and MCB Bank sold its shares at a price of Rs 470 per share to May Bank, Malaysia.


Although, mergers and acquisitions ensuing from the State Bank's initiative would be enhancing the economic efficiencies and stability of the banking sector, the caveat is that there may be an emergence of cartels once consolidation reaches its optimum.

Such consolidation, whether in the financial sector or any other sector, may lead to dominance of certain players and accumulation (unification) of market power especially if the merging firms have previously been competitors (horizontal mergers).