DOWNBEAT M&A ACTIVITIES
Aug 23 - 29, 2010
A closer look at the list of companies listed at Karachi Stock Exchange - Pakistan's largest bourse - shows that out of the total listed companies nearly two-third are of no consequence for the investors. Bulk of the daily trading volume pertains to 30 companies and at times even benchmark KSE-100 index does not look true reflector of investors' sentiments. The number of companies placed on defaulters' counter is very long. The companies placed on this counter suffer from some common contentious issues that include no payment of dividend to shareholders not complying with the listing regulation and above all these are improved version of proprietorship. Various options are available to weed out such irresponsible corporate entities but hardly exercised either by the sponsors or the shareholders.
Over the years some companies have opted for buy back of shares. Karachi stock exchange often releases the names of companies in which trading is suspended, but most of these entities had gone out of operations decades ago and assets of these companies embezzled by the sponsors and/or staff of the entities, the most notorious being National Fibres, Islamic Investment Bank and its subsidiary Islamic Modaraba, Beema Insurance and the list continues. This situation has prevailed only because of the absence of supporting laws for takeover, acquisition and merger. Stock exchanges and apex regulator, securities & exchange commission of Pakistan could be held responsible for the prevailing sad state of affairs.
However, one sector emerges exceptional that is commercial banks. The credit of saving banks from bankruptcy goes to State bank of Pakistan. In the history of commercial banking in Pakistan, spreading over more than six decades, it is difficult to find any commercial bank going delinquent. If and when any issue aroused the central bank was prompt in bringing change of management at the ailing entity. Even if need was felt to inject additional liquidity the response was prompt. Some of the examples include winding up of Mehran Bank, sale of Union Bank and a few mergers and acquisitions.
State bank issued nearly a dozen permissions for setting up of commercial banks after the announcement of liberalisation, deregulation and privatisation strategy of government in early nineties. Soon after two distinct groups of banks emerged; these were 'big five' and small private sector banks. To bridge the gap minimum requirement of paid-up capital for commercial banks was increased. While some of the banks were successful in mobilising the additional capital others are still struggling to meet the requirement.
In a bid to comply with this requirement some foreign entities stepped in by injecting additional capital and also attaining majority stake. One such example was Samba Group of Saudi Arabia's injection of funds in Crescent Bank leading to change of name. Another UAE based entity Suroor Investment took substantial stake in three of the smaller banks namely Arif Habib Bank, Mybank and Atlas Bank. Name of Arif Habib Bank has been changed to Summit Bank and it is yet to be seen whether the foreign investor holding substantial stake would merge all the three entities or prefer to maintain their individuality. From the management point of view amalgamation of three banks could bring synergy and also help in optimising operational cost.
Royal Bank of Scotland acquiring of ABN Amro Bank globally also brought the change in management and signage. However, it seems that inability to bring a visible change in the profitability, RBS chose to sell its stake in the locally incorporated entity. While there were few other contenders Faysal Bank emerged successful. It is believed that in an attempt to optimise operational expenses, RBS would be merged into Faysal Bank.
Earlier foreign investors acquired strategic shares of Habib Bank and United Bank by offering attractive bids in privatisation process. Stake was also acquired by Maybank of Malaysia in MCB Bank. The other listed banks with foreign equity stake are Bank Alfalah, NIB Bank and Faysal Bank.
Banking sector experts have contrary views regarding foreigners acquiring stakes in local listed bank. While one group terms it a positive sign other group calls it creation of many East India Companies. They say the GoP sold its stake in the state owned banks to get dollars without realising the fact that reparation of dividend would add to foreign exchange outflow every year. They also say that the central bank has also succumbed to the pressure of foreign equity holders by allowing them to determine their own tariff of service charges. They also say that many banks insist on maintaining minimum balances and also penalise the accountholders if stipulated balance is not maintained.
Some of the banking sector experts are of the opinion that the keen interest of foreign investors in acquiring stake in commercial banks is mainly driven by the exceptionally high spread available in Pakistan, almost double the rate in the developed markets.
The strength of Pakistani banks and the regulatory framework is evident from the fact that even during the recession many of the players have managed to avoid posting losses. Some analysts say that the central bank of Pakistan is a little orthodox, while others term this prudent banking.
Some of the sector experts strongly believe that the prudential regulations favor the banks more and often endorse policies which are anti-accountholders. The central bank took a major step by making it mandatory for banks to pay minimum five per cent return on deposits, but often banks are able to avoid this on one or the other pretext.
There is one apprehension that once the Pakistan's economy is back on track, enters in to the growth phase and banks start posting profit, repatriation of dividends will start eroding country's foreign exchange reserves.
While many of the accountholders are full of complaints about high service charges, they are also cognisant of the high quality of service offered by some that include ATMs, debt/credit cards, online banking, internet banking and mobile banking helping the accountholders to avoid visit to branches.