CORPORATE BANKING TO HELP BOOST ECONOMIC ACTIVITY ON THE BACK OF REDUCTION IN INTEREST RATES
AN INTERVIEW WITH MR. IRTIZA KAZMI, CORPORATE HEAD -SOUTH, CORPORATE & INVESTMENT BANKING GROUP, NATIONAL BANK OF PAKISTAN
SAAD ANWAR HASHMI
Oct 15 - 21, 2012
PAGE: PLEASE TELL US ABOUT YOUR CAREER PROGRESSION?
IRTIZA KAZMI: I started my banking career with MCB in 1995 as a Credit and Marketing Officer and later moved to ORIX Investment Bank in 1997, where I last served as an Assistant Manager, Credit and Marketing. In 2001, I joined Bank Alfalah (Corporate Banking and Structured Finance) and later Dubai Islamic Bank Pakistan in 2006, where my last assignment was the Head of Investment Banking. In February 2009, I moved to Pak Kuwait Investment Company (Pvt) Limited where I was heading both Corporate Finance and Investment Banking arms before joining National Bank of Pakistan in December 2009 as Corporate Head-South. I have over 17 years of experience in DFI's, Commercial as well as Islamic Banking.
PAGE: SBP HAS RECENTLY SLASHED THE DISCOUNT RATE TO 10 PERCENT TO HELP BOOST PRIVATE SECTOR CREDIT. WHAT IMPACT WILL IT HAVE ON NBP'S STRATEGY WITH REGARD TO CORPORATE ADVANCES?
IRTIZA KAZMI: The reduction in interest rate by SBP has been welcomed by the market in general with a hope that industrial/commercial activity will increase through private sector credit off-take. The strategy of a larger bank versus a smaller bank will be different when it comes to corporate advances. NBP had an asset book of PKR 1.15 trillion as on December 31st, 2011 with a deposit base of PKR 945 billion as on June 30th 2012. NBP with a AAA rating and strong branch presence has an advantage to raise lower cost deposits. Such deposits are channelized through its Corporate Banking, Commercial, Agricultural, SME and Retail segments at competitive rates. Despite the fact that a minimum cost of deposit is (presently around 6 percent) which has to be given to the depositors as per SBP directives, NBP is able to earn through a healthy spread through margins since cost of raising liability (deposits) is comparatively lower. Corporate advances therefore channelized through a larger bank like NBP will benefit the clients since rates offered will continue to be competitive. Smaller banks will tend to find themselves in a pressure situation where the top line margin will be squeezed in terms of interest income since benchmark rates have reduced. These banks are more likely to seek further diversification through Retail, Commercial, Corporate and SME as such advances yield a higher spread.
PAGE: WHAT WAS THE CREDIT SCENARIO WHEN INTEREST RATES WERE AT HIGHER THAN THEY ARE TODAY?
IRTIZA KAZMI: In a high interest rate scenario, corporate clients are deterred with debt financing and aim to reduce financing cost to the minimum. High interest rate hampers specially the SME sector which is the backbone of our economy. The move by SBP at first to reduce the policy rate earlier by 150 bps and now by 50 bps is a positive sign which will help increase advances through Retail, Commercial, SME and Corporate alike.
PAGE: BANKS TEND TO INVEST RESIDUAL FUNDS IN GOVERNMENT PAPERS WHEREAS THESE FUNDS COULD REDUCE THE CROWDING-OUT IMPACT AND BE USED FOR CREDIT DISBURSEMENTS THROUGH SME, COMMERCIAL, CORPORATE OR RETAIL. WOULD YOU EXPECT NBP TO KEEP INVESTING IN GOVERNMENT SECURITIES AND HOLD PRIVATE SECTOR OFF-TAKE?
IRTIZA KAZMI: The Crowding out impact through investment in Treasury Bills has been an attractive avenue for the banks since returns are risk free. Larger banks have the advantage to channelize their deposit base to diversified sectors yet have quantum of funds as deposits which are invested in Treasury Securities while maintaining a healthy yield. This is simply a game of economies of scale. Smaller banks on the other hand cannot put all eggs in one basket and would find themselves channelizing funds through Retail, Commercial and SME for a spread higher than that of Treasury securities to improve their profitability. We can very well witness that there has been increased marketing efforts by smaller banks in order to attract the customer base which otherwise would be banking with one or few larger banks. Mid-sized and smaller banks will aim to capitalize on new niches to sustain the overall profitability through diversification. Some banks would focus on becoming trade leaders, others on personal loans, and some on credit cards, mortgages and so forth.
PAGE: HOW WOULD GDP IMPROVE PROVIDED GOVERNMENT BORROWING IS NOT CURTAILED AND CHANNELIZED FOR INFRASTRUCTURAL AND ECONOMIC DEVELOPMENT?
IRTIZA KAZMI: Government borrowings assists in managing the budgetary deficits but unfortunately is not channelized to improve the country's infrastructure. For any country, GDP will not increase at an optimal level if infrastructural development and initiatives taken by the government does not support industrial output. This is yet again extremely important for developing economies like Pakistan. Automobile manufacturers sold 157,325 locally assembled cars in FY12 compared to 127,944 cars in FY11 whereas development expenditure is not brought in to maintain and build roads and bridges. The consumer durable and electronics industry which includes air conditioners, refrigerator, televisions and microwaves to name a few is growing at a rapid pace whereas electricity shortfall and load shedding to run these appliances is imminent. Gas shortage has affected the entire industry from the fertilizer sector to related industries which relay on gas generated power to support their plants. Government must spend on such infrastructural and economic development to create an enabling environment for the industries to do business. For instance, as a rule of thumb, if a developing economy wishes to maintain X percent of GDP, they should increase its power (fuel & energy) availability by 1.5X to ensure sustainable economic growth.
PAGE: WHY DID BANK CREDIT DECLINE WHEN INTEREST RATES WERE HIGHER AND WHAT WAS THE STRATEGY OF BANKS TO COUNTER REDUCED LENDING?
IRTIZA KAZMI: Talking about the years through 2005 through mid-2012, higher interest rates made repayment of advances difficult for Retail, Corporates, SME and Commercial banking. NPL's in the banking sector have presently reached PKR 653 billion as on FY12 simply due to high rates which erodes the capacity for repayment. With Corporate clients, reasons varied for instance Textiles suffered with high cost of inputs and depressed international export markets. Banks in a high interest rate environment become extremely cautious with the lending and strive to maintain the current portfolio. Investment in Treasury Bills is seen as a safe haven which presently has an outstanding stock of PKR 1,660 billion. In consumer banking, overall advances in Credit Cards, Mortgages and Auto financing have declined. Reduction in rate will assist the entire sector and will improve recovery through reduction in default rate which will encourage banks to focus away from Treasury securities to other lending avenues. When the overall sector improves and industry becomes more vibrant, those laid off will be brought back where banks in order to compete will invest heavily on technology and systems as already witnessed through online and branchless banking.
PAGE: GOING FORWARD, HOW DO YOU THINK BANKS WOULD VIEW ADVANCES IN TERMS OF COMFORT IF DIVERSIFICATION IS IMMINENT FROM GOVERNMENT SECURITIES AND HOW WILL IT IMPACT CORPORATE ADVANCES?
IRTIZA KAZMI: Upto two weeks back, treasury securities were yielding a return of 10.2 percent which may witness a further decline. Banks would need to capitalize on the deposit base since the overall cost of deposit has gone up whereas the benchmark rate is reduced. Banks will be required to keep a close tap on the expenses and focus on diversification which would be more prevalent in Retail, SME and Consumer banking than Corporate Banking. Keeping with an example, if previously a bank gave an advance of PKR 100 to one entity, a bank would now give a PKR 1.0 advance to 100 individuals/entities. This would assist in diversification, mitigate risk through lending and would allow the banks to earn through a higher yield. Corporate advances are already diversified. What would be the key is to see the multiplier effect of a single event; for example if gas curtailment does not end, how would it impact other industries which are directly or indirectly impacted through utilization of gas.
PAGE: WITH DECLINING INTEREST RATE, THERE IS A LIKELY POSSIBILITY THAT BANKS WILLING TO DIVERSIFY WOULD ALSO INCREASE THE SPREAD OVER BENCHMARK RATE IN ORDER TO MAINTAIN AND GROW THE INTEREST INCOME. WHAT IS YOUR VIEW ON THIS ASSUMPTION?
IRTIZA KAZMI: For any bank including NBP, the spread charged is made up of banks basic cost of funds, operational cost and risk which includes both credit, maturity and default risk. In a decreased interest rate scenario, if banks would increase the spread, this would defeat SBPís purpose of reduction in rates where the clients either through Corporate, Commercial, SME or Retail will not benefit. In order to maintain profitability and yet be competitive, securing interest income through increase in spread would be a counterproductive measure. This is where we would experience more diversification to distribute the risk and earn through all lending arms of the bank.
PAGE: UNDOCUMENTED OR GREY ECONOMY HAS A SIGNIFICANT QUANTUM IN PAKISTAN. HOW DO YOU THINK THIS PARALLEL ECONOMY EFFECT YOUR LENDING DECISIONS?
IRTIZA KAZMI: The undocumented economy is a major concern for the government since business transactions are not recorded which results in evasion of tax. The grey economy for that matter has its pro's and con's. The disadvantage is evasion of direct taxation with utilization and movement of funds not channelized through the banking sector. However, due to the parallel economy, the overall market has grown which could be seen as an advantage. We have witnessed a number of restaurants spring up in Karachi who work primarily on cash and do not have bank accounts. Agricultural business remains widely undocumented, however, has provide employment opportunities to millions of people.
The way to analyze the undocumented industry and growth within the rural and urban sector in most part is through viewing the motorcycles sold in the market. The country sold 835,000 motorcycles in FY11 and 829,800 motorcycles in FY12. The prime purchasers are those who either live in rural areas or in urban but earn minimum without having the wages or salaries channelized through the banking system. We have also seen various unknown brands which spring in the market manufactured by ad hoc companies operating from home or one room shops. Despite the fact that crops have suffered due to flooding, year on year the country produces bumper crops which also shows how the undocumented economy has benefited the people. It is however imperative to say that the parallel economy should be brought into the formal sector and channelized through banks. Good initiative which includes branchless banking being pushed by some banks is a positive sign. We say that GDP is 3.7 percent however, if the unorganized and parallel sector is taken into account, the GDP would be much higher.
PAGE: HIGH OIL PRICES HAVE IMPACT THE INDUSTRY THROUGH SUPPLY SIDE INFLATION. HOW DO YOU SEE THE MOVE BY THE GOVERNMENT TO REMOVE SUBSIDY ON OIL?
IRTIZA KAZMI: Removing the subsidy on oil should be seen as a positive sign for sustainable economic growth in the long run. Prices are now adjusted on a weekly basis based on international prices are passed on to the end consumers. The market has adjusted to the increase in oil price which is eventually passed on to the consumers. It is unfortunate that the tax charged on each liter of petrol ranges between 33 percent to 35 percent which should reduce in order to help decrease supply side inflation through increasing tax base.
PAGE: CORPORATE BANKING ADVANCES ARE PRUNE TO PARTICULAR SECTORS WHERE RECOVERY MAYBE SWIFT. IT HAS BEEN WITNESSED THAT CORPORATE BANKING WOULD GENERALLY AVOID EXPOSURE IN SENSITIVE INDUSTRIES E.G. HOSPITAL, CONSTRUCTION ETC WHERE RECOVERY IN CASE OF DEFAULT BECOMES MORE OF AN EMOTIONAL RATHER THAN A BUSINESS DECISION. WHAT IS YOUR VIEW ON THE SAME?
IRTIZA KAZMI: Advances through Corporate Banking is a commercial decision. If any entity does not service the principal or mark-up, corrective measures with regard to restructuring or litigation are taken regardless of the nature of the business. The advances channelized trough Corporate Banking becomes a moral responsibility for the clients to return since the money belongs to the depositors. Decisions are therefore taken on objective basis. What makes NBP different from other banks is the capacity with which the problems and issues of the client are understood and catered to. Other banks would tend to make swift decisions to go into litigation whereas NBP would negotiate a deal which at the end of the day is mutually beneficial for the bank and the client. However, this does not mean that extreme and last resort measures such as filing a suit would not be considered.
PAGE: WHICH ARE THE SECTORS WHERE YOU WOULD LIKE ADVANCES TO BE CHANNELIZED FURTHER BASED ON BUSINESS VIABILITY AND WHICH ARE THE SECTORS WHERE YOU WOULD BE CAUTIOUS AND RATHER BE ON A "HOLD AND MAINTAIN POLICY"?
IRTIZA KAZMI: The situation varies from time to time which defines the sector viability and lending strategy. If the fertilizer sector was viable 4 years back considering no gas curtailment, today the same sector is hampered with gas supply shortage. If we were optimistic with the sector earlier, today the sector poses a different risk dynamic. Since Corporate Banking including NBP has a diversified exposure in various industries, we also need to see the multiplier effect as mentioned earlier on other industries. Shortage of gas for instance not only affects fertilizers, it also impacts textiles, power, and utilities who rely on gas supply. Multiplier effect on all sectors is therefore the key. Other factors which have put the industry under distress include poor infrastructure, law and order issues and political uncertainty.
PAGE: IT IS GENERALLY BELIEVED THAT ADVANCES CHANNELIZED THROUGH NBP CORPORATE BANKING MAY BE INFLUENCED LEADING TO FORCEFUL LENDING. WHAT IS YOUR VIEW ON THIS MARKET BELIEVE?
IRTIZA KAZMI: Contrary to market belief, NBP Corporate Banking does not give advances on the basis of external pressure which may result in forceful funding. Each case is analyzed for all risk factors involved through our Relationship Teams and Risk Management before approval and sanction is given. With the structures and processes in place, each new or previous case is carefully considered before advances are extended. Today, NBP Corporate Banking has relationships with major corporations throughout Pakistan which other banks share aswell. We are approached by the Government to support certain projects and sectors which are mostly backed by sovereign government guarantee. Such cases are obliged and considered, again considering all risk elements. The Corporate portfolio is reviewed on the basis of IRR as well as Economic Rate of Return where NBP Corporate has excelled. NBP Corporate focuses on asset quality. A classic example is such were recently a large industrial group in Textiles went into litigation where NBP did not have a share as high as the exposure taken by other banks. This further substantiates that NBP does not give advances with forced funding and analyzes each element involved before credit is extended.
PAGE: HOW DO YOU FORESEE CORPORATE BANKING BUSINESS AND NBP'S OVERALL LENDING STRATEGY THROUGH FY13 INTERMS OF BUSINESS STRATEGY?
IRTIZA KAZMI: NBP is a mature organization whereas Corporate Banking has been maintaining relationships with all existing customers who also bank with other lenders. The strategy would be to yield the maximum out of the current portfolio and focus on increasing trade, remittances business along with cash management solutions which has a high potential in the market. Client relationships will continue to be optimized whereas advances will be given selectively analyzing all risk elements of the industry and the client. NBP has 1,283 branches all of which are online and used to provide the best possible solutions to the customers. NBP Corporate shares a significant portion of the overall advances of the bank. NBP in terms of Retail has successful products i.e. Cash against Gold, Advance Salary and is the market leader with Agricultural financing which is expected to yield results. NBP will strive to focus on sectors which is the need for the economy including the Power sector, Infrastructural development, Export oriented industries and industries involved in import substitution.
PAGE: HAVING ACQUIRED EXPERIENCE WORKING IN COMMERCIAL AND ISLAMIC BANKING ALONG WITH A DFI, HOW HAS BEEN YOUR EXPERIENCE LEADING CORPORATE BANKING - SOUTH OF NBP, THE LARGEST COMMERCIAL BANK IN THE COUNTRY WITH A BALANCE SHEET FOOTING OF MORE THAN PKR 1 TRILLION?
IRTIZA KAZMI: Working with NBP has been a fulfilling and rewarding experience. I have remained in the field of Corporate Finance and Investment Banking for almost two decades and have in the past worked with clients who are already booked with NBP Corporate Banking. Major difference of working with NBP versus other banks in the past is most definitely the asset book with at NBP Corporate runs in hundreds of billions. The task of leading a team with a strong portfolio is challenging and fruitful. I have used my experience to guide my team to perform at optimal levels and maintain strong client relationships.