LAST week, it emerged that Standard Chartered Bank Pakistan had signed a non-binding memorandum of understanding with Orix Leasing to divest its entire shareholding in two of its subsidiaries that are involved in the Modaraba and leasing activities.

The foreign bank’s decision to offload its stakes in the Standard Chartered Modaraba (SCM) — subject to due diligence and regulatory approvals — is a bit surprising, given that SCM had posted a solid 50pc yearly growth in after-tax earnings for the financial year ending June 30 (FY14).

The group, comprising the bank and its three subsidiaries — SCM, Standard Chartered Leasing Ltd (SCLL) and Standard Chartered Services of Pakistan (Pvt) Ltd — had consolidated assets of over Rs428bn by end-June.

Responding to Dawn’s queries by e-mail, Mr Najam Siddiqi, Acting CEO of Standard Chartered Bank Pakistan Ltd (SCBPL), said the bank’s “willingness to consider potential divestment of shareholdings in SCLL and SCM is based on the fact that they are not absolutely core to our strategic objectives in the country”.

The SCM and SCLL transactions, if [completed], would represent a further step in Standard Chartered executing on its refreshed strategy announced in November 2013, focusing on core client segments — Najam Siddiqi, Acting CEO of Standard Chartered Bank Pakistan

He added that “the transaction, if [completed], would represent a further step in Standard Chartered executing on its refreshed strategy announced in November 2013 and focusing on core client segments. Pakistan is a core market for [us]”.

The bank holds 86.45pc equity in SCLL and 20pc in the Modaraba.

Mr Siddiqi said the potential divestment would have no impact on the bank’s existing operations, as “both SCLL and SCM are successful businesses in their own right and operate as entirely standalone entities, with limited support required from SCBPL. We remain committed to our business in Pakistan and have no intention of disposing of any other part of our business”.

Half yearly performance: The bank posted an after-tax profit of Rs4.72bn for 1HCY14, virtually unchanged from Rs4.68bn in 1HCY13. Its earnings-per-share worked out at Rs1.22, against last year’s Rs1.21. It announced a dividend of Rs0.75 per share (7.5pc).

This year’s muted bottom line growth can be largely attributed to last year’s high base effect, when the bank had booked oversized reversals in provisions against toxic debt. Besides, it continues to enjoy one of the highest net interest margins in the industry at 6.6pc, leading to net interest income of Rs9.7bn for 1HCY14.

The higher margins came as it continued to park its surplus funds into loans as well as high yielding Pakistan Investment Bonds. Its net advances and net investments were both up around 8.8pc in the period under review.

The bank followed the industry’s practice of substituting lower yielding Treasury bills into PIBs. SCBPL’s PIB portfolio expanded 160pc to reach Rs83.2bn by end-June. Conversely, its T-bill holdings dropped 37.2pc to Rs64.6bn.

Meanwhile, the growth in the bank’s loan book (8.9pc) easily outpaced that of the banking industry (1.9pc) during the six-month period. Its net lending clocked in at Rs147.5bn, against Rs135.5bn by end-2013.

“We believe in sustainable credit expansion in corporate, commercial, business and retail client segments, and are now seeing positive signs in private sector credit environment,” said Mr Siddiqi.

However, it will be interesting to note if the bank, and the industry at large, are able to keep up with this trend for the rest of the year. Provisional central bank data released last week shows that the private sector retired a net Rs74bn in credit in the first two-and-a-half months of this fiscal.

NPLs: SCBPL’s non-performing loans dipped 2.6pc to Rs24bn by end-June. And after recording a big reversal of Rs920.4m in provisions against NPLs in 1HCY13, it booked provisions of Rs20.4m this year.

Deposits: The bank continues to enjoy one of the highest ratios of current and savings accounts to total deposits at over 92pc. Its deposit base rose 5.5pc to Rs312.8bn, in line with the industry’s growth of 5.6pc during the period. Current accounts were up a healthy 12.7pc to Rs141.9bn, while savings accounts reached Rs146.4bn.

Expansion: At a time when small- and mid-tier banks are expanding their branch networks to mobilise more deposits, SCBPL’s network surprisingly stayed constant at 116 branches. But this helped it keep a tight grip on non-core expenses, which grew by 6.4pc to Rs6.6bn.

However, the bank’s acting CEO pointed out that it was simply responding to “global trends, where client preference is continuously shifting towards digital channels, [against] uni-dimensional brick and mortar setups. [We have] employed an integrated multi-channel strategy, investing heavily in the digital space, especially with the launch of Breeze — our smartphone application for mobile banking.

He also said the bank is the leader in digital interbank fund transfer (IBFT) transactions, with “digital transactions now accounting for majority transactions in the bank”.

“By the end of this year, we plan to open a fully functional digital branch in Pakistan — the first of its kind in the country. We have one of the lowest costs of deposit in the industry and one of the highest per-branch productivity,” said Mr Siddiqi.

Published in Dawn, Economic & Business, September 29th, 2014