While privatisation of state units is slowing down, much more direct foreign investment is now flowing into take-overs of local private banks and companies.
NIB Bank, a subsidiary of Singapore-based Tamasek Holdings, acquired, last month, 63.36 per cent shares of Pakistan Industrial Credit & Investment Corporation for $339 million.
Through this acquisition, NIB has also gained control of PICIC Commercial Bank, PICIC Asset Management Company, PICIC Insurance Ltd. and PICIC Exchange Company. Thus, it has now become a key player in Pakistan’s financial market.
In the outgoing fiscal year, Standard Chartered Bank acquired Union Bank for $487 million. Metropolitan Bank merged with Habib Bank AG Zurich’s Pakistan Operations to create Habib Metropolitan Bank and ABN Amro bought Prime Bank for about $228 million. Besides, Samba Financial Group of Saudi Arabia took control of 68 per cent of Crescent Commercial Bank Ltd. through the issuance of 600 million new shares valued at $98.75 million.
Standard Chartered and Habib Bank AG Zurich have completed the process of acquisition and merger. But the ABN Amro’ take-over of Prime Bank would complete by the end of this month or early next month, an official of the bank told Dawn.
“We have made the payment and met all requirements. You will see the Prime Bank sign-boards replaced with that of ours within four to five weeks,” he said.
After acquiring Prime Bank, ABN Amro has emerged as the second largest foreign bank and its officials say the bank would now extend its services to agriculture and small and medium enterprises.
“With 80 plus branches now, we are well positioned to enter into the areas where we had never ventured like agriculture credit and SME financing,” said a senior official of the bank.
Banking sources say three more banks may be acquired or merged with some bigger banks in near future. An Egyptian billionaire and a consortium of financial and telecom institutions are in the race for acquiring Saudi-Pak Commercial Bank and a large American bank is trying to take over Soneri Bank. Word is also taking rounds about a possible take-over of Mybank by some investors.
“As renowned foreign banks acquire local ones, it reflects their long-term confidence in Pakistan economy thus facilitating faster and larger inflows of foreign investment,” says Arif Habib, chairman of Arif Habib Group. The group bought 7.36 per cent of PICIC shares from public on behalf of NIB Bank. (NIB bought 56 per cent shares directly. All direct and indirect buying of took place at Rs78 per piece.)
“The most immediate benefit of foreign-sponsored acquisitions is that local share holders are getting attractive prices on their stocks,” said Habib with whose group merged Rupali Bank of Bangladesh in fiscal year 2005 creating Arif Habib Rupali Bank.
“Moreover, as foreign banks grow in size after acquiring local banks, they would give local banking giants a tough competition. And that would ultimately benefit customers.”
Syed Ali Raza who heads extra-large state-run National Bank of Pakistan also thinks so. But he says large local banks including NBP are prepared to meet the challenges thrown by acquisitions and mergers.
“We’re going to focus on agriculture and on SMEs--the areas where we have the right network and expertise to serve,” he said. “Foreign banks, I think, won’t be able to compete with us in these areas even after they grow in size.”
Unlike the central banks of India and Bangladesh, the State Bank of Pakistan does not require foreign banks to offer farm loans. And they don’t even do it on their own. At the end of 2006, their combined exposure in the agriculture sector was only Rs18.2 million and in fishing and fish-farming sector Rs25 million!
Against that, foreign banks carried personal and consumer loan portfolio of Rs38.4 billion and manufacturing loan portfolio of Rs52 billion at the end of 2006.
Raza and other top bankers say, however, that large local banks now need to make substantial investment in information technology and human resources to compete with the foreign banks. “Foreign banks have latest technologies… they have history of customer care…now as they start using networks of local banks their edge in consumer banking would rise further,” reckoned Raza.
From customers’ viewpoint a key question is whether mergers and acquisitions in the banking sector would squeeze the banking spread—the highest in the region, and bring relief to depositors?
“I think, as competition heats up, the spread would shrink and depositors would certainly benefit. If banks go beyond a certain level in charging their customers, they would lose customers but if they give higher returns to depositors there is no threat except that their banking spread would shrink,” said Raza.
Bankers say a gradual decline in the banking spread—currently at 730 basis points—would not hit the profitability of banks in a big way. Banks can compensate it by increasing their non-interest income and by reducing the operational cost through enhanced efficiency.
Foreign banks have accelerated acquisitions of local ones, mainly because the State Bank of Pakistan has stopped issuing new banking licences except for Islamic banking.
And sponsors of local banks are selling these banks to foreign ones or merging with them because they cannot meet the SBP requirement to increase the paid-up capitals. However, what primarily attracts foreign banks to Pakistan is banks’ growing profitability on the back of rather unchecked increase in banking spread.
The combined profits of 26 out of 35 commercial banks during July-March FY07 rose 18.7 percent to about Rs50 billion from Rs42 billion in July-March FY06.
Privatisation of Habib Bank and United Bank that were bought by foreign investors and acquisitions of local banks by foreign ones has increased the foreign stake in the overall paid-up capital of the banking and financial system supervised by the central bank. SBP Governor Dr Shamshad Akhtar had told a conference in Geneva in February this year that foreign stakes stood at 47 per cent. Now it might be over 50 per cent.
Bankers say since 80 per cent of Pakistan’s total banking assets are in the hands of private sector, the increasing influence of foreign banks should bring in improvement in the system through increased competition. They say that had the system been heavily dependent on state-run banks, this could have an adverse impact.
Acquisitions and mergers are not limited to the banking sector in Pakistan though this sector has certainly seen much more activity than the other sectors. In telecommunication sector, Singapore Telecommunications Ltd. or SingTel is going to acquire 30 per cent shares of Warid Telecom for $758 million and both companies have already signed an agreement to this effect.
In the last fiscal year, China Mobile Ltd., the world’s largest mobile-phone operator bought 100 per cent shares of Paktel Ltd. for $460 million and renamed it as CMPak Limited.
Immediately after this take-over, China Mobile poured in more funds into Pakistan for business expansion. Officials say CMPak plans to invest $400 million in Pakistan in 2007 to expand its network.
With a low mobile phones penetration rate of 39 per cent, and a strong regulatory regime, Pakistani cellular market has emerged as an attractive destination for investment.
That is why not only new companies are exploring this market but those already operating here are reinvesting their earnings.
In the outgoing fiscal year, Telenor Company re-invested $98.4 million earnings—and this was in line with the trend seen in other sectors. In July-March FY07, re-invested earnings grew over 50 per cent to $660 million and the State Bank has forecast the full year re-invested earnings to be around $1 billion.
The US-based Philip Morris International (PMI) also taken over Lakson Tobacco by increasing its share holding from 40 to 97.6 per cent in the last fiscal year. The acquisition was worth $382 million.
Acquisitions of local companies by foreign ones and corporate marriages between the two are not only bringing in the much-needed foreign exchange but also technology and expertise in various fields. And generally, a higher inflow FDI is not only helping Pakistan in improving its external account but through their spill over effects it is also contributing towards overall improvement of the economy.
“But there are also some concerns about potential costs of FDI such as profit outflows and effects on competition in the domestic market,” said the SBP in its second quarterly report for FY07. “Specifically, profit outflows that arise from FDI could further deteriorate the current account position by augmenting the investment income payments,” it warned.
The latest data show that in eleven months of FY07, profits and dividend outflows totalled $760 million, an increase of 51 per cent over the outflows of $504 million in the entire FY06.
This indicates that the full fiscal year 2007 outflows would easily cross $800 million thus showing an even greater increase over the fiscal year 2006 outflows.