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.