Burj-NBP deal on the cards?

Published January 12, 2015
Illustration by Abro
Illustration by Abro

The banking sector enters 2015 promising more deal-making activities. Apart from the roughly half a dozen transactions that got underway last year, only one went all the way to completion. And another one might be following suit.

Interestingly — though the circumstances are markedly different — it may be yet another Islamic bank that proceeds in that direction.

In October 2014, Meezan Bank acquired HSBC’s Pakistan operations. Analysts said at the time that the deal had more to do with the foreign bank’s parent company’s decision to exit from certain markets, including Pakistan.

And the state-run National Bank of Pakistan has expressed an interest in potentially acquiring Burj Bank Ltd. NBP recently said it will conduct due diligence on Burj, and hoped to complete the exercise in a ‘short timeframe’. However, it was in August 2014 that it had first shown interest in the bank.

“This transaction looks like a winner for both parties, [given] NBP’s financial strength and Burj’s brand equity,” said a senior Burj Bank executive

The Burj deal is being closely watched by the market, as it has so far failed to meet the central bank’s minimum capital requirement (MCR) of Rs10bn.

The issue of capital shortfall at small banks garnered urgent national prominence after the government placed the troubled KASB Bank under a six-month moratorium in November after the bank failed to comply with the MCR and the capital adequacy ratio (CAR) requirement of 10pc.

The episode prompted other capital-starved banks — both conventional and Islamic ones — to scramble to shore up their capital levels. In December alone, three banks either received advances against rights issues from their sponsors, or announced their intent to shortly issue rights shares.

That leaves Burj Bank, which had Rs46.2bn in assets by September. In February 2014, MCB Bank had announced that it will appraise Burj; however, it soon said it will not be proceeding any further. One market source suggested that the discussions probably broke down over the price issue. MCB has since announced that it will establish its own Islamic banking subsidiary.

“Look, Burj is a small Islamic bank that has been running losses of late and has failed to meet the MCR. While the discussions are naturally a closely held secret, if it wishes, NBP can completely acquire it,” commented a senior sector watcher not affiliated with any of the two banks.

But that is ignoring one key fact: conventional banks, particularly the bigger ones, have only recently woken up to the true potential of Islamic banking. “In a country like ours where banks have barely touched the surface of the bankable population, the opportunities are immense. Pakistan is a young and predominantly Muslim country; big or small, the pie will [eventually] grow larger and all banks will have their fair share,” a senior Burj Bank executive told Dawn.

Burj is one of just five full-fledged Islamic banks in the country. It is backed by the Islamic Corporation for the Development (ICD), the private sector investment arm of the Islamic Development Bank, which held a 33.9pc stake by the end of 2013.

“Burj has [swiftly] established itself as a progressive and innovative brand with a strong balance sheet and a healthy CAR. Burj has developed a strong alternate delivery channel portfolio and has significantly grown its retail asset portfolio,” he added.

By the end of September, the bank’s CAR stood at 18.72pc. While the SBP has set the CAR limit at 10pc for all banks, it set it higher at 23pc for Burj, given that the bank’s capital (net of losses) stood at Rs4.918bn. However, the CAR limit for the bank was later reduced to 18pc.

“Burj Bank is taking concrete measures to raise capital to meet the MCR of Rs10bn. Mr Khaled Al Aboodi, the CEO of ICD and the chairman of Burj Bank, recently visited Pakistan to meet senior officials at the SBP and NBP. He assured the SBP and NBP that ICD will extend full cooperation in raising capital for Burj,” said the executive.

Transaction structure: In case the two banks decide to proceed with the deal, NBP will have two choices: it can completely acquire Burj (akin to what Meezan did with HSBC), or it can make a capital injection in return for an equity stake in the small bank. Either way, Burj’s MCR is expected to go over the Rs10bn threshold.

However, in case the deal goes through, it remains to be seen if Burj would exist as a standalone Islamic bank, or if its operations will be merged with NBP’s Islamic banking section. By end-September, NBP had 21 Islamic banking branches, while Burj had 75.

“This transaction looks like a winner for both parties, [given] NBP’s financial strength and Burj’s brand equity. While [the] deal has obvious benefits for Burj, NBP also stands to gain from Burj’s progressive approach towards brand-building, its state of the art branches and competent human resource,” said the senior Burj executive.

Published in Dawn, Economic & Business, January 12th, 2015

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