Bank flags relationship risk ahead of YSX listing
Myanmar Citizens Bank has named its reliance on the Ministry of Commerce as a major risk to its business model.
MYANMAR Citizens Bank – soon to be the first lender listed on the Yangon Stock Exchange – named its reliance on the Ministry of Commerce as a major risk to its business model in disclosure documents published last week.
The ministry, which founded MCB in 1992, has reduced its holdings in the lender to around 10 percent but the bank still enjoys huge commercial advantages as a result of this relationship, and the possibility the commerce ministry could sell its holdings is a key risk to MCB’s business, the firm said.
The ministry founded the bank mainly to process foreign exchange for exporters, and still owned the majority of shares in the lender as recently as 2012. Along with the share sales, the ministry’s influence over the bank – at least on paper – has also declined. Until this year, it held a separate class of shares to the 90pc held by the general public.
These special Class A shares allowed it to appoint five of the bank’s 15 directors and the managing director. But the Central Bank of Myanmar and the Directorate of Investment and Company Administration approved the removal of this distinction between Class A and Class B shares in May.
If the ministry is an ordinary shareholder on paper, however, the reality is very different. MCB published its disclosure document last week ahead of its debut on August 26, and listed the possibility that the ministry could sell its shares as one of the main risks to its business.
The government ministry has helped the bank build relationships with government officials and other “important persons” inside and outside Myanmar, MCB said. But there is also a commercial arrangement whereby MCB collects import-export license fees from trades on behalf of the ministry.
MCB has partnered with the ministry to create an e-payment system that allows importers and exporters with an account at MCB to pay their licence fees to the Ministry of Commerce online or at an MCB branch, rather than physically travelling to Nay Pyi Taw.
This has allowed MCB to “vastly expand” its customer base, the bank said.
Customer deposits rose from K26.2 billion in March 31 2015, to K41.1 billion at the same point this year – a 56pc increase. The top 10 depositors account for over 37pc of the bank’s total deposits, according to the disclosure document, but they are not named.
There is no formal arrangement with the ministry or even a contractual agreement for MCB to collect the licence fees, however. The ministry is also planning on drastically reducing the number of goods that require an import licence.
But as the service charge MCB collects for processing traders’ licence fees provides less than 1pc of the bank’s total income, any change to licence requirements would not hit the bank’s bottom line, MCB said.
The commercial agreement does provide a platform for the lender to rapidly expand its customer base. If the ministry sold its shares then the business relationships and commercial arrangements may no longer be available, and MCB’s profitability could suffer, the disclosure document said.
MCB’s net profit after tax has more than doubled across the last three financial years, from K2.51 billion in 2013-14 to K5.3 billion in 2015-16. The bank said the rise in profits was partly down to new activities like pledge loans – requiring physical collateral that is not land or buildings – and an expansion of hire purchase loans.
But a ramp-up in share capital – from K18.2 billion at the end of the 2013-14 financial year to K49.8 billion as the end of March this year – has also helped profits, it said.
For the financial year ending in March, 36pc of the bank’s private sector loans were to the trading sector, with services the second-largest recipient with 27pc and the industrial sector receiving 22pc of MCB loans.
The bank had 13 accounts with non-performing loans in the most recent financial year, amounting to K3 billion. This gave an NPL ratio – the NPL figure as a percentage of total loans – of 2.69pc.
MCB has three classifications of non-performing loan, beginning with “sub-standard” where defaults on payments of interest or principle have lasted for six months. The bank said it will “eventually” adopt the Central Bank’s revised NPL definitions, which begin with “watch loans” where there are defaults on interest or principle for 31 days.
With K49.8 billion in share capital the bank has almost reached its target of K50 billion in paid-up capital, which will help MCB fund a planned branch expansion.
The number of MCB branches rose from three to 21 between 2010 and 2016, and the bank is aiming to establish another 50 branches in the next five years.
It also plans to hire foreign bankers with international expertise to mitigate the risk of losing senior management to rival banks, it added.
Of the bank’s 10.4 million shares, 4.45 million are held by individuals on the board of directors or key executives. Potential investors often look at the floating stock of a particular company. This is the number of shares available for trading – the total number of shares minus those held by major shareholders, employees and company insiders.
In the case of MCB the floating stock will be around 42pc. U Tun Tun, chief financial officer of First Myanmar Investment, estimated that his company – the first to list on the exchange – listed with a floating stock of 25-26pc.
The directors and executive officers of Myanmar Thilawa SEZ Holdings – the second firm to list on the YSX – held 46 percent of total shares when that firm launched its shares on the exchange, according to MTSH’s disclosure document.
Pedestrians wait outside Myanmar Citizens Bank headquarters in downtown Yangon.