Bank flags re­la­tion­ship risk ahead of YSX list­ing

The Myanmar Times - - Front Page - STEVE GIL­MORE s.gil­more@mm­times.com

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.

Photo: Aung Myin Ye Zaw

Pedes­tri­ans wait out­side Myan­mar Cit­i­zens Bank head­quar­ters in down­town Yan­gon.

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