What shape Meezan Bank Pak­istan is go­ing to ac­quire in fu­ture

The Financial Daily - - MARKET SUMMARY -

Muham­mad Arif

Since some time three banks in Pak­istan i.e. Bank Al­falah (BAFL), Meezan Bank (MEBL), and Faysal Bank (FABL) owned by for­eign­ers from the Gulf are look­ing to sell them off as they want to seek exit op­por­tu­nity from Pak­istan's bank­ing in­dus­try.

How­ever the mat­ter is still at halt due to SBP in­for­mal 'cur­rency con­trols' as In such a case, any pay­ment made to them will likely in­volve the Pak­istani ac­quirer draw­ing down the coun­try's dol­lar re­serves by sell­ing rupees and buy­ing US dol­lars in the cur­rency mar­ket and then send­ing that cash abroad to the sell­ers' home coun­try (in this case, UAE, Kuwait, and Saudi Ara­bia re­spec­tively).

As an al­ter­na­tive State Bank may ask any ac­quirer of th­ese banks to ei­ther raise the money to pay the sell­ers from out­side Pak­istan, and then make the pay­ment with­out any money ever travers­ing through the Pak­istani bank­ing sys­tem at all (and thus not im­pact­ing the coun­try's for­eign ex­change re­serves), or if the money must leave Pak­istan, that it do so in small in­stall­ments paid out over an ex­tended pe­riod of time. Both of th­ese con­di­tions are un­likely to work, the first be­ing dif­fi­cult if not out­right im­pos­si­ble for the buy­ers, and the sec­ond be­ing un­ac­cept­able to the sell­ers.

For the first time in Pak­istani his­tory, three per­fectly healthy and vi­able banks are si­mul­ta­ne­ously up for sale. None of them is a dis­tressed as­set holder be­ing sold by spon­sors who had hastily got­ten into the bank­ing busi­ness and made too many bad loans that they did not have the cap­i­tal or the stom­ach to be able to cover.

None of th­ese banks are like na­tion­al­ized banks filled with a bal­ance sheet of po­lit­i­cally mo­ti­vated bad loans and an em­ployee ros­ter of peo­ple who want a pay­check for do­ing very lit­tle.

Among th­ese banks Meezan Bank is the most valu­able, as mea­sured by its mar­ket cap­i­tal­iza­tion, which is higher than that of Bank Al­falah.

As of Sep 2018 its as­set base is Rs 842 bil­lion against Rs 782 bil­lion as of Dec 2017 Its de­posits have gone to Rs 711 bil­lion as of Sept 2018 from Rs 673 bil­lion as on Dec 2017.

Hence if any­thing goes against the Meezan Bank is its de­posit base that is grow­ing too fast for its man­age­ment to be able to prof­itably de­ploy in loans. The task is made much harder by the fact that - un­like other banks - it can­not buy long-term gov­ern­ment bonds in­stead it has to rely on short term Sukuk with low rates of prof­its.

The long­est ten­ure on a Shariah-com­pli­ant gov­ern­ment bond in Pak­istan is of three years, and its yields are typ­i­cally lower than a con­ven­tional three-year bond. Con­ven­tional banks have re­sponded to the his­tor­i­cally low-in­ter­est rates in Pak­istan by shov­el­ing money into long-term gov­ern­ment bonds, where they can earn a nice spread of sev­eral ba­sis points above the oneyear bond. Is­lamic banks, Meezan has been work­ing with the gov­ern­ment to in­tro­duce a Shariah-com­pli­ant ver­sion of the 10-year bond.

In the mean­time, when Meezan Bank is des­per­ate to de­ploy its cap­i­tal into cor­po­rate and com­mer­cial loans, and its ex­ist­ing and prospec­tive client base know that, which is why they are able to bar­gain down for lower rates than they would pay on con­ven­tional loans.

It can­not rely on the re­li­gios­ity of CFOs and cor­po­rate trea­sur­ers for higher rates, be­cause Meezan Bank ap­pears to have al­ready run through the list of com­pa­nies that bank only with Is­lamic banks and now has to com­pete for the Shariah-ag­nos­tic busi­ness along­side con­ven­tional banks.

Meezan Bank started its ex­is­tence in 1997 as Al-Meezan In­vest­ment Bank, an in­sti­tu­tion with a limited li­cence to build up a cor- po­rate and in­vest­ment bank­ing fran­chise. At the time it started out, Al-Meezan In­vest­ment Bank was so small, and con­sid­ered so in­signif­i­cant, that it did not even have a full-time CEO. Ir­fan Sid­diqui, the man who was given the job (and still has it) was serv­ing as gen­eral man­ager (ef­fec­tively COO) of Pak-Kuwait In­vest­ment Com­pany (PKIC), a joint ven­ture be­tween the gov­ern­ments of Pak­istan and Kuwait. Sid­diqui con­tin­ued in both ca­pac­i­ties un­til at least 2001. How­ever af­ter join­ing Meezna Bank he tried to con­tact Gulf Arab states for its growth.

Meezan Bank's cur­rent share­hold­ing is now dom­i­nated by Noor Fi­nan­cial In­vest­ments Com­pany, a pub­licly listed com­pany in Kuwait that man­ages the wealth of sev­eral of that coun­try's rich­est fam­i­lies. Noor Fi­nan­cial owns 49% of the bank and has pub­licly made it known that its shares are up for sale. Most no­tably, in 2013, they tried to sell the bank to Habibul­lah Khan, the Karachi-based bil­lion­aire who owns Mega Con­glom­er­ate, a ship­ping and lo­gis­tics con­glom­er­ate that has since branched out into real es­tate devel­op­ment and other in­dus­tries as well. That trans­ac­tion, how­ever, was blocked by the State Bank of Pak­istan, in part be­cause Habibul­lah Khan was us­ing an off­shore com­pany to con­duct the trans­ac­tion.

Meezan Bank's rapid growth makes it an at­trac­tive ac­qui­si­tion tar­get, though the one risk it has is the fact that the founder CEO Ir­fan Sid­diqui is un­likely to con­tinue the job for much longer, hav­ing served in it for what is ef­fec­tively more than 21 years.

The is­sues con­fronting Meezan Bank now at present are

1. Con­ti­nu­ity of Man­age­ment af­ter Ir­fan Sid­diqui leaves.

2. In­vest­ment av­enues in short to ab­sorb grow­ing de­posits on long term ba­sis.

3. Re­for­ma­tion of trea­sury de­part­ment that some times do trans­ac­tions with con­ven­tional banks on con­ven­tional ba­sis for its day to day liq­uid­ity man­age­ment.

4. Sariah ad­vi­sory com­mit­tee role to fo­cus on ways that how to com­pete with con­ven­tional mar­ket us­ing Is­lamic fi­nan­cial prod­ucts.

5. Though it is col­lab­o­rat­ing with IBA for its re­search ac­tiv­i­ties but that has done noth­ing apart from hold­ing an­nual sem­i­nars. Re­search ac­tiv­i­ties re­quire bring­ing agree­ment on def­i­ni­tion of Riba, for­mu­la­tion if Leg­is­la­tion for Is­lamic Bank­ing and Fi­nance, Short term and long term mar­ket prod­ucts, to make Is­lamic bank­ing ac­tive part of macro poli­cies, fresh cur­ricu­lum of Is­lamic Bank­ing and Fi­nance for ed­u­ca­tion. Th­ese ar­eas are to­tally miss­ing ar­eas and to­tally in con­trol of Muftis who know noth­ing about the fi­nan­cial mar­ket dy­nam­ics.

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