Four years after president and CEO of Union Bank Shaukat Tarin was asked by Pakistan’s central bank governor to review closely the rising expenditure of his bank, he is celebrating not just its rapid transformation but also the successful conclusion of the sale of a majority stake to Standard Chartered Bank.
The deal, which was successfully signed on August 9 after months of negotiations and eventual valuation of Union Bank at about $507m, marks an unprecedented entry to the south Asian country by a large western bank. Standard Chartered initially signed up for 57.5% of Union Bank and expects to raise its stake to 81% by purchasing further shares for a total expenditure of about $410m, according to officials at Pakistan’s central bank in Karachi.
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Standard Chartered, which specialises in emerging markets, expects to become a robust player by raising its number of branches from 46 to 99 after merging with Union Bank’s 53-branch network. “Just four years ago, the central bank was telling me I was too top-heavy, my profits were low and expenses were high by comparison to others in my peer group,” recalls Mr Tarin.
Mr Tarin was appointed as president in 2001, after a consortium of investors bought Union Bank for $12m. Its largest shareholder was Abdullah Basodan, the Saudi investor, with a stake of just over 49%, while the remaining shares were owned by smaller individual investors.
An experienced international banker with previous experience of overseeing a turnaround at Pakistan’s then publicly owned Habib Bank before it was privatised, Mr Tarin decided his top priority for Union Bank was to oversee a substantial facelift to change its image from laidback to more robust.
“The central bank’s warning came after we began investing in technology and training our people to become competitive. I could see there were going to be opportunities in the Pakistani market. There was a method to that madness, which eventually paid off,” he says.
The bank’s after-tax profit for 2005 rose to Rps1.76bn ($29.1m), up 110% from Rps830m the previous year. Last year, Pakistani banks declared profits that were 70%-200% higher from the year before.
News of Standard Chartered’s buyout of Union Bank has been an opportunity for Pakistan’s senior officials to hail the country’s increasingly reformed banks. It’s a turnaround from a decade ago, when the largest banks – especially in the public sector – were overshadowed by concerns over future profits in the midst of worries such as large bad debts, heavy costs for staffing and sluggish profits.
A reform programme put in motion in 1997 led for the first time to the handing over of the three largest public sector banks to top managers hired from the private sector. The move was accompanied by the redundancies of about 20,000 public sector bank employees, which cut staffing costs in the short term and paved the way towards hiring younger, better trained employees to cope with new business plans such as the large-scale expansion of loans to individual consumers. Union Bank has emerged as a leading player in offering loans to individual car buyers and purchasers of new homes.
Other banks that have expanded their lending to serve a rising number of car buyers have also benefited from this business. The sales of new cars during the last financial year (July-June) rose to 250,000, up almost twice on the year before. Central bank officials estimate that at least 80% of those cars were financed through loans from banks, almost twice the proportion from just six years ago, indicating that consumers are increasingly turning to banks for auto loans.
Foreign interest
“Foreign banks are interested in the Pakistani market, with such a good track record of rising profits for banks,” says central bank governor Shamshad Akhtar. Ms Akhtar confirmed to The Banker that other foreign banks were looking to invest in Pakistan through acquiring local banks as Standard Chartered has done, but declined to reveal their identities. “This is a time of opportunities in Pakistan and that’s something well appreciated,” she says.
The central bank says it would consider requests from foreign banks to expand existing branch networks or establish new operations in Pakistan, though it is not prepared to issue licences for new domestic banks except for those established either as Islamic banks or microfinance banks.
Western bankers, however, say their eagerness to consider buying local Pakistani banks and merging them with operations of foreign banks fundamentally flows from the consideration of being able to set up operations at a quicker pace. “You save time on matters such as hiring staff because the staff is already there. You don’t have to do other things which are essentially about raising operations from scratch and are often very time-consuming. The eagerness to enter the Pakistani market is primarily because banks have done so well here recently and there are plenty of good opportunities for making money,” says the country head in Pakistan of a western bank, who asked not to be named.
However, bankers warn that expectations of a relative slowdown of the Pakistani economy this financial year promises to scale down returns for banks from last year’s historical results. A continuing concern over the past few months has been increasing pressure on the central bank to actively work towards containing inflation.
Brake on lending
In July, the central bank raised its main discount rate by half a per cent to 9.5% to put a brake on the pace of lending from banks. That followed another move in early July to raise the statutory liquidity requirement for banks to 18% from 15%, in yet another move to slow down the flow of new credit. The central bank insists that it expects economic growth for the present financial year to remain at the government’s target of 7% of GDP, but independent economists believe growth could be lower.
Another concern is tied to the effect on economies, including Pakistan, of the current situation in the Middle East, which has triggered a rise in global oil prices. “As an oil import-dependent country, Pakistan falls in the league of those that face mounting economic pressures,” comments one senior western economist based in Islamabad.
Effect of elections
Finally, Pakistan is expected to go through an era of political uncertainty as it faces national elections, which are due by November 2007 – an event that many say could have implications for the country’s economic and investment prospects too. The transition is likely to revive controversy over the position of Pakistan’s military ruler, General Pervez Musharraf, whose seven-year tenure since seizing power in a bloodless coup in 1999 has seen an economic recovery in the past three years.
General Musharraf is up against increasingly vociferous calls from opposition leaders, urging him to resign his position as chief of the military and continue as a civilian ruler. Many businessmen concede that notwithstanding his controversial position for pro-democracy purists, his decision to forego control of the powerful military may also undermine his ability to oversee further reforms.
Mr Tarin, however, remains unconvinced there will be a slowdown in the long-term prospects of Pakistani banks. Having successfully overseen the Standard Chartered deal, he believes Pakistan’s large population of about 160 million with its rising demand for consumer goods has opened up new opportunities for banks.
“If you come to a country, you just don’t look at the short term. You take stock of what lies ahead in the medium to long term. There are definitely opportunities in Pakistan that are now visible on everyone’s radar screens,” he says.
Officials at the central bank in Karachi say an emerging trend would be confirmed by indications of other western banks trying to follow Standard Chartered’s example. As one official says: “The Union Bank deal is definitely a major milestone for Pakistani banks. If there are one or two more who follow, that would then be a trend. Pakistan becoming a trendsetter for such mergers and acquisitions would confirm that the world is acknowledging what we have achieved through our reforms.”
