ARTICLE (May 06 2010): Financial statements for 2009 indicate that Pakistan's banks have successfully weathered the immediate after-shocks of the previous year's global financial storm. Fortunately, our banks never had direct exposure to the crisis, thanks to prudence by the State Bank, which disallowed (and still does) institutions under its charge from investing in overseas debt markets, despite the high returns promised by derivatives instruments.
The five major banks (NBP, HBL, MCB, UBL, ABL) have made healthy profits, in total Rs 62 billion, reflecting an average return of 18.75% on equity, with earnings at 1.4 times the par value of each share. Retained earnings for the past few years, supported by adequate provisioning, enable the banking majors to maintain excellent capital adequacy ratios, averaging above 15%.
The picture is not so rosy for banks in the next tier, where the higher pro rata exposure to retail and consumer loans has required massive write-downs. These organisations are still reeling from the triple shocks that jolted the domestic economy in 2008 through the stock exchanges collapse, the spike in dollar prices and failure of the Dubai property market. Their average return on equity is 2.3% with earnings per share averaging 10% of par value.
What is noticeable is that banking profits have not emanated from cost efficiencies, innovative services or investment in new products and markets, but through higher spreads (average lending rates were 17% for the majors, 22% for the next tier, Citibank topping with 36%!) that have squeezed the profitability and increased the vulnerability of their customers, while contributing to lower investment and higher unemployment in the economy. In this respect, our banks have achieved undesirable commonality with their peers in developed countries, ie there is a clear disconnect between the health of banks and health of the economy.
Results announced for first quarter January-March 2010 reveals that bank profitability is being sustained, which is comforting, but that the profits are still coming from high lending rates. This is not good. Instead of waiting on the State Bank to lower the discount rate, banks should feel confident, possessing resources and reserves, to lower their spreads, thereby providing much-needed stimulus for the business growth of their customers.
They need to turn their attention also to risk areas where mitigation does not lie in higher spreads, but in pro-active initiatives and change of mindset, both to strategize increased and diversified credit as the driver of growth and to confront issues that impair the banking sector's freedom of action. Some issues are identified here.
First is risk concentration - sector-wise lending in Textiles and Energy claims 25% to 30% of the top banks' lending portfolios, while segment risk is concentrated on corporate lending, topping 60% for most banks. The sector and segment risks are intertwined, textiles and energy companies are also the major corporate borrowers, the prospects for both are not good.
In the case of textiles, the reason for its problems is management inefficiency, rather than market conditions or cost-push factors; therefore, continuing to throw good money at bad managers is not a sound proposition. As for the power sector, although there is no denying the growth prospects, the Rs 200 billion inter-corporate debt is a current risk not only for the companies involved but also their lenders. The money may be safe but it cannot be unblocked and danger lurks because both textiles and power sector loans are fast reaching a stage where debt servicing will become a problem, if it is not one already.
Second, the banks need to address the potential for liquidity squeeze. One of the causes of the 2008 global financial crisis was that the affected banks paid too much attention to capital adequacy ratios and too little to liquidity risk. The same applies In Pakistan today, with banks enjoying healthy capital ratios but loan exposure to corporates in general and the textiles and energy sectors in particular (this exceeds Rs 800 billion in the top 10 banks) can create severe liquidity problems across the financial system.
Third, customer loan concentration - as the financial reports do not disclose loan segmentation by number of customers, one has to go by a 2007 State Bank report which noted that bank lending in Pakistan remained highly unbalanced: out of 5.5 million borrowers, less than 25,000 entities accounted for 70% of the loan book and less than 60 groups accounted for 30% of all lending. This credit monopolisation results in the banks being held hostage to a clique of vested interests, whose financial power enables them to nullify efforts towards broad-based lending and leads to a speculative economy in which manufacturing, new project and SME activity, in particular, remain starved of funding.
Fourth is non-compliance with global regulatory standards - two months ago Pakistan was placed on the watch list by the Financial Action Task Force (FATF) for failure to comply fully with Anti-Money Laundering procedures, which came as a surprise, considering that bank auditors since 2007 have been signing off their clients as being fully AML compliant. Similarly, banks remain behind schedule in adopting Basel II-mandated measures for risk mitigation and developing internal capital adequacy processes (ICAAP.)
Consider the cost of not complying. Pakistan's international trade plus current account and services transfers are in the region of USD 60 billion. The lower ratings generated by FATF blacklisting and lower Basel II compliance translate into higher risk premia that counterparties attach to financial transactions with Pakistan. Assuming a conservative half percentage point as additional premium, the cost of this lack of compliance is USD 300 million annually, ie Rs 25 billion, being borne by business in Pakistan.
The fifth area of concern is capacity-building - modern banking is a technology-driven, people intensive business. A bank is only as good as the skills of the people who manage it and as safe as the information available to those who supervise its managers. One of the factors behind the overseas 2008 financial crisis was the inability of senior management and Boards to understand the mathematics that created the products or the technology that drove their banks' processes.
Such disconnect exists also in Pakistan and banks would be prudent to move quickly to close this skills gap. Being on the FATF watch list is result of inadequate training in AML procedures; similarly, the collapse of the consumer lending portfolio may be traced largely to the absence of training among managers to deal with adversity in this otherwise highest profit area for banks.
Basel II compliance is a complex and continuous process, which stresses training not only for banks to achieve the desired risk mitigation competencies but also for regulators, for supervising risk controls to ensure that banks arrive at the prescribed milestones through a robust training regime.
Sixth is Section 27 B of the Banking Companies Ordinance - Senator Rabbani's ill-considered initiative to repeal this legislation, which prohibits union membership to non-employees and other undesirable activities, may have been deflected by the business tycoons who dominate the Senate Banking & Finance Committee, but it threatens to come back through the National Assembly, where the business lobby is not so strong. The banking industry, with SBP backing, needs to remain vigilant to ensure that this highly contentious move does not become a risk element for the entire industry.
Seventh are new additions to the Banking Ordinance, which propose wide powers to the State Bank to intervene pro-actively in Bank management affairs. On the surface, they may be genuinely motivated for shareholder protection, in practice they can become a tool for political intervention in bank affairs and, combined with repeal of Section 27-B, would present the country with a return to the pre- 997 situation that saw the banking system crippled and on its knees.
In conclusion, it is noted that while the future, as always, poses uncertainties, the risks perceived by banks in 2008 are no longer the principal areas of concern. The banks need to move on, to exit from the cocoon of high spreads towards improving the health of their customers as a necessity for keeping themselves in good health. A satisfied and loyal customer base will create banks need to effectively protect the banking system from what appears to be a looming political assault on its independence and integrity.
(The writer is a management consultant)
Source: http://www.brecorder.com/index.php?id=1053010&currPageNo=1&query=&search=&term=&supDate=
Wednesday, May 12, 2010
Wednesday, May 5, 2010
Pre-Budget Economic Scenario By Muhammad Ahmad Sabazwari
Source: http://jang.com.pk/jang/may2010-daily/04-05-2010/col1.htm
Pre-Budget Economic Scenario
Technology-driven growth By Shahid Javed Burki
Initially economists believed that economic growth was the consequence of applying increasing amount of capital and labour to production processes. By capital they meant machines as well as land, the latter being more important in the economies in which agriculture was the most prominent activity.
However, diminishing returns set in beyond a certain point and output per unit of input declined as more and more of the two factors were added to the processes of production. This was one reason why rapidly growing work force in developing countries employed mostly in agriculture did not produce corresponding increases in output. A way had to be found to employ labour in more productive activities. An economy had to industrialise in order to grow.
More recently, economists have concluded that a production function that only has capital and labour as variables does not fully explain economic growth. They brought in two additional factors into play: human development and technology. Human development was also referred to as skill formation. Improving either could improve the rate of economic growth without adding greatly to the stock of capital and labour. Since developed countries had a distinct advantage over those that were still developing in being able to improve their technological base and the levels of skills of their work force, they could still sustain higher growth rate even when fewer and fewer people were able to join the work force.
Even more recently, there is a growing recognition that a new type of technological development is taking place that will give the more populous emerging economies an edge over those that have reached the post-industrial stage. This is aimed at developing products that can reach the markets in the countries that have large populations but still low per capita incomes.
This realization was first applied to marketing by large manufacturers of basic consumer products. Large firms began to see handsome returns if they could package their products in a way that they could be transported at a lower cost and could be sold at a lower unit price. Companies such as Lever Brothers and Proctor and Gamble came out with smaller soaps and shampoos packaged in small plastic bags rather than in large bottles. This way they were able to attract new and relatively less well-to-do customers.
But then manufacturers went a step further. They came to the conclusion that repackaged old products were only a small technological way to develop markets for old and traditional products. What was required were entirely new products. That led to some remarkable innovations by large companies that had their base in large emerging economies.
There are several examples of this approach to manufacturing. One of the most interesting ones is the Nano, a small car that is being marketed in India at a price of $3000 and is likely to take a significant share of the markets in the developing world. The other is a $300 laptop computer developed by Huawei, a Chinese telecommunications, giant that would reach millions of new customers in the developing world.
Some observers of changes in the global economy believe that this development is as significant a revolution as the introduction of the assembly line by Henry Ford in the United States in the early part of the 20th century or the development of lean manufacturing by Toyota in the later part of the same century. But the new innovations are not only being applied to the automobile industry. They are being developed for application in some unexpected areas.
One example is the Narayana Hrudayala Hospital in Bangalore where Devi Shetty, India’s most celebrated heart surgeon, has developed techniques and processes to perform mass surgery. His hospital has 1000 beds and he and his team of four dozen cardiologists are performing 600 open-heart surgeries a week. The hospital charges an average of $2,000 for open heart surgery compared with $20,000 to $100,000 in America, but its success rates are as good as in the best American hospitals.
These developments in the emerging world have been noticed by the firms in more developed countries. Many of them have begun to take advantage of the technological surge in many emerging economies. For instance, of the world’s 500 largest firms, 98 have R&D facilities in China and 63 in India. IBM now employs more people in developing countries than in the United States. Its largest product development facility is no longer in Poughkeepsie, north of New York, but in the vicinity of Beijing. This –devolution of many advanced firms to locations considered appropriate by western and Japanese firms not only helps with the employment of trained people who may not be able to find jobs in the part of the economy run by indigenous firms. It also provides the developing world access to new technologies. This development in the world of technology involving firms in many emerging markets has earned a new epithet: it is being called “frugal innovations”.
This on-going technological revolution is not likely to peter out soon. It is the result of a set of circumstances that are going to be around for a long time to come. First is the sheer size of some of the emerging markets. Between the two, China and India have 2.5 billion people. Of these a billion would be classified as the middle class. They are potential customers of all kinds of manufactured products that were beyond the dreams or imagination of their parents. Their demand is funding the growth of firms that are already giants in their fields. For instance Infosys (an IT services company) and ZTE (a manufacturer of mobile phones) are growing at the rate of 40 per cent a year.
Second firms in emerging markets are bringing in managerial and technical talent from outside the world. Toyota for long did not hire non-Japanese to the senior ranks of its management but companies in countries such as Brazil, China and Indian are bringing the talent from wherever it is available.
Third, technologically savvy firms are expanding outside the borders of the countries in which they are located. In 2007, before the world went into recession, China spent $30 billion acquiring assets abroad. India did even better. It reported spending $35 billion. Brazilian companies are also picking up companies in Europe and the United States
Once again Pakistan is missing out on an important development which could quicken the pace of the economic development and help alleviate poverty and improve the distribution of income. No significant technological innovation in the past decade can be attributed to a Pakistani scientist, or a Pakistani engineer or to an institution based in Pakistan.
There are many reasons for this. Of these two are particularly important: neglect by the state to develop skills among the members of the rapidly expanding workforce and neglect, once again by the state, to encourage the development of institutions that can take the lead in technological innovations.
The state needs to step forward with a well developed plan. This should be aimed at improving the technological base of the economy, making research and development (R &D) an important component of the activities of all enterprises, moving the export sector towards the marketing of more knowledge-intensive products, helping the farming community better their processes, move towards the production of crops for which the country has comparative advantage, and provide incentives to all firms to upgrade the levels of skills of their workers.
Source: http://news.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/technologydriven-growth-350
However, diminishing returns set in beyond a certain point and output per unit of input declined as more and more of the two factors were added to the processes of production. This was one reason why rapidly growing work force in developing countries employed mostly in agriculture did not produce corresponding increases in output. A way had to be found to employ labour in more productive activities. An economy had to industrialise in order to grow.
More recently, economists have concluded that a production function that only has capital and labour as variables does not fully explain economic growth. They brought in two additional factors into play: human development and technology. Human development was also referred to as skill formation. Improving either could improve the rate of economic growth without adding greatly to the stock of capital and labour. Since developed countries had a distinct advantage over those that were still developing in being able to improve their technological base and the levels of skills of their work force, they could still sustain higher growth rate even when fewer and fewer people were able to join the work force.
Even more recently, there is a growing recognition that a new type of technological development is taking place that will give the more populous emerging economies an edge over those that have reached the post-industrial stage. This is aimed at developing products that can reach the markets in the countries that have large populations but still low per capita incomes.
This realization was first applied to marketing by large manufacturers of basic consumer products. Large firms began to see handsome returns if they could package their products in a way that they could be transported at a lower cost and could be sold at a lower unit price. Companies such as Lever Brothers and Proctor and Gamble came out with smaller soaps and shampoos packaged in small plastic bags rather than in large bottles. This way they were able to attract new and relatively less well-to-do customers.
But then manufacturers went a step further. They came to the conclusion that repackaged old products were only a small technological way to develop markets for old and traditional products. What was required were entirely new products. That led to some remarkable innovations by large companies that had their base in large emerging economies.
There are several examples of this approach to manufacturing. One of the most interesting ones is the Nano, a small car that is being marketed in India at a price of $3000 and is likely to take a significant share of the markets in the developing world. The other is a $300 laptop computer developed by Huawei, a Chinese telecommunications, giant that would reach millions of new customers in the developing world.
Some observers of changes in the global economy believe that this development is as significant a revolution as the introduction of the assembly line by Henry Ford in the United States in the early part of the 20th century or the development of lean manufacturing by Toyota in the later part of the same century. But the new innovations are not only being applied to the automobile industry. They are being developed for application in some unexpected areas.
One example is the Narayana Hrudayala Hospital in Bangalore where Devi Shetty, India’s most celebrated heart surgeon, has developed techniques and processes to perform mass surgery. His hospital has 1000 beds and he and his team of four dozen cardiologists are performing 600 open-heart surgeries a week. The hospital charges an average of $2,000 for open heart surgery compared with $20,000 to $100,000 in America, but its success rates are as good as in the best American hospitals.
These developments in the emerging world have been noticed by the firms in more developed countries. Many of them have begun to take advantage of the technological surge in many emerging economies. For instance, of the world’s 500 largest firms, 98 have R&D facilities in China and 63 in India. IBM now employs more people in developing countries than in the United States. Its largest product development facility is no longer in Poughkeepsie, north of New York, but in the vicinity of Beijing. This –devolution of many advanced firms to locations considered appropriate by western and Japanese firms not only helps with the employment of trained people who may not be able to find jobs in the part of the economy run by indigenous firms. It also provides the developing world access to new technologies. This development in the world of technology involving firms in many emerging markets has earned a new epithet: it is being called “frugal innovations”.
This on-going technological revolution is not likely to peter out soon. It is the result of a set of circumstances that are going to be around for a long time to come. First is the sheer size of some of the emerging markets. Between the two, China and India have 2.5 billion people. Of these a billion would be classified as the middle class. They are potential customers of all kinds of manufactured products that were beyond the dreams or imagination of their parents. Their demand is funding the growth of firms that are already giants in their fields. For instance Infosys (an IT services company) and ZTE (a manufacturer of mobile phones) are growing at the rate of 40 per cent a year.
Second firms in emerging markets are bringing in managerial and technical talent from outside the world. Toyota for long did not hire non-Japanese to the senior ranks of its management but companies in countries such as Brazil, China and Indian are bringing the talent from wherever it is available.
Third, technologically savvy firms are expanding outside the borders of the countries in which they are located. In 2007, before the world went into recession, China spent $30 billion acquiring assets abroad. India did even better. It reported spending $35 billion. Brazilian companies are also picking up companies in Europe and the United States
Once again Pakistan is missing out on an important development which could quicken the pace of the economic development and help alleviate poverty and improve the distribution of income. No significant technological innovation in the past decade can be attributed to a Pakistani scientist, or a Pakistani engineer or to an institution based in Pakistan.
There are many reasons for this. Of these two are particularly important: neglect by the state to develop skills among the members of the rapidly expanding workforce and neglect, once again by the state, to encourage the development of institutions that can take the lead in technological innovations.
The state needs to step forward with a well developed plan. This should be aimed at improving the technological base of the economy, making research and development (R &D) an important component of the activities of all enterprises, moving the export sector towards the marketing of more knowledge-intensive products, helping the farming community better their processes, move towards the production of crops for which the country has comparative advantage, and provide incentives to all firms to upgrade the levels of skills of their workers.
Source: http://news.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/technologydriven-growth-350
Banks’ appetite for acquisitions Dr Kamal A. Munir
The banking industry witnessed an unprecedented number of acquisitions between 2005 and 2010. One bank, involved in two acquisitions, was the ABN AMRO Bank, Pakistan.
The ABN AMRO Bank, Pakistan (AABPL) first acquired the Prime Commercial Bank in 2007, and was then itself acquired by the Royal Bank of Scotland (RBS) the same year.
Now in 2010, the RBS is up for sale. Out of the various parties that initially signalled interest in buying the RBS, the State Bank of Pakistan has allowed only the Faysal Bank and the EFG-Hermes, an Egyptian Private Equity outfit, to proceed with due diligence. But does it actually make sense for either to buy the RBS operations in Pakistan?
Before we go to the Faysal Bank or the EFG, let us for a minute consider the RBS status. The RBS Pakistan is essentially the AABPL, whose parent was globally bought out by the RBS. The ABN had managed to steadily establish itself as one of the leading foreign banks in Pakistan. Buoyed by the banking sector reforms introduced by the Shaukat Aziz government, the AABPL, in an attempt to expand its loan and deposit base, decided to buy out the Prime Commercial Bank, a growing local bank with an extensive network of 69 branches, spanning 24 cities.
The acquisition of Prime Bank for $227 million, however, did not pay the dividends that the AABPL had expected. The cultural differences turned out to be too big to bridge and attempts to apply much more stringent credit and risk controls on the newly acquired portfolio were fraught with difficulties.
Despite significant integration costs (sources place it at more than $30 million), efforts to effectively harmonise the two teams also proved to be beyond the capabilities of the new management. Combined with the bursting of the consumer lending bubble, the non-performing loans suddenly increased.
The situation was accentuated by a general demoralisation of the PCBL employees, who thought they were being treated as pariahs within the AABPL. Perhaps frustrated by these problems, the then CEO of the AABPL, Naved Khan, decided to leave for Faysal Bank after less than one year of the acquisition. Meanwhile, in 2007, the AABPL/RBS posted a loss of Rs1.6 billion, which was followed by further losses of Rs518 million and Rs1.3 billion in 2008 and 2009 respectively.
The ABN AMRO’s global sale to the RBS meant that the AABPL was now the RBS Pakistan. Given the situation, however, there was little that the RBS could do to turn things around. Unsurprisingly, within a year, the RBS Pakistan was looking to sell. Ironically, or perhaps encouragingly, one of the strongest suitors on the scene is Naved Khan, who was the CEO of AABPL when it acquired the Prime Bank.
The problem, however, is that just as acquiring the Prime Bank proved to be an organisational challenge for the AABPL, in bringing the RBS into the folds of Faysal Bank, Khan could find himself contending with very similar problems.
Faysal Bank already has around 130 branches and is active in almost all segments including corporate, SME, consumer and Islamic banking without having a clear leadership position in any of these. Buying the RBS (remember, the operations will come without the RBS brand) is unlikely to bolster their position in any particular line of business. Nor is it likely to create any synergies.
On the cost side, the RBS salary head is far bigger than Faysal Bank’s and assimilation of the RBS employees is likely to be a hugely expensive proposition. After all, there is very little that could convince the RBS employees to stay and work for a lesser brand at a smaller salary. The 130 branches of Faysal Bank and 79 of the RBS will also need to integrate. If the $30 million or more that the AABPL spent on integrating the Prime Bank is anything to go by, this will also significantly add to the total bill.
On the revenue side, many of RBS’s prized preferred banking customers, who were attracted by the brand, are likely to leave. Similarly, many of the multinationals who valued the RBS’s global network (as well as brand) are also likely to take their business elsewhere. Consider all this, and one begins to wonder where the synergies will materialise from?
For the EFG-Hermes, the buy makes more sense. The RBS is probably a simple valuation play for them. Not only will they not have the headache of assimilating one bank in another with all the usual organisational and cultural problems and expenses, but buying the RBS will also save them from setting up a new bank and incurring a cost of Rs7 billion in paid up capital as prescribed by the State Bank of Pakistan
Add to this, an existing infrastructure which would probably take another $25 million or more to build. Since the Muslim Commercial Bank has already set a benchmark with its offer of $87 million, the EFG’s bid may be lower. At this bargain price, the EFG can simply wait for better times and sell its assets in Pakistan at a much higher price.
The asset quality that the RBS is carrying on its books, off-balance sheet derivative contracts worth a whopping Rs78 billion, and the successive losses are quickly eroding its equity.
The only hope is that Naveed Khan, having been at the helm of RBS probably knows more about any value that may be hidden in this deal. If he is able to pull it off, it would be a case worth teaching in business schools around the world.
The author is Professor of Strategy at LUMS and Cambridge University.
Source: http://news.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/banks-appetite-for-acquisitions-350
The ABN AMRO Bank, Pakistan (AABPL) first acquired the Prime Commercial Bank in 2007, and was then itself acquired by the Royal Bank of Scotland (RBS) the same year.
Now in 2010, the RBS is up for sale. Out of the various parties that initially signalled interest in buying the RBS, the State Bank of Pakistan has allowed only the Faysal Bank and the EFG-Hermes, an Egyptian Private Equity outfit, to proceed with due diligence. But does it actually make sense for either to buy the RBS operations in Pakistan?
Before we go to the Faysal Bank or the EFG, let us for a minute consider the RBS status. The RBS Pakistan is essentially the AABPL, whose parent was globally bought out by the RBS. The ABN had managed to steadily establish itself as one of the leading foreign banks in Pakistan. Buoyed by the banking sector reforms introduced by the Shaukat Aziz government, the AABPL, in an attempt to expand its loan and deposit base, decided to buy out the Prime Commercial Bank, a growing local bank with an extensive network of 69 branches, spanning 24 cities.
The acquisition of Prime Bank for $227 million, however, did not pay the dividends that the AABPL had expected. The cultural differences turned out to be too big to bridge and attempts to apply much more stringent credit and risk controls on the newly acquired portfolio were fraught with difficulties.
Despite significant integration costs (sources place it at more than $30 million), efforts to effectively harmonise the two teams also proved to be beyond the capabilities of the new management. Combined with the bursting of the consumer lending bubble, the non-performing loans suddenly increased.
The situation was accentuated by a general demoralisation of the PCBL employees, who thought they were being treated as pariahs within the AABPL. Perhaps frustrated by these problems, the then CEO of the AABPL, Naved Khan, decided to leave for Faysal Bank after less than one year of the acquisition. Meanwhile, in 2007, the AABPL/RBS posted a loss of Rs1.6 billion, which was followed by further losses of Rs518 million and Rs1.3 billion in 2008 and 2009 respectively.
The ABN AMRO’s global sale to the RBS meant that the AABPL was now the RBS Pakistan. Given the situation, however, there was little that the RBS could do to turn things around. Unsurprisingly, within a year, the RBS Pakistan was looking to sell. Ironically, or perhaps encouragingly, one of the strongest suitors on the scene is Naved Khan, who was the CEO of AABPL when it acquired the Prime Bank.
The problem, however, is that just as acquiring the Prime Bank proved to be an organisational challenge for the AABPL, in bringing the RBS into the folds of Faysal Bank, Khan could find himself contending with very similar problems.
Faysal Bank already has around 130 branches and is active in almost all segments including corporate, SME, consumer and Islamic banking without having a clear leadership position in any of these. Buying the RBS (remember, the operations will come without the RBS brand) is unlikely to bolster their position in any particular line of business. Nor is it likely to create any synergies.
On the cost side, the RBS salary head is far bigger than Faysal Bank’s and assimilation of the RBS employees is likely to be a hugely expensive proposition. After all, there is very little that could convince the RBS employees to stay and work for a lesser brand at a smaller salary. The 130 branches of Faysal Bank and 79 of the RBS will also need to integrate. If the $30 million or more that the AABPL spent on integrating the Prime Bank is anything to go by, this will also significantly add to the total bill.
On the revenue side, many of RBS’s prized preferred banking customers, who were attracted by the brand, are likely to leave. Similarly, many of the multinationals who valued the RBS’s global network (as well as brand) are also likely to take their business elsewhere. Consider all this, and one begins to wonder where the synergies will materialise from?
For the EFG-Hermes, the buy makes more sense. The RBS is probably a simple valuation play for them. Not only will they not have the headache of assimilating one bank in another with all the usual organisational and cultural problems and expenses, but buying the RBS will also save them from setting up a new bank and incurring a cost of Rs7 billion in paid up capital as prescribed by the State Bank of Pakistan
Add to this, an existing infrastructure which would probably take another $25 million or more to build. Since the Muslim Commercial Bank has already set a benchmark with its offer of $87 million, the EFG’s bid may be lower. At this bargain price, the EFG can simply wait for better times and sell its assets in Pakistan at a much higher price.
The asset quality that the RBS is carrying on its books, off-balance sheet derivative contracts worth a whopping Rs78 billion, and the successive losses are quickly eroding its equity.
The only hope is that Naveed Khan, having been at the helm of RBS probably knows more about any value that may be hidden in this deal. If he is able to pull it off, it would be a case worth teaching in business schools around the world.
The author is Professor of Strategy at LUMS and Cambridge University.
Source: http://news.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/banks-appetite-for-acquisitions-350
Chinese showcasing of World Expo By Afshan Subohi
THE galloping China invested all it took in Shanghai to showcase its ability to beat the West at its own game.
The face of development projected by the free world — skyscrappers, gigantic airports, modern amenities, metro networks, hotels, shopping malls, overlapping highways, you name it — Shanghai has it all only on a bigger scale. It is competing to become the world’s next business centre.
The city got a fresh dose of huge investment in infrastructure over the last two years and a major facelift in the run up to the ‘World Expo’ whose opening ceremony was held on Friday.
This city of some 20 million people was frantically preparing to host the biggest and the longest-ever trade fair in the history of the world. Pakistan also invested in its pavilion in the Shanghai expo park. The Trade and Development Authority had organised meaningful participation of the private sector.
On Thursday, dumpers were moving round every other street corner in Shanghai, collecting left-over material from fresh construction. There were clean trolleys hanging from high rises. The government buildings hoisted new bright red national flags. Hedges were pruned to carve figures of Chinese families. Highways adorned the expo screens and hanging blue posters.
The technology-savvy grand exhibition site spread over 5.3 kilometres has had six trial runs to ensure efficient management before it opened to the public on Saturday.
What, however, is forcing China to underreport the quantum of investment made over the last two years in Shanghai and downgrade the World Expo comparison with the Beijing Olympics is hard to understand.
Song Chao, director, information office of Shanghai, general director of the press centre, World Expo Shanghai, insisted that China had invested over $5 billion on the Expo 2010 and expected some 70 million visitors including trade delegations from 246 countries before it closed on October 31. Independent observers, however, estimate the cost to be as high as $55 billion over the past two years.
“People are confusing expenditure on Shanghai infrastructure with the expo budget of the government to arrive at fabulous numbers that are incorrect. The expo did give impetus to the drive to improve the infrastructure of Shanghai but that is also part of the bigger plan to sustain growth rate and achieve development. We aspire Shanghai to become world’s shipping and financial centre,” Chao said talking to a group of visiting journalists in a meeting on Thursday.
He admitted that many sponsors had invested heavily to augment the Chinese government’s efforts to put up an impressive show that would pave the way for China’s closer commercial relations with its trading partners. The event, he said, focused on ‘communication and sharing’.
“Unfriendly media draws parallel between the Beijing Olympics and the Shanghai Expo. This is wrong,” he insisted.
Many ordinary citizens, interviewed to seek their views on the expo and what it meant for them, gave a lukewarm response.
But there was a sense of pride among almost all Chinese over the show that had been put up. Many, however, in the lower rung failed to see the connection between their working life and the trade fair. Almost everyone said they would visit the fair that had an entry ticket between RM90-250 except for senior citizens and workers who worked on the site.
“The roads have just been cleared up. We endured great difficulty during the time when work for infrastructure was in progress as it disrupted the flow of traffic in the highly populous city. It took me double the time to commute to and from my work,” a petty officer at a hotel told Dawn.
“I hope the Shanghai Expo achieves what it promises: a better city, a better life,” a taxi driver responded through an interpreter. “No pain, no gain,” he added with a smile.
“We are busy and excited,” said a worker whitewashing side wall of a pavement.
Shen Dingli, Professor and Head of Center for American Studies, complained about lack of transparency in the management of expo affairs.
“Such massive expenditure on the expo is a waste. For ordinary Chinese, the expo does not matter,” he said in a meeting with journalists at the centre.
On second thoughts, however, he softened his position by saying that he supported the expo but had his reservations about the way decisions were taken without consulting people whose money was being spent.
“It would help those whose business will get a boost, for others, it will not matter much,” said a hotel employee.
Yuri, another taxi driver, felt benefits, if any, were less than the loss of peace that the sudden influx of people would cause.
Some young people visiting Shanghai from other parts of China to see the expo were happy as it gave them an excuse to visit the second biggest city of their huge country.
Some successful US businessmen were all praise for the Chinese government whom they found to be very supportive of their own private businesses and respectful of overseas investors.
“China is doing all the right things at the right time to deliver high growth target,” Amcham member said in his office in Shanghai.
Chinese growth impetus was undeterred by pitfalls of 2008 financial crisis. While all free market champions are struggling despite hefty bailout injections in their economies, China continues its march ahead by growing at the rate of over 11 per cent.
“The Shanghai Expo could be for China what the Osaka Expo proved to be for Japan”, a Japanese financial journalist said suggesting greater development impetus beyond the expo in China.
Source: http://news.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/chinese-showcasing-of-world-expo-350
The face of development projected by the free world — skyscrappers, gigantic airports, modern amenities, metro networks, hotels, shopping malls, overlapping highways, you name it — Shanghai has it all only on a bigger scale. It is competing to become the world’s next business centre.
The city got a fresh dose of huge investment in infrastructure over the last two years and a major facelift in the run up to the ‘World Expo’ whose opening ceremony was held on Friday.
This city of some 20 million people was frantically preparing to host the biggest and the longest-ever trade fair in the history of the world. Pakistan also invested in its pavilion in the Shanghai expo park. The Trade and Development Authority had organised meaningful participation of the private sector.
On Thursday, dumpers were moving round every other street corner in Shanghai, collecting left-over material from fresh construction. There were clean trolleys hanging from high rises. The government buildings hoisted new bright red national flags. Hedges were pruned to carve figures of Chinese families. Highways adorned the expo screens and hanging blue posters.
The technology-savvy grand exhibition site spread over 5.3 kilometres has had six trial runs to ensure efficient management before it opened to the public on Saturday.
What, however, is forcing China to underreport the quantum of investment made over the last two years in Shanghai and downgrade the World Expo comparison with the Beijing Olympics is hard to understand.
Song Chao, director, information office of Shanghai, general director of the press centre, World Expo Shanghai, insisted that China had invested over $5 billion on the Expo 2010 and expected some 70 million visitors including trade delegations from 246 countries before it closed on October 31. Independent observers, however, estimate the cost to be as high as $55 billion over the past two years.
“People are confusing expenditure on Shanghai infrastructure with the expo budget of the government to arrive at fabulous numbers that are incorrect. The expo did give impetus to the drive to improve the infrastructure of Shanghai but that is also part of the bigger plan to sustain growth rate and achieve development. We aspire Shanghai to become world’s shipping and financial centre,” Chao said talking to a group of visiting journalists in a meeting on Thursday.
He admitted that many sponsors had invested heavily to augment the Chinese government’s efforts to put up an impressive show that would pave the way for China’s closer commercial relations with its trading partners. The event, he said, focused on ‘communication and sharing’.
“Unfriendly media draws parallel between the Beijing Olympics and the Shanghai Expo. This is wrong,” he insisted.
Many ordinary citizens, interviewed to seek their views on the expo and what it meant for them, gave a lukewarm response.
But there was a sense of pride among almost all Chinese over the show that had been put up. Many, however, in the lower rung failed to see the connection between their working life and the trade fair. Almost everyone said they would visit the fair that had an entry ticket between RM90-250 except for senior citizens and workers who worked on the site.
“The roads have just been cleared up. We endured great difficulty during the time when work for infrastructure was in progress as it disrupted the flow of traffic in the highly populous city. It took me double the time to commute to and from my work,” a petty officer at a hotel told Dawn.
“I hope the Shanghai Expo achieves what it promises: a better city, a better life,” a taxi driver responded through an interpreter. “No pain, no gain,” he added with a smile.
“We are busy and excited,” said a worker whitewashing side wall of a pavement.
Shen Dingli, Professor and Head of Center for American Studies, complained about lack of transparency in the management of expo affairs.
“Such massive expenditure on the expo is a waste. For ordinary Chinese, the expo does not matter,” he said in a meeting with journalists at the centre.
On second thoughts, however, he softened his position by saying that he supported the expo but had his reservations about the way decisions were taken without consulting people whose money was being spent.
“It would help those whose business will get a boost, for others, it will not matter much,” said a hotel employee.
Yuri, another taxi driver, felt benefits, if any, were less than the loss of peace that the sudden influx of people would cause.
Some young people visiting Shanghai from other parts of China to see the expo were happy as it gave them an excuse to visit the second biggest city of their huge country.
Some successful US businessmen were all praise for the Chinese government whom they found to be very supportive of their own private businesses and respectful of overseas investors.
“China is doing all the right things at the right time to deliver high growth target,” Amcham member said in his office in Shanghai.
Chinese growth impetus was undeterred by pitfalls of 2008 financial crisis. While all free market champions are struggling despite hefty bailout injections in their economies, China continues its march ahead by growing at the rate of over 11 per cent.
“The Shanghai Expo could be for China what the Osaka Expo proved to be for Japan”, a Japanese financial journalist said suggesting greater development impetus beyond the expo in China.
Source: http://news.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/chinese-showcasing-of-world-expo-350
IMF tranche and fiscal squeeze By Khaleeq Kiani
After a lot of squabbling, Pakistan now hopes to get the much-delayed $1.2 billion tranche from the IMF after its approval by the Fund’s executive board on May 14 in Washington.
Before the expected approval of the funds, Pakistan authorities under the fourth review need to draw a roadmap with the World Bank and the Asian Development Bank to eliminate electricity subsidies by August 2010.
This instalment was to be released after the completion of Dubai talks on February 15 but was delayed due to disagreement between the IMF and authorities on the observance of performance criteria. As a result, the country’s foreign exchange reserves slipped below $15 billion after many months.
The $11.3 billion IMF programme under the Standby Arrangement (SBA) is fully financed but Pakistan also needs crucial disbursements of external assistance, largely from the ADB, the World Bank and Friends of Democratic Pakistan.
The authorities and the IMF agree that the stabilisation programme has progressed well, with economic recovery under way and external sector position improving despite challenging circumstances. However, the fiscal deficit targets remained out of control in each of the first three quarters ending March 31.
Pakistan has sought at least two waivers from the IMF for slippages in important macroeconomic targets and requested modifications in future programme milestones. “We request waivers for non-observance for the end-March quantitative performance criteria on the overall budget deficit (excluding grants) and net government borrowing from the State Bank,” according to letter of intent (LoI) sent to the IMF board.
The government missed the adjusted end-March quantitative performance criteria on the fiscal deficit by 0.4 per cent of GDP on account of lower revenue and security-related expenditure and shortfalls in disbursement of IDP grants and pledges made at Tokyo. The government also missed the end-March quantitative performance criteria on net government borrowing from the central bank by 0.2 per cent of GDP due to delay in the disbursement of external financing.
The LoI said: “We also request (i) a modification of the end-June 2010 performance criteria for the budget deficit to increase the cumulative end-quarter ceilings by Rs22 billion (0.15 per cent of GDP) in order to allow space for urgent security outlays and avoid undue cuts in other priority spending, and (ii) a modification of the end-June 2010 performance criterion (raising the floor) for net foreign assets of the SBP by $300 million, taking into account our strengthened external position.”
The two sides agreed that reaching agreement on the 2010-11 budget and further progress on the July 1 introduction of VAT would be key issues for the fifth review. So far, Pakistan has received $6.4 billion under the IMF programme.
Pakistan authorities and the IMF staff agree that the stabilisation programme faced challenges because of slower than planned electricity reforms, delays in disbursements of pledged lenders’ support, revenue shortfalls and military operations, complicating the fiscal management.
Inflation has also picked up beyond target. The upward revised fiscal gap from 4.9 per cent to 5.1 per cent is to be met through higher than projected privatisation inflows which would more than compensate for foreign inflows because tax and non-tax revenues might be lower than targeted. The growth rate is anticipated to remain at around three or 3.3 per cent because the large-scale manufacturing has started to pick up after a protracted decline. Agriculture performance is mixed, with lower rice and sugarcane output, offset by a stable outlook for wheat and higher cotton output. Private sector credit growth has improved somewhat as businesses rebuild their working capital and financial and capital markets remain positive.
However, the growth outlook is subject to risk due to domestic security situation, erratic power supply and the current pace of global economic recovery. These factors would push annual consumer index up at 12 per cent. The current account deficit is expected to improve further to 3.75 per cent of GDP supported by lower imports despite higher oil prices, lower profit outflows and strong remittance inflows.
The government has assured the IMF that the integrated value added tax acts as introduced in the federal and provincial assemblies will be maintained. The integrated VAT regime will be implemented to avoid the problem of cascading and tax competition. The review of VAT law by the provincial and federal legislative committees would be completed by mid-May and it would be passed assemblies by May 31.
As preparatory step towards full implementation of VAT Act by July 1, 2010, the VAT regulations and zero rating would be issued 2-3 weeks after its enactment. A review of business processes, record keeping and design of forms will be integral component of the VAT regulations.
The government has also given an undertaking to the IMF to complete the transition to a single treasury account by June 2010. The government said it was collecting information on commercial bank deposits of federal entities and would have all non-own sources, non-security related cash balances transferred to the federal consolidated fund by the end of June and associated accounts closed.
“We will ensure that these transfers do not affect liquidity of the banking system. We will ensure that a minimum interest rate is received on all federal government deposits,” the S-MEFP said.
Privately, the authorities agree that the FBR would not be able to collect more than Rs1,350 billion by end of this fiscal year. The current year’s revenue target has already been slashed to Rs1,380 billion from Rs1,396 billion after partially taking into account a shortfall of 0.2 per cent of GDP in the first half of the fiscal year. The collection in the third quarter was short of target by over Rs25 billion.
The government has committed to redoubling its efforts to reduce the number of non-filers and under-reporting taxpayers. The FBR has sent around 200,000 letters to non-filers and under-reporters, resulting in additional 121,000 taxpayers filing their returns before the extended deadline of January 25, 2010.
The FBR would also focus on collection of tax arrears stuck with oil and insurance sectors. Banking and insurance sectors are being forced to pay their outstanding withholding taxes which have not been deposited through reconciliation of accounts.
About 900 companies and associations of persons have been identified for audit and 468 of them have been outsourced to the Institute of Chartered Accountants of Pakistan, along with auditing framework. Most of the audits are expected to be completed by June this year. The remaining will be conducted by the FBR and completed by the end of May.
Likewise, a comprehensive plan for nationwide rollout of poverty-scoreboard based targeting for the Benazir Income Support Programme (BISP) has been prepared with the help of the World Bank and the process for contracting firms will be completed by end-May. Delays in the rollout of the poverty scorecard system will slow delivery of BISP assistance and result in disbursement of about Rs50 billion, providing a saving of about Rs20 billion during the current year.
Source: http://news.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/imf-tranche-and-fiscal-squeeze-350
Before the expected approval of the funds, Pakistan authorities under the fourth review need to draw a roadmap with the World Bank and the Asian Development Bank to eliminate electricity subsidies by August 2010.
This instalment was to be released after the completion of Dubai talks on February 15 but was delayed due to disagreement between the IMF and authorities on the observance of performance criteria. As a result, the country’s foreign exchange reserves slipped below $15 billion after many months.
The $11.3 billion IMF programme under the Standby Arrangement (SBA) is fully financed but Pakistan also needs crucial disbursements of external assistance, largely from the ADB, the World Bank and Friends of Democratic Pakistan.
The authorities and the IMF agree that the stabilisation programme has progressed well, with economic recovery under way and external sector position improving despite challenging circumstances. However, the fiscal deficit targets remained out of control in each of the first three quarters ending March 31.
Pakistan has sought at least two waivers from the IMF for slippages in important macroeconomic targets and requested modifications in future programme milestones. “We request waivers for non-observance for the end-March quantitative performance criteria on the overall budget deficit (excluding grants) and net government borrowing from the State Bank,” according to letter of intent (LoI) sent to the IMF board.
The government missed the adjusted end-March quantitative performance criteria on the fiscal deficit by 0.4 per cent of GDP on account of lower revenue and security-related expenditure and shortfalls in disbursement of IDP grants and pledges made at Tokyo. The government also missed the end-March quantitative performance criteria on net government borrowing from the central bank by 0.2 per cent of GDP due to delay in the disbursement of external financing.
The LoI said: “We also request (i) a modification of the end-June 2010 performance criteria for the budget deficit to increase the cumulative end-quarter ceilings by Rs22 billion (0.15 per cent of GDP) in order to allow space for urgent security outlays and avoid undue cuts in other priority spending, and (ii) a modification of the end-June 2010 performance criterion (raising the floor) for net foreign assets of the SBP by $300 million, taking into account our strengthened external position.”
The two sides agreed that reaching agreement on the 2010-11 budget and further progress on the July 1 introduction of VAT would be key issues for the fifth review. So far, Pakistan has received $6.4 billion under the IMF programme.
Pakistan authorities and the IMF staff agree that the stabilisation programme faced challenges because of slower than planned electricity reforms, delays in disbursements of pledged lenders’ support, revenue shortfalls and military operations, complicating the fiscal management.
Inflation has also picked up beyond target. The upward revised fiscal gap from 4.9 per cent to 5.1 per cent is to be met through higher than projected privatisation inflows which would more than compensate for foreign inflows because tax and non-tax revenues might be lower than targeted. The growth rate is anticipated to remain at around three or 3.3 per cent because the large-scale manufacturing has started to pick up after a protracted decline. Agriculture performance is mixed, with lower rice and sugarcane output, offset by a stable outlook for wheat and higher cotton output. Private sector credit growth has improved somewhat as businesses rebuild their working capital and financial and capital markets remain positive.
However, the growth outlook is subject to risk due to domestic security situation, erratic power supply and the current pace of global economic recovery. These factors would push annual consumer index up at 12 per cent. The current account deficit is expected to improve further to 3.75 per cent of GDP supported by lower imports despite higher oil prices, lower profit outflows and strong remittance inflows.
The government has assured the IMF that the integrated value added tax acts as introduced in the federal and provincial assemblies will be maintained. The integrated VAT regime will be implemented to avoid the problem of cascading and tax competition. The review of VAT law by the provincial and federal legislative committees would be completed by mid-May and it would be passed assemblies by May 31.
As preparatory step towards full implementation of VAT Act by July 1, 2010, the VAT regulations and zero rating would be issued 2-3 weeks after its enactment. A review of business processes, record keeping and design of forms will be integral component of the VAT regulations.
The government has also given an undertaking to the IMF to complete the transition to a single treasury account by June 2010. The government said it was collecting information on commercial bank deposits of federal entities and would have all non-own sources, non-security related cash balances transferred to the federal consolidated fund by the end of June and associated accounts closed.
“We will ensure that these transfers do not affect liquidity of the banking system. We will ensure that a minimum interest rate is received on all federal government deposits,” the S-MEFP said.
Privately, the authorities agree that the FBR would not be able to collect more than Rs1,350 billion by end of this fiscal year. The current year’s revenue target has already been slashed to Rs1,380 billion from Rs1,396 billion after partially taking into account a shortfall of 0.2 per cent of GDP in the first half of the fiscal year. The collection in the third quarter was short of target by over Rs25 billion.
The government has committed to redoubling its efforts to reduce the number of non-filers and under-reporting taxpayers. The FBR has sent around 200,000 letters to non-filers and under-reporters, resulting in additional 121,000 taxpayers filing their returns before the extended deadline of January 25, 2010.
The FBR would also focus on collection of tax arrears stuck with oil and insurance sectors. Banking and insurance sectors are being forced to pay their outstanding withholding taxes which have not been deposited through reconciliation of accounts.
About 900 companies and associations of persons have been identified for audit and 468 of them have been outsourced to the Institute of Chartered Accountants of Pakistan, along with auditing framework. Most of the audits are expected to be completed by June this year. The remaining will be conducted by the FBR and completed by the end of May.
Likewise, a comprehensive plan for nationwide rollout of poverty-scoreboard based targeting for the Benazir Income Support Programme (BISP) has been prepared with the help of the World Bank and the process for contracting firms will be completed by end-May. Delays in the rollout of the poverty scorecard system will slow delivery of BISP assistance and result in disbursement of about Rs50 billion, providing a saving of about Rs20 billion during the current year.
Source: http://news.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/imf-tranche-and-fiscal-squeeze-350
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