ON the morning of 15th of this month a flurry of activity was witnessed in the financial markets as MCB Bank Limited and NIB Bank Limited announced that they were in a preliminary non-binding discussion on a possible merger of NIB into MCB.

NIB Bank was represented by Fullerton Financial Holdings Pte. Ltd (FFH) — a subsidiary of Temasek Holdings Pte, which happens to be the majority shareholder of NIB.

According to analysts at KASB Securities, the swap ratio could be 120 to 131 shares of NIB for every share in MCB since the market price of MCB stock is Rs210 against NIB’s Rs2. If that would be the case, senior bankers say Tamesek Holdings of Singapore would retain a few seats on the MCB board of directors which is thought to be what MCB wants, sure to give it a global look.

In 2008, MCB took Maybank as a strategic regional partner by offering 20pc of its shares to the Malysian bank.

NIB held total assets of Rs243bn and at the last count on Dec 31, 2015, the bank carried accumulated losses of Rs41bn on its balance sheet. MCB has assets in excess of Rs1 trillion. Analyst Zoya Ahmed at AKD Securities says: “The acquisition (if it goes through) will make MCB the second largest bank in Pakistan, after HBL, with total 1,424 branches, post-acquisition while its deposit base could go up 17pc to Rs830.5bn”. MCB maintains network of 1,246 branches while NIB has 171 branches.

NIB bank came into being in Oct 2003 through the merger of National Development Leasing Corporation and the Pakistan operations of the Bangladesh bank, International Finance Investment and Commerce Bank Limited Tamesek Holdings Pte, the majority shareholder in NIB Bank is a Singapore state-owned investment company, which initially ploughed $540m in the equity of NIB.

In 2011, Tamesek invested another Rs6.35bn ($74m) in subscription to the bank’s right issue. With the outstanding shares of NIB at 10.3bn and the ruling make price of the stock at Rs 2.06 (last Thursday closing), market capitalisation of the bank works out at Rs21.2bn ($200m). As Tamesek (through its subsidiary Bugis Investments (Mauritius) Pte. Ltd) holds 9.1bn shares (88.38pc) shares in NIB, the present value of the majority equity holder would amount to S176m — representing bleeding of $364m from the investment of $540m.

Converted into rupee, it would mean a staggering loss of Rs38bn to the sponsor. No wonder the Singaporian parent was eager to let go. Earlier in winter of 2011, Tamesek was rumored to be in talks to sell its stake to the Industrial and Commercial Bank of China (ICBC). That deal did not transpire and the Singaporian parent sat waiting and watching for another corporate buyer for a friendly takeover.

Shaukat Tarin, advisor to the chairman, Silkbank (President of the bank till 2008) thought it was a win-win situation for both banks. He told this writer that the majority stakeholder in NIB had been contemplating an exit for some years now. “MCB may have seen value in acquisition possibly at a proper discount”, he said and alluded to the heavy deferred tax asset which MCB may have thought to be another big incentive of acquisition.

Shaukat Tarin did not believe that if one big investor was to go, others would follow. He observed that for another 2-3 years at least, banking sector in Pakistan would continue to offer the right returns to both big and smaller banks. About his own Silkbank Tarin said: “None of our big investor wants to quit, as we are trying to organically grow ourselves”.

A banking expert believes that much of the blame for a failed NIB lay on the choice of right management. “Although competent in investment banking, the men at the helm were not the right set for conducting commercial banking”, he said and pointed to the July 2007 buy-out of 63.36pc equity of PICIC Asset Management Company for Rs20.5b ($34m). NIB management puffed its chest on having generated $250m inflow into the country from Singapore which at the time was the largest foreign currency generating transaction in the country’s banking sector, second only to the earlier inflow into HBL.

“It was a wrong decision as time proved it and caused Tamesek Holding enormous losses since NIB eventually sold PICIC Asset Management Company a month ago, in Feb 2016 to HBL Asset Management — a wholly owned subsidiary of HBL for only Rs4.1bn.

Zubyr Soomro, former Pakistan country officer of Citibank Pakistan said in reply to queries on Thursday that the decision of NIB to quit was not really a big surprise as it was thought to be on the look out for a right buyer. “The bank has not really been a stunning success story and it is a pity that it could not seize the opportunities of development, given the good performance of the banking sector in Pakistan over the last 15-16 years”. Zubyr Soomro reckoned that MCB’s interest in NIB was a good sign.

“It remains to be seen what use the big bank makes of this different type of franchise”, he said. Dilating on the industry worldwide, Soomro affirmed that banks had not been able to reposition themselves and the lingering effects of the global financial crisis of 2008 were still all too visible in advanced countries and emerging markets.

“First look suggests no real synergy for MCB in NIB merger apart from huge deferred tax asset of Rs9.5bn on NIB’s books” wrote Taha Khan Javed, analyst at Alfalah Securities in a note immediately following the announcement. But Ali Raza, former President National Bank of Pakistan, talking to this scribe affirmed ”In every acquisition, both parties have something to gain and less to lose”, he said and added that sale of one smaller bank should not be considered a harbinger of a trend. He said that mergers & acquisitions were dependent on timings; pricing and the business strategies of majority stakeholders. Mergers & acquisitions, former NBP chief pointed out, was a phenomenon all over the world and it helped keep the banking sector vibrant.

According to Raza Jafri head of Research at Intermarket Securities, post-merger MCB could be betting on two counts: Sizeable non-performing loans (NPL) recoveries and possible benefit of NIB’s tax losses. “NIBs coverage is 86pc with its provisions at Rs24.4bn, which is about equal to MCB’s FY15 net profit”, Raza says.

He believes that the transaction could mean that post-merger MCB’s Current-Savings Account (CASA) would drop 5ppt to 85pc and NPL ratio would jump 4ppt to 10.3pc. On the flip side, MCB stands to benefit from a book that has high NPLs but, more importantly, that have extensively been provided for (NIBs coverage at 86pc).

“The prime motive behind MCB’s decision to acquire NIB appears to be the NPL recoveries”, Raza Jafri muses. Other benefits to MCB include: addition of 171 NIB branches to its portfolio that could be used for MCB’s Islamic subsidiary. The consensus view of banking experts at the week-end was that MCB was unlikely to pay a premium over the market price, as NIB’s desperation to sell looked far greater than MCB’s urge to merge.

Published in Dawn, Business & Finance weekly, March 21st, 2016