KARACHI, May 15: Standard Chartered and Union Bank are engaged in merger talks that will enable the former to acquire 65 domestic branches of the latter. Banking sources said the talks were initiated a few weeks ago and the deal was likely to be completed in the next two months.

“It is too early to say how much more time the deal will take to materialise but the talks are in progress,” said head of a commercial bank.

The merger will be unique as none of the two banks has any financial compulsion. Even the smaller of the two — Union Bank — enjoys both market credibility and decent balance sheet. Earlier, most of the mergers of domestic banks took place to avoid threat of bankruptcy.

Standard Chartered, the largest foreign bank in the country, has already acquired the operations of Grindlays Bank in Pakistan. After the merger with Union Bank, its access to depositors would improve tremendously.

Bankers said the merger would affect the banking style of Standard Chartered which used to deal with the corporate sector, as Union Bank developed expertise in consumer financing.

Union Bank earnings grew rapidly during the last four years. Its share of consumer financing was up to 33 per cent.

In 2005, Union Bank, a rapidly growing bank in Pakistan, made an addition of 13 branches, including one off-shore branch. Now the bank has a total 65 domestic and two international branches. It has planned to open 13 to 23 more branches in 2006, and in the next five to six years it wants to reach the figure of 200 branches.

The State Bank has been persuading banks for years to get stronger through mergers and acquisitions.

The SBP former governor had advocated the mergers and was of the view that an economy like Pakistan needed no more than 20 large commercial banks.

This was the reason that the State Bank has increased the minimum paid-up requirement to Rs6 billion in the next three years. Small banks will face tough time to chase the paid-up capital requirements and most of them may opt for merger or face closure.

Assets of Union Bank soared by 51 per cent to Rs117bn in 2005. The share of bank’s earning assets in total assets increased to 89 per cent as on Dec 31, 2005 as compared to 84 per cent a year earlier. In 2005, deposits of the bank grew by 45 per cent annually as against the industry deposits growth of 20 per cent. The share of fixed deposits has increased to 32 per cent from 16 per cent a year earlier.

Earning of the bank grew by 110 per cent to Rs1.74bn (EPS Rs6.2) in 2005. Earnings soared by 322 per cent annually during the last five years (2001-2005). Net interest income and fee income of the bank soared by 57 per cent and 76 per cent, respectively, to Rs4.5bn and Rs1.9bn.

The bankers said this would be the first experience in Pakistan that a well established bank would merge with a foreign bank but this was in line with the international trend. Mergers of big corporations and banks are now common in developed countries that make them stronger to get bigger share in their respective sectors. Union Bank’s spread for 2005 was 8.1 per cent. This was on the higher side than the sector average of 6.3 per cent. The main reason behind this is the presence of a 33 per cent share of high-yielding consumer finance in total advances of the bank, whereas for the sector the share of consumer finance is now 21 per cent.

Standard Chartered is the largest and oldest foreign bank in Pakistan, with a presence of more than 150 years in this region. Standard Chartered has 45 online branches in Pakistan.