KARACHI: Al Baraka Bank has begun conducting due diligence of Burj Bank, which may lead to the amalgamation of two of the smaller entities in Pakistan’s banking industry.
In response to a query sent earlier this week, the chief spokesperson for the State Bank of Pakistan (SBP) told The Banker Pakistan that it has granted Al Baraka Bank the permission to commence due diligence of Burj Bank.
Neither Al Baraka Bank nor Burj Bank is listed on the stock exchange. This means neither party is obligated to inform the public at large about the on-going due diligence exercise.
Sources say due diligence started on April 18 and should take less than a month to complete. “Al Baraka is likely to get the deal finalised. It has a greater chance of emerging as the acquirer of Burj among all contenders because both banks are struggling to meet regulatory minimum capital requirements,” a person with direct knowledge of the negotiations said on the condition of anonymity.
Every prospective buyer of a banking institution must seek due diligence approval from the central bank to carry out a comprehensive examination of its financial accounts and determine its actual worth. However, the central bank reserves the right to bar a business group from purchasing a major stake in a bank in order to ensure overall soundness of the banking system.
Al Baraka is the sixth institution that is conducting due diligence of Burj Bank, a relatively small Islamic bank with 75 branches across Pakistan.
Summit Bank and Bank of Khyber recently undertook due diligence of Burj Bank. Earlier, two of the largest banking institutions of the country, National Bank of Pakistan (NBP) and MCB Bank, also conducted the due diligence exercise. Instead of purchasing Burj Bank, MCB Bank eventually decided to set up its own Islamic banking subsidiary.
In contrast, NBP quoted a “depressingly low” price for a majority stake, which was unacceptable to the sponsors of the Islamic bank, sources say.
In addition, a major real-estate group also conducted a comprehensive review of Burj Bank’s financial accounts for a possible acquisition. It quoted a “favourable” price, but its bid to acquire a majority shareholding in Burj Bank was eventually shot down by the regulator for unknown reasons.
As of December 31, 2015, Al Baraka Bank’s capital for regulatory purposes amounted to Rs8.1 billion as opposed to the usual minimum capital requirement (MCR) of Rs10 billion. The SBP has granted a relaxation to Al Baraka in this regard for the time being.
Major stockholders of Al Baraka Bank include Al Baraka Islamic Bank Bahrain (66.6%), Mal Al Khaleej Investments (17.7%) and Sheikh Tariq Bin Faisal Khalid Al Qassemi (11.5%). Al Baraka’s net profit for 2015 amounted to Rs240.4 million, up almost 65% from a year ago.
According to the 2014 annual report, which is the latest full-year financial account available, Bahrain-based Bank Al-Khair is the largest shareholder in Burj Bank with 37.9% stakes. It is followed by Jeddah-based Islamic Corporation for the Development of the Private Sector with a shareholding of 33.9%.
Burj Bank posted a net loss of Rs260.8 million in January-September 2015 as opposed to the net loss of Rs379 million it made in the same nine-month period of 2014.