The banking industry continues to be haunted by ‘rising risks’ despite its energetic efforts to reform and consolidate its market position.
The sector has been working to open up fresh avenues in a bid to increase revenues since it is particularly easier to finance surging imports in a growing economy.
The consolidation of the banking system has been managed through a significant rise in the number of mergers and acquisitions following the global financial crisis of 2007, though its pace in Pakistan has been slower than that recorded for international markets.
“Progress in the rapidly evolving scenario lies in cross-industry collaboration as the value-chain participants alone can deal with the challenges involved,” says MCB Bank CEO
Some foreign banks have exited the country and a few smaller banks have merged with major ones.
But all that is not enough. The banking industry is facing organic stress. “Our industry is undergoing a significant transformation and the pace of commotion in the banking industry is accelerating,” says Imran Maqbool, the president and CEO of MCB Bank.
In the bank’s annual report for 2016, he observes that the industry is facing more and more competition because of non-bank new comers in a digital era which puts ‘a significant portion of bank business and revenues at risk.’
Owing to rising risks, the MCB president believes that “progress in the rapidly evolving scenario lies in cross-industry collaboration as the value chain participants alone can deal with the challenges involved in cash minimisation and digitalisation.”
This vision seems to have shaped some of the distinctive features of the NIB merger with MCB.
Under the shares swap arrangement, MCB has given Singapore-based Fullerton Financial Holdings (International) stakes in the company (MCB). Thus no foreign exchange was involved in the swap deal.
The FFH is the second bank to make a strategic investment in the MCB; the first one being Malaysia-based Mybank.
This sets a new trend where foreign investors prefer to acquire stakes in local businesss, rather than float their own outfits, as also recorded by the SECP in case of newly incorporated companies.
This networking has expanded the MCB’s regional reach enabling it to raise its equity capital from most successful economies with the bank taking pride in the confidence that foreign banks have reposed in it. The MCB has also overseas branches in Sri Lanka, Bahrain and UAE.
In the banking sector, a total of 57 cases of mergers and acquisitions were reported during 2002 to 2011.
According to a study, the performance of a majority of 10 banks with concluding deals in 2008 and 2009 did not show any improvement after M&A compared to the prior period.
Some leading foreign banks that exited the Pakistani market included ABN-AMRO, Bank of Scotland and American Express Bank.
Most of the mergers have been between local institutions while many banks have acquired non-banking financial and other institutions as well as smaller non-performing local small banks.
While maintaining their presence in the country, a couple of foreign banks have disinvested segments of financing activity in the field of housing and retail.
While some foreign banks entered the Pakistani market during the Musharraf administration, many local private banks had opened earlier.
The two segments coupled together often created an impression that the economy was overbanked but foreign banks generally wound up their business owing to the need of their parents to consolidate their position in their respective domestic markets.
Blue-chip companies in Pakistan also prefer self-financing to bank borrowing.
To quote the State Bank’s financial sector review report for 2016, its stress test demonstrated that the banking sector was generally able to stand adverse shocks.
The review report’s release for the public, however, coincides with the merger of NIB with MCB and a slump in the stock market where banks have put a significant portion of their investment.
Experts in the banking sector stress the need for banks to adopt a distinctive type of strategy to adjust to the changing dynamics of both the domestic and international market.
It has to do more with adopting the latest technologies, out of the box thinking and innovative financing products to meet the fast changing market demand.
Banks may consider more equity financing rather than preferring to remain stuck to the traditional ways of lending.
This will lead to better company appraisals where investments are being made and also offer an opportunity to banks, as an insider, to closely monitor performance while helping them better manage their cash flows. This is one of ways in which risks to the banking business can be reduced.