Profit E-Magazine Issue 38

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11 Weekly Roundup 14 Engro poised to set up first Pak merchant LNG terminal

18 18 A bank sold for just Rs1,000. Does it make any sense?

26 Shopkeepers’ scam adds fizz to profits 30 How Rangers aided Advans Bank double its size in one year

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36

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36 Why should Suzuki improve models, if people continue to patronise 40 For the Average Joe, where to invest is the question

Managing Editor: Babar Nizami l Joint Editor: Yousaf Nizami l Contributing Editor: Farooq Tirmizi l Business Editor: Agha Akbar Reporters: Farooq Baloch l Kazim Alam l Aisha Arshad l Arshad Hussain l Bilal Hussain l Eleazar Bhatti l Syeda Masooma l Ghulam Abbass l Ahmad Ahmadani l Shehzad Paracha l Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) l Zulfiqar Butt (Lhr) l Mudassir Iqbal (Isl) l Layout: Rizwan Ahmad l Illustrator: ZEB l Photographers: Zubair Mehfooz & Imran Gillani lPublishing Editor: Arif Nizami l Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk

CONTENTS

welcome

THE STATE OF THE STATE BANK Who was minding the store?

o pushover, the State Bank. Even to the most cynical of observers, the central bank, with its suit-tie-and-Brylcreem, no-nonsense tradition, doesn’t quite give the impression of a docile government department that will do whatever it is told, rules be damned. No, it won’t put up with any BS coming from the government or the biggest of the banks, thank you very much.

It strikes absolute terror in the hearts of the men and women working for the banking sector whenever there is an audit, so famously exacting are its standards and so stringent is it in its execution of the aforementioned.

Well, the sale of KASB Bank has certainly punctured a large, gaping hole in that carefully crafted image. It turns out that it did a pretty bad job at, well, regulating banks.

The sale of the bank for Rs1000 to Bankislami understandably raised eyebrows. Don’t get us wrong; toxic, hemorrhaging organisations can be sold for such sums; after all, organisations are sold warts and all. Assets and liabilities.

But the problem here is that there is a difference of opinion about how much those assets and liabilities were worth. KASB Bank insists that its figures were much healthier than the numbers that the SBP-engaged Ernst & Young (EY) audit yielded.

But that isn’t the point here, is it? It doesn’t reflect well on the SBP if the KASB Bank’s own valuation of itself was correct and it doesn’t reflect well if the figures of the audit it commissioned were right.

If the KASB Bank’s own valuation was correct, then it actually was sold for a song by SBP. If the auditors’ valuation was correct, then was SBP sleeping on the job when it let things get so bad at KASB? Because, as per EY the three-month freezing of the depositors’ accounts didn’t come close to revealing how bad the situation actually was. Apparently, more than a staggering half of the bank’s loan portfolio comprised of Non Performing Loans!

N

FROM THE MANAGING EDITOR

Who, exactly, was minding the store here? What happened to SBP’s strict standards? How did the central bank let things get to this point? Would things be any different if EY conducted a similar audit of other banks?

In the interest of watching out for depositors and the banking sector in general, the SBP bullies banks into running a relatively tight ship. What exactly was going on here?

Hanlon’s Razor asks us never to attribute to malice something that could be explained away by stupidity. In finance and government matters, it would serve us well never to attribute to mala fide and corruption what could be explained away by general incompetence. But was this squarely incompetence on behalf of the SBP? For instance, lending Rs20 billion to Bankislami so it could service the depositors needs scrutiny. Was the possibility of this facility made public at the bidding stage? Other potential buyers would have incorporated this into their bidding strategy. Like with other transparency concerns raised on this transaction, the central bank might argue here as well that it wasn’t required to announce this, as per law. Is this a good enough answer?

Ashraf Wathra, the then Governor of the State Bank needs to do some explaining.

The KASB Bank deal doesn’t pass the smell test.

Post-script: The Villains of the Piece: A scathing word, here, about EY. As mentioned above, the KASB’s own valuation of itself was drastically better than what EY said. Guess who the KASB’s own auditors, who gave them those figures, were? EY! EY’s behaviour hasn’t been one becoming of a Big Four auditor but that of one of the ‘professional witnesses’ found across the nation’s katcheries, who will say anything for a tidy fee.

Scandalous.

Babar Nizami

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Readers Say Considering the size of our economy, banks are overpopulated, hence all can’t survive. On top of that, people have almost boycotted the banks after the government imposed tax on cheques as well. Now people are trading in cash wherever possible. Governments have been writing off too many bank loans frequently, this has affected as well.

(Apropos: Three major banks are up for sale. Who will buy them?)

Riaz Akhtar A well written piece. The irony of Pakistani Market is that once the company or the product matures, parent company wants to get out of it. That is not the case with India where foreign investment has been in place since decades. All in all, SBP is expected to give hard time if Sale proceeds from these banks make their way out of the country.

(Apropos: Three major banks are up for sale. Who will buy them?)

Adnan Ali Farooq, very comprehensive but seems you have a personal issue with HSBC which is probably the only sore point of your otherwise well researched and written document. Yes, perhaps HSBC never really understood Pakistan and hence never became what Citi once was or what SCB still is. However, HSBC never exited or reentered the market between 1982 and 2013. It retrenched it’s operations a few times and all due to external events but those were never full exits, till the one in 2013.

(Apropos: Three major banks are up for sale. Who will buy them?)

Anonymous

How to ContaCt

facebook.com/Profitpk twitter.com/Profitpk linkedin.com/showcase/13251020 profit.com.pk profit@pakistantoday.com

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I second that, the Chinese have enough money to buy them and then will control the finance along with the electricity they already do and obviously lets not forget the great port. How do people not see where this is going........ look at what happened to India with the EIC, look at how they have distressed Australia right now.

There are many such examples in history, let's try not to become one of them. If they control what is most necessary to our economy and people then they control us. Almost forgot about Zong.....

(Apropos:Three major banks are up for sale. Who will buy them?)

Saad Marfani

I enjoyed your article however please revisit your facts on BCCI & Agha Hasan Abedi. Perhaps some independent research rather than 'well documented' history you mention. Well written but disappointed on this aspect.

(Apropos: Three major banks are up for sale. Who will buy them?)

Mubashir Malik Very informative article about the history of all these banks here in Pakistan.

You are also spot on about the blunders committed by European banks in Pakistan’s market. From HSBC’s botched attempts at banking in Pakistan to Barclays ill-timed decision to enter. But to me, ABN-AMRO’s decision to purchase Prime Bank easily takes the cake as ABN was working very successfully in Pakistan since over 50 years. Just one purchase (albeit at a spectacularly huge cost), and the Bank had to shut down its operations in Pakistan. Ironically, while ABN AMRO Pakistan was hit by the mini typhoon called ‘Prime’, at the same time in 2008, the world got hit by the Tsunami of ‘Subprime’.

(Apropos: Three major banks are up for sale. Who will buy them?)

Analyst With most of the talented bankers taken by other emerging banks, these banks with pseudo type top management, feel heat of slowing down. The result being up for sale.

(Apropos: Three major banks are up for sale. Who will buy them?)

Syed Shahab Uddin Dr Ishrat was probably the best SBP governor. Through his proactive efforts Pakistani banks came out unaffected from the global financial crisis of 2007. Overall the national economy from 2002-2007 was in a great shape. High growth, low inflation and debt was kept under control. Things started going south in 2008 after oil hit USD 146/barrel and some gross economic mismanagement by the PPP government.

(Apropos: Why Ishaq Dar deserves bouquets and not brickbats) Hassan Faraz

COMMENTS

PTI MNA Asad Umar

QUOTE

“After the standing committee rejected the amnesty bill with a clear majority, there is no justification to implement the scheme”

“The government is making all-out efforts to introduce 5G technology in Pakistan by 2020.

Minister for State for information and Telecommunication Anusha Rahman

3.81pc

growth was recorded in agriculture sector during the financial year 2017-18, reported the Economic Survey 2017-18. The contributing factors to this growth were from attractive output prices, higher yields, better government policies and availability of certified seeds, pesticides, agriculture credit and intensive fertilizers offtake. Crops sector during 2017-18 posted a growth of 3.83 percent against last years growth of 0.91 percent. Sub-sector growth in significant crops, other crops and cotton ginning posted a rise of 3.57 percent, 3.33 percent and 8.72 percent respectively compared to previous years growth of 2.18 percent, -2.66 percent and 5.58 percent respectively. Rice, sugarcane considered amongst the notable Kharif crops outstripped their production targets in 2017-18 by posting growth of 7.45 percent and 8.65 percent respectively. Cotton crop production posted a growth of 11.85 percent in 2017-18, outstripping last year’s production levels. But the wheat and maize production posted a fall of 4.43 percent and 7.04 percent respectively, said the economic survey.

$121m

will be invested by Fauji Fertilizer in Thar Energy Limited (TEL). In a notification sent to the exchange on Monday from the company said, “the shareholders of Fauji Fertilizer Company Limited (the “Company”), in an Extraordinary General Meeting of the Company, approved investment in Thar Energy Limited of up to USD 121 Million or its Rupee equivalent (inclusive of total equity investment of up to USD 39 Million and other sponsor support commitments).” Previously, FFC in a notification sent to the exchange earlier this month said “On April 3, 2018, the board of directors of FFC recommended for approval by the company’s members in terms of Section 199 of the Companies Act, 2017 at an Extraordinary General Meeting of the Company, equity investment of up to $39 million (or its rupee equivalent) and sponsor support commitments of up to an additional $82 million in Thar Energy Limited (TEL).” The decision had been taken by FFC further to its decision to invest equity in TEL amounting to $10 million, taken on January 30, 2018, as a result of which TEL will become an associated company of FFC.

BRIEFING

24.3pc

was the percentage of people living below the poverty line in 2015-16 in Pakistan compared to 50.4 percent in 2005-06 as per the Economic Survey 2017-18. According to the Economic Survey, Pakistan’s poverty headcount has registered a prominent decline in the last decade or so at both the regional and national levels. The country’s poverty headcount has exhibited a continuous fall at both the regional and national levels, with poverty in rural and urban areas showing a declining trend with a poverty headcount of 12.5 percent 30.7 percent and 12.5 percent respectively in 2015-16. The fall in poverty shows more prominence in urban areas than rural areas, reported the Economic Survey 2018. Some of the major reasons which contributed to this fall in poverty headcount since 2005-06 were poverty alleviation reduction programmes like “Benazir Income Support Programme (BISP), improved political situation, peace and tranquility, strong recovery from low GDP growth rate of 1.7% in 2008-09 to 4.5% in 2015-16, continued higher inflows of remittances especially from Middle East which are destined to relatively poor families and above all a more inclusive characteristics of economic growth,” said the report.

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“The SBP not only gave BankIslami an entire bank for Rs1,000, but also provided it with cash support of Rs20 billion” Pakistan Peoples Party MNA Syed Naveed Qamar

QUOTE

$7b

was in last few years to keep the rupee overvalued against the US dollar, said a member of the Economic Advisory Council (EAC). The member of EAC has sought action against those individuals responsible for this $7 billion spending and this assertion by Dr. Abid Hassan wasn’t disputed by State Bank of Pakistan Governor, Tariq Bajwa or by Adviser to Prime Minister on Finance, Dr. Miftah Ismail. This propping up of the rupee against the US dollar was done by the central bank before the government’s ultimate decision to let it depreciate against the greenback by around 5 percent in December 2017 and 5 percent in March 2018.

61.4pc

was the figure of Pakistan’s net debt during the financial year 2017-18, said Dr. Miftah Ismail. Miftah Ismail said net debt has increased from 60.2 percent to 61.4 percent, while the external debt has decreased from 21.4 percent of Gross Domestic Product (GDP) to 20.5 percent of the GDP during FY17-18. He said the government has had to take on external debt to finish projects that the previous governments had taken on and not completed. On Thursday, the adviser to the Prime Minister on Finance along with the Minister for Planning and Development Ahsan Iqbal revealed the economy’s performance over the fiscal year 2017-18 (FY1718), a day before the announcement of federal budget FY 201819. According to the Pakistan Economic Survey (PES), the total public debt stood at Rs22.82 trillion by the end of December 2017 and it recorded an increase of Rs1.4 trillion during the first six months of the current fiscal year. “With the current account deficit widening and not being fully offset by financial inflows, the country’s total liquid forex reserves fell by $4.5 billion during July-March FY17-18,” the PES said.

4.4pc

increase was recorded in foreign direct investment (FDI) from a year ago in the first nine months of FY 2017-18. According to data released by the State Bank of Pakistan (SBP) on Tuesday, the country attracted FDI of $152.7 million in March, down 52 per cent from $318.3 million in the same month of the preceding year. China has been the primary foreign investor in recent years, mainly because of the China-Pakistan Economic Corridor (CPEC) project.

Investment originating from Beijing amounted to $1.34 billion in July-March, which accounts for almost 64 per cent of total FDI received. China invested $797 million in the same period of the last fiscal year, SBP data shows.

70.1pc

is the public-debt-to-GDP ratio of Pakistan, which is set to touch a 15-year high. Also, this high ratio is in contravention of the Fiscal Responsibility and Debt Limitation (FRDL) Act 2005. The government had envisaged a target of 61.4 percent for the public-debt to GDP ratio for FY 2017-18, which is 10.1 percentage points higher than the restriction set by parliament. For developing economies like Pakistan, 70.1 percent public debt to GDP ratio is 20 percentage points higher than what is sustainable for such countries. Apprising the federal cabinet about the economy, Finance Secretary Arif Ahmed Khan said the public debt will touch Rs24 trillion by end of FY 2017-18.

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21pc

were Pakistan’s mobile internet users as a percentage of the population according to a Global Digital report prepared by We Are Social and Hootsuite. The internet penetration stood at 22 percent (44.6 million users) of the population at end of the aforementioned period. Sifting through the report reveals some interesting revelations, as the country’s active social media users stood at 35 million with a penetration of 18 percent at end of January 2018. The unique mobile users in the same period were recorded at 109.5 million, with a penetration of 55 percent.

For Pakistan, the active social user’s penetration was determined to be 16 percent (32 million) at end of January this year. The “Annual Digital Growth” section revealed Pakistan’s internet users jumped up by 27 percent (+10 million) in years’ time compared to January 2017.

BRIEFING

ENGRO

POISED TO SET UP FIRST PAK MERCHANT LNG TERMINAL

The $500 million joint venture with Shell, Gunvor, and Fatima Group will allow Engro to import, regasify and sell liquified natural gas without the need for government contracts, tapping into what has become one of the world’s major Regasified-LNG markets

I

By Farooq Baloch

n a move, which will enable its expansion into a much wider Liquified Natural Gas (LNG) market independent of the government, Pakistan’s largest private sector conglomerate, Engro Corporation has partnered with Gunvor, Shell and Fatima Group to set up Pakistan’s first merchant terminal for its Regasified-LNG business close to Karachi’s Port Qasim.

“We are putting up a joint venture, to set up a new terminal. We’ll import the gas ourselves, find customers on our own and manage the whole cycle ourselves,” said CEO of Engro Elengy Pakistan Terminal, Jahangir Piracha during the course of a recent interview with Profit. “A purely merchant terminal, it will have nothing to do with the Pakistan government,” added he.

He was alluding to this being the country’s third LNG regasification and storage project, with the dis-

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tinction of being the first merchant terminal.

Currently, the state-owned Pakistan LNG Terminals Limited (PLTL) is responsible for import, sale, and distribution of LNG in the country while Engro Elengy Pakistan Terminal, a subsidiary of Engro Corp. and Pakistan GasPort Consortium (PGPC) Limited handle storage and regasification of the commodity.

Worth $500 million, the integrated project includes the hybrid ship – or floating storage regasification unit (FSRU) vessel – alone having a price tag of $300 million.

Major partners

P

artnering Engro are two major global companies and a sizable local entity: Shell, the world’s largest gas company that accounts for 60% of the world’s LNG production; Gunvor, one of the largest traders of LNG; and local industrial giant Fatima Group. The shareholding pattern has been finalized and the project is in advance stages,

said Piracha, without sharing further details.

“When there are four partners, none gets a major stake,” said the CEO, responding to Engro’s equity. “It takes about 12 to 14 months to set up an LNG terminal, but if you add project development time, it takes about three years,” he said, doing away with another query about its commencement date.

Pakistan started importing LNG in 2015 when Engro set up the country’s first FSRU. According to a September 2017 report, the government has invested $8 billion on a transmission line, terminals and LNG-fired power plants to deal with chronic power crisis and gas shortage in the energy-starved nation.

Last year, the government decided to move away from oil-fired power plants, two-and-a-half times more expensive compared to the gas-based power plants yet constituting more than 20% of the country’s power generation.

Owing to this shift in the energy mix, LNG now accounts for a fifth of Pakistan’s total power production. With the infrastructure in place and more projects in the pipeline, Pakistan has become a major buyer of imported gas in Southeast Asia’s booming LNG market – now 70% of the world’s demand, and a focal point for the global LNG industry.

Going by the latest reports, the LNG sector is looking at $500 million in investment just for the terminals (assuming each costs $125 million).

Trafigura along with PGPC is developing its second LNG terminal at Port Qasim, which will operate entirely in the private sector without recourse to Pakistan’s sovereign guarantees, the local partner of the international trading giant says on its website.

According to Bloomberg, Exxon Mobil and Energas have also planned to build an FSRU in the same vicinity.

‘WE ARE PUTTING UP A JOINT VENTURE, TO SET UP A NEW TERMINAL. WE’LL IMPORT THE GAS OURSELVES, FIND CUSTOMERS ON OUR OWN AND MANAGE THE WHOLE CYCLE OURSELVES… A PURELY MERCHANT TERMINAL, IT WILL HAVE NOTHING TO DO WITH THE PAKISTAN GOVERNMENT’ Jahangir Piracha, CEO, Engro Elengy Pakistan Terminal Moreover, there are reports of Vitol joining hands with Total to set up its own FSRU in the same area to grab a slice of the LNG pie – as per the government estimates, set to expand fivefold to 30 million tonnes annually by 2025.

Based on various reports, Islamabad has entered into some inter-government agreements and is negotiating with various gas companies to become partners. Currently, Pakistan has only one such agreement with Qatar for supply of eight million tons of LNG to be delivered by Shell, ENI, and Gunvor.

“Within three to five years, imported gases as a percentage of total gas in the system will go from 10% to over 60%,” PLTL says, adding, “Gas-based electricity generation will move to over 40% and will be primarily supplied by LNG.” The government’s ambitious plans can be attributed to its election mani-

‘PAKISTAN STARTED IMPORTING LNG IN 2015 WHEN ENGRO SET UP THE COUNTRY’S FIRST FSRU. ACCORDING TO A SEPTEMBER 2017 REPORT, THE GOVERNMENT HAS INVESTED $8 BILLION ON A TRANSMISSION LINE, TERMINALS AND LNG-FIRED POWER PLANTS TO DEAL WITH CHRONIC POWER CRISIS AND GAS SHORTAGE IN THE ENERGY-STARVED NATION’

festo, which promised to rid the country of load-shedding. At the fag end of its term, beset with issues emerging from accountability, the cost of failure could be steep – impacting their fate in the general elections scheduled for later this year.

With a focus on Punjab, the incumbent’s political bastion that produces only 3% of the country’s indigenous gas, the government has set up three gas-fired power plants in Bhikki, Haveli Bahadur Shah and Baloki that have a combined capacity of producing 3600 Megawatt. These high-efficiency gas-fired power plants are the major buyer of RLNG at the moment with a demand of 540 million cubic feet per day or 45% of the country’s RLNG supply.

Efficiency issues

A

s per the new policy, the government will shut more furnace oil (FO)-based power plants and move to gas-fired projects, thus spurring further growth in LNG consumption.

Switching away from FO-based plants that operate on 38% efficiency to RLNG-fired power plants that operate on 62% efficiency translates to an annual efficiency gain of $1.6 billion, said Piracha, highlighting the rationale behind this shift in the policy. “It’s a very substantial gain,” he adds.

The efficiency gains resulting from switching to RLNG-based power generation sound impressive, but that doesn’t appear to be the case at the moment.

The three power projects have not

ENERGY

been able to generate electricity as per their installed capacity due to technical issues, according to a Profit report.

These plants were supposed to operate at full capacity by December 2017, but they are still in the test phase and going through teething problems.

“The scheduled imports have been disrupted because of reduced offtake of RLNG by Sui Northern Gas Pipelines Limited. As a result, penalties, demurrages, and LDs are being triggered,” says the report, adding, these are costing the LNG terminal of PGPC $150,000 per day in penalties because it is operating at only 40% of its capacity.

When it comes to the energy sector, the poor management and inefficiencies of successive governments are no secret. However, some analysts are even skeptical of the government’s ambitious LNG import estimates. For example, energy research and consultancy firm Wood Mackenzie says, Pakistan could boost its LNG imports to only 10 million tons per annum by the early 2020s.

Excessive buying?

T

his certainly merits a question: is the government too ambitious and buying more gas than what is required?

“Even if we have a big excess, that will be for a year or two then the demand shoots,” said Piracha, adding, the country needs new power plants constantly because the economy is growing between 5% and 6%.

Explaining, the CEO said, in a country of 200 million where young people are joining the workforce, appliances like ACs, microwave ovens etc. would be needed. “The demand is growing and we have to increase our power generation every year,” he added.

According to Piracha, Pakistan’s current natural gas demand is 6 billion cubic feet per day while supply accounts for 4 bcfd, which comes from

‘IF ONE LOOKS AT THE MARKET SIZE AND POTENTIAL FOR GROWTH, ONE CAN CERTAINLY UNDERSTAND THE OPTIMISM OF COMPANIES JUMPING ON THE LNG BANDWAGON, BUT A MERCHANT TERMINAL ALONE MAY NOT BE ENOUGH TO CASH IN ON THE OPPORTUNITY’ is Pakistan’s domestic sources and 1.2 bcfd comes from the two terminals that handle imported LNG. “You are sitting on 5.2 bcfd. Even presently, you are short by 800 mcfd and this will keep increasing every year because new gas connections have to be issued, the new industry is also being set up and population is growing,” said he, adding, there will be a very big demand-supply gap again.

The government’s main focus is power generation, with a heavy focus on coal, this being a cheaper source of producing energy compared to LNG, but the chief of Engro’s LNG terminal went on to clarify they were looking at a much bigger market, and not just the power sector.

Multiple uses

“L

NG can be put to multiple uses. From domestic kitchen users, to the textile mills producing steam, or fertilizer companies as raw material, to CNG sector as fuel for automobiles, LNG has much wider usage than coal,” added he, explaining the rationale behind a merchant terminal.

By doing away with the government, the RLNG companies can find takers in the industrial sector – especially textile and fertilizers, the latter the largest consumer of gas in the country. Since both Fatima Group and Engro have their own fertilizer plants that require natural gas as a major raw material, stand to gain more in from this merchant terminal where they are partners since it will reduce their de-

‘PARTNERING ENGRO ARE TWO MAJOR GLOBAL COMPANIES AND A SIZABLE LOCAL ENTITY: SHELL, THE WORLD’S LARGEST GAS COMPANY THAT ACCOUNTS FOR 60% OF THE WORLD’S LNG PRODUCTION; GUNVOR, ONE OF THE LARGEST TRADERS OF LNG; AND LOCAL INDUSTRIAL GIANT FATIMA GROUP’ 16

pendence on the government-owned gas distribution companies.

“There is a big demand for gas in Pakistan. We are used to gas for the last 30 years, not using it only for power generation, but multiple uses,” said Piracha, in particular referring to domestic consumers firing their stoves, geysers and heaters and a nationwide network of Compressed Natural Gas filling stations – boasting the region’s largest natural gas-fueled vehicle fleet after China and Iran.

If one looks at the market size and potential for growth, one can certainly understand the optimism of companies jumping on the LNG bandwagon, but a merchant terminal alone may not be enough to cash in on the opportunity.

The companies that are setting up their terminals in the port city will still need the infrastructure to ship the gas far and wide – especially to destinations up-north, in Punjab and KP. According to Pakistan LNG Policy 2011, these companies will have access to the government’s transmission network, but the existing SSGPL and SNGPL infrastructure is not big enough to cater to the capacity new terminals would add to the grid.

Storage is a major challenge in this business since the gas has to be consumed as transported or the terminal operator may face problems. PGP is a case in point, for it is operating at less than half its capacity, courtesy the newly installed 3600 MW power plants that have yet to operate at full capacity.

But Piracha is confident the government will help address that issue through timely completion of LNG III, a Rs175 billion pipeline connecting Karachi with Lahore and capable of handling 1.2 bcfd.

“The Economic Coordination Committee and even the cabinet has approved it. Now hopefully the work will start,” said Piracha. “It has to come online, for not just us, but others are also looking forward to it. If it doesn’t come, we would again have severe shortage of gas.” n

ENERGY

A BANK SOLD FOR JUST .

DOES IT MAKE ANY SENSE?

Profit demystifies the controversy over the sale of KASB Bank

“S

By Kazim Alam

he walked up to my seat and handed me a tissue paper that had a phone number scribbled on it.

This was unusual: a female flight attendant giving her cell number to a random male passenger – it’s mostly the other way around, you know. She asked me to call her after the flight and explain how I was able to buy a whole bank for just Rs1,000, even though her personal account in the same bank had a deposit of Rs20,000,” BankIslami Pakistan Ltd (BIPL) CEO

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Hasan Bilgrami said at a recent public event in Karachi.

This little anecdote captures the bewilderment of ordinary Pakistanis at a transaction that transferred the ownership of KASB Bank to BIPL three years ago for just Rs1,000.

The ‘fantastic deal’ has not just stopped at perplexing so many people – an overwhelming number of experts and ordinary folk alike find the opaqueness of the whole deal unsettling.

The issue received renewed media attention early this month when a report by the auditor general of Pakistan (AGP) called the amalgamation ‘irregular’, noting that it caused a loss of Rs3.4

billion on concessional loans extended to BIPL by the State Bank of Pakistan (SBP). The National Accountability Bureau (NAB) also smells a rat and has expressed it without reservation in one of its reports.

The relentless scrutiny has not stopped at that. Post its meeting on April 25, the head of the National Assembly’s Public Accounts Committee and the leader of the opposition in the National Assembly, Khursheed Shah, was miffed at the unseemly merger to the point to make that rarest of requests to the Supreme Court: To take suo motu notice of the SBP’s transgression, “terming it the biggest scandal in

the central bank’s history that had also tainted its image.”

With the issue already under investigation by the bureau, Shah also called on the NAB chairman to turn it into an exemplary case.

Sold for a song?

A

bank is supposed to be well-capitalised, i.e. it should have the capacity to absorb losses on its assets and continue to remain solvent. As events transpired, the SBP put KASB Bank under a moratorium in the middle of November 2014 for its lack of capitalisation.

In May 2015, KASB Bank with 105 branches and total assets of almost Rs67 billion was sold to BIPL at a token price of Rs1,000.

KASB Bank wasn’t capitalised up to the regulatory requirements. Hence, it posed a risk to the banking system, according to the SBP. Any failure on its part to honour its financial obligations could possibly lead to system-wide repercussions.

The central bank froze the accounts of the bank, meaning big depositors and sponsors were not allowed to take out any funds. The SBP directly engaged KASB’s audit firm (Ernst & Young) that reviewed the bank’s financial statements and concluded that the enterprise had a negative net worth.

Next, the SBP invited interested buyers to conduct due diligence of their own. Four banks - BankIslami, JS Bank, Sindh Bank, and Askari Bank - showed their interest and BIPL eventually acquired it at a token price of Rs1,000.

But what about the deposit of Rs20,000 that the flight attendant had in KASB Bank? Wouldn’t Bilgrami have a surplus of at least Rs19,000 on day one?

In fact, the last published balance sheet of KASB Bank showed it held deposits of almost Rs62 billion on September 30, 2014.

How could a bank with deposits of billions of rupees be handed over to a buyer for just Rs1,000?

The question has apparently befuddled everyone, ranging from a rank non-cognoscenti like a flight attendant to the hawk-eyed AGP and from probing media pundits to the NAB’s cynical sleuths. “... (The SBP) management amalgamated KASB Bank, having assets and deposits of Rs57 billion with BankIslami on May 7, 2015 without considering market value of assets of KASB Bank or its shares price at the stock exchange…”, the AGP report for 2017-18 stated.

The language used in the AGP report is unclear on whether Rs57 billion was the value of KASB Bank’s assets or deposits. For a bank, deposits are liabilities, not assets.

Simply put, deposits are funds that a bank owes to its clients. Just like an unpaid electricity bill, deposits represent an amount payable for the bank.

In a distressed sale, which was the case in KASB Bank, carrying a deposit base without an equivalent amount of assets (loans to borrowers) is a bad thing. It’s bad because the buyer has to undertake that it’ll pay depositors their money whenever they come knocking at its door.

‘THE CREDIT LINE... OF RS20 BILLION THAT THE SBP EXTENDED TO BIPL AT AN INTEREST RATE OF 0.01 PERCENT PER ANNUM SHOWED THAT THE ACQUIRER WAS “NOT CAPABLE OF MANAGING THE LOSSES OF KASB. SO THERE WAS NO POINT IN MERGING (KASB BANK) WITH BIPL AS OTHER REMEDIES WERE ALSO AVAILABLE IN THE SBP ACT AND BANKING COMPANIES ORDINANCE,” IT SAID, ADDING, SIMILAR FINANCIAL ASSISTANCE COULD BE GIVEN TO KASB BANK BY APPOINTING AN ADMINISTRATOR AND CHANGING ITS BOARD STRUCTURE’ National Accountability Bureau’s (NAB) take on the affair

“So the price consideration of Rs1,000 that you hear is wrong. The net price is Rs1,000 plus an undertaking to take Rs53 billion of deposits,” said Bilgrami. He was obviously exaggerating by not taking the assets of KASB Bank into consideration.

A loss-making enterprise

T

he Chakwal Group was the original owner of KASB Bank, which was then licensed as Platinum Commercial Bank. It sold the bank to Nauman Builders in 1998. The KASB Group acquired the bank in 2002 and renamed it.

The new owners then decided to keep their myriad businesses on the balance sheet of KASB Bank, which became a holding company of sorts for the KASB Group.

So when BIPL took it over, KASB Bank was operating as a commercial bank and acting as a significant shareholder of an oil exploration company, an asset management company, securities brokerage firm and investment bank, a modaraba management company, a foreign investment company, a foreign venture capital company and even a real estate company.

According to Bilgrami KASB Bank was the only bank in the region that had a negative capital adequacy ratio (CAR) as per a later balance sheet that KASB Bank prepared itself in November 2014. The ratio stood at minus 4.6 percent. That means that its liabilities outstripped its assets.

With a loss of Rs49.5 million in the third quarter of 2014, the bank’s accumulated losses amounted to Rs12.5 billion on Sept 30. Its non-performing loans (NPLs) as a percentage of total loans were the highest in the industry at the time.

In its last printed financial accounts, the the bank acknowledged “the existence of material uncertainties” regarding its “sustainability”.

In the notes to the unconsolidated financial statements for the third quarter of 2014, KASB Bank stated: “Currently, the bank is in violation of the applicable regulatory capital requirements, which exposes the bank to regulatory actions under the banking laws… The bank may, therefore, be unable to continue realising its assets and discharging its liabilities in the normal course of business,” it said.

In a thinly veiled statement, the

MERGERS & ACQUISITIONS

defunct bank also implied that it wasn’t receiving support from the SBP to implement a restructuring plan. “While the bank has regularly updated the SBP on its plans and proposals regarding the recapitalisation and restructuring of the bank, it needs an explicit support of the SBP in accepting and moving forward with its recapitalisation and restructuring plan.”

In short, the bank was in poor shape. It was bleeding money quarter in, quarter out. Its restructuring plans were not being approved. The SBP was getting anxious, and the bank seemed to know something bad was going to happen.

Liquidity to deploy

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IPL was a small Shariah-compliant lender at the time and also struggled to meet the regulatory requirements regarding CAR. Its earnings amounted to only Rs134.3 million in the third quarter of 2014.

As opposed to the share capital of Rs19.5 billion on the balance sheet of KASB Bank, BIPL’s share capital was just Rs5.2 billion on Sept 30, 2014.

However, BIPL didn’t have huge accumulated losses on its balance sheet like KASB Bank.

This resulted in net assets of BIPL amounting to Rs6.8 billion against just Rs1.3 billion on the books of KASB Bank.

In order to raise its capital, BIPL had just concluded a rights share issue of Rs400 million and was in the process of holding another issue to meet the SBP’s requirement regarding capitalisation.

“The reason we went [for the acquisition] was that we had a rights issue. There was a dearth of assets in the Islamic banking industry. So we thought if we acquired a bank we could deploy our capital,” Bilgrami said.

As on Sept 30, 2014, BIPL’s book

‘THEN ALL THE LEADING (AUDIT) FIRMS OF PAKISTAN, INCLUDING KPMG, ERNST & YOUNG AND DELOITTE, EVALUATED THE BANK AND ALL ARRIVED AT A NEGATIVE NET WORTH… SO THE NEGATIVE NET WORTH IS VERY WELL-ESTABLISHED’ Hasan Bilgrami, CEO, BankIslami Pakistan Ltd (BIPL) value per share was Rs12.90 against Rs0.60 per share of KASB Bank. The book value per share is a key indicator that analysts use to assess the real value of shareholders’ equity in an entity.

Even the miniscule book value per share of KASB Bank at the time was due to heavy deferred tax assets, according to Bilgrami. Deferred tax assets are created when a company pays taxes in advance. These are returned to the company in subsequent years in the shape of tax relief.

KASB Bank’s deferred tax assets amounted to almost Rs4.8 billion on Sept 30, 2014.

The decision to acquire a conventional bank with a troubled balance sheet wasn’t difficult for BIPL. It had the prior experience of buying out Citibank’s entire mortgage portfolio and then converting it into the Islamic mode. “We were fairly confident that we could convert the (KASB) portfolio, we could also extract some value out of it.”

‘WHEN BIPL TOOK IT OVER, KASB BANK WAS OPERATING AS A COMMERCIAL BANK AND ACTING AS A SIGNIFICANT SHAREHOLDER OF AN OIL EXPLORATION COMPANY, AN ASSET MANAGEMENT COMPANY, A MODARABA MANAGEMENT COMPANY, A FOREIGN INVESTMENT COMPANY, A FOREIGN VENTURE CAPITAL COMPANY AND EVEN A REAL ESTATE COMPANY’ 20

Due diligence

The SBP engaged PricewaterhouseCoopers, a chartered accountancy firm, in December 2014 to conduct KASB Bank’s financial due diligence and valuation, supposedly a comprehensive appraisal of a bank’s books to determine its net worth.

The exercise concluded that the bank was tanking: its net worth was negative. This means the bank’s liabilities were actually higher than its assets. According to one senior central banker who was directly involved with this transaction, the valuation exercise unearthed too many “unacknowledged losses” in the form of bad loans that eventually ate into the bank’s equity and turned it negative.

The SBP didn’t make the valuation report public. It didn’t even share it with the sponsors of the defunct bank. The former SBP official refused to state the negative value that the audit firm arrived at after conducting the valuation exercise.

“The Banking Companies Ordinance 1962 doesn’t require the central bank to share the valuation report with stakeholders,” he said.

Afterwards, Sindh Bank, Askari Bank, JS Bank and BIPL expressed interest in acquiring KASB Bank and conducted their own due diligence exercises, using different audit firms.

“Then all the leading (audit) firms of Pakistan, including KPMG, Ernst & Young and Deloitte, evaluated the bank and all arrived at a negative net worth…

so the negative net worth is very well-established,” claimed Bilgrami.

BIPL decided to go ahead with the transaction. Using Section 47 of the Banking Companies Ordinance 1962, which gave the central bank the power to apply to the federal government for the suspension of business by a banking company and prepare a scheme for its reconstruction or amalgamation, the SBP let BIPL assume all assets and liabilities of KASB Bank in May 2015.

“The SBP uses the power of a high court. So it’s a quasi-judicial power that is used and can be challenged only in a high court. This is a powerful section.

Everywhere in the world, central banks have got this power. Especially after the crisis of 2008, all central banks armed themselves with more powers. The idea is that financial markets should be working smoothly and there should be no destruction in the financial markets,” said Bilgrami.

One of the reasons other potential buyers looked at KASB Bank with suspicion, according to Bilgrami, was the presence of ‘Iranian deposits’ of $200 million.

“It was the big elephant in the room,” he said. Having funds of a sanctioned entity can spell disaster for a bank. Seemingly small acts of noncompliance with global financial regulations can attract severe penalties. Case in point: the recent penalty of $225 million on Habib Bank Ltd (HBL) for regulatory noncompliance and the subsequent closure of its New York operations.

Unlike other interested buyers, BIPL decided to actually evaluate the implications of having an entity that “had a sanctioned account”. It engaged lawyers in Pakistan and abroad and corresponded with the US Treasury.

“We found out that probably the least concerning thing was Iranian deposits as long as we comply with sanctions’ conditions… it’s been three years and

Source: published financial statements

we have never been bothered about it.

The lesson learned is do not go by the popular perception. The reality may be completely different,” he said.

This comment raises questions about the quality of the due diligence exercise conducted by the rest of the potential acquirers. Were they allowed to contact the sponsors of the defunct bank to seek explanation about the “Iranian deposits”? In a typical case of due diligence, potential acquirers get such information from the current management. Why did the other three banks stay in the dark about the non-toxic nature of these deposits? Did SBP try it’s best to sell KASB at the best possible price?

The run, largest ever in Pakistan

E

ven a hint about a bank going under can ruin its credibility for years to come. What depositors heard in November 2014 wasn’t

‘IN 2014, KASB BANK POSTED A NET PROFIT OF RS1.4 BILLION. BUT THE SBP DIDN’T LET US HOLD THE ANNUAL GENERAL MEETING FOR SHAREHOLDERS’ APPROVAL. A PROFIT OF RS1.1 BILLION CAME FROM RECOVERY (OF NPLS) ONLY. IT WAS THE MOMENTUM OF OUR RECOVERY THAT BIPL HAS ALREADY GOT RS5 BILLION IN CASH THAT THE VALUATION HAD SHOWN TO BE ZERO’

a little murmur. It indeed was a blast.

Every depositor was worried. Everyone wanted out once the moratorium was imposed.

Imagine you had a savings account at KASB Bank and you had a medical emergency in the months following the imposition of the moratorium. It was your money and yet you could not withdraw it from the bank. Imagine you had to remit funds overseas for your daughter’s tuition, but your bank had shut shop indefinitely.

As soon as the moratorium was lifted, and KASB Bank branches reopened under the BIPL banner, there was a run on the bank – the largest in our banking history.

People queued up outside branches and withdrew their deposits in droves. BIPL’s umbrella didn’t inspire much by way of confidence. After all, it too was not a big bank with a balance sheet carrying assets of trillions of rupees! It really was a small bank itself, with limited brand recognition.

“We had collected data and found out that the worst run in the banking industry was 30 percent (of deposits).

So we budgeted that 30 percent would be withdrawn, which was around Rs16 billion,” Bilgrami said.

He clearly underestimated the desperation of depositors to take out their money at the first opportunity.

“Withdrawals amounted to Rs27 billion.

Everyone was paid the money they demanded,” Bilgrami said, adding that no depositor returned empty-handed once

MERGERS & ACQUISITIONS

the bank reopened.

BIPL sought support from the SBP to ease the growing pressure on deposits. It demanded that the SBP extended a credit facility of Rs8 billion at no cost to BIPL for 10 years at least so that the negative net worth of the bank could be plugged. The central bank partially agreed to this demand, giving Rs5 billion instead.

BIPL also requested that whatever amount was withdrawn should then be made available to it by the central bank (in the form of a loan) so that there is no pressure on deposits.

The SBP accepted the demand, but capped the amount at Rs15 billion.

“For both Rs5 billion and Rs15 billion (loans from the SBP), we provided our assets as collateral. Had BIPL not stepped forward and offered its assets to be put in as collateral, Rs20 billion was not available with KASB Bank to meet withdrawals,” Bilgrami said while .

BIPL received the first loan of Rs5 billion at an interest rate of 0.01 percent while the second loan of Rs15 billion had a subsidised annual cost of 4.7 percent.

According to BIPL’s own estimates this translated into a benefit of almost Rs3 billion for BIPL.

An empire crumbles

W

alk a mile in the shoes of the KASB Bank sponsors, and you’ll know what it means to build a business empire over decades and lose it all in just one night.

Almost 84 percent shares of KASB Bank were owned by KASB Corporation before the moratorium kicked in. The corporation owned, besides KASB Bank, seven other subsidiaries – KASB Funds, KASB Invest, KASB Capital, KASB Securities, KASB Modaraba, My Solutions Corporation and Structured Venture.

But with BIPL acquiring the entire KASB Bank consisting of 1.9 billion shares for just Rs1,000, the value of KASB Corporation’s stake in the bank came down to zero.

Furthermore, KASB Bank owned 77.1 percent shares in KASB Securities, one of the prominent brokerages of the time. As a result of the forced amalgamation of KASB Bank with BIPL, KASB Securities automatically became a subsidiary of BIPL when the Islamic lender took over the distressed bank.

Sponsors of erstwhile KASB Bank have stayed mum since May 2015. They have generally refrained from giving

22

‘SHAREHOLDERS OF ERSTWHILE KASB BANK HAVE STILL NOT LOST HOPE. THE SHC ORDER ENTAILS THAT THE SBP SHOULD REVISIT THE PROCESS TO DETERMINE THE BANK’S VALUATION AS PER STATUTORY REQUIREMENTS. THE CENTRAL BANK WILL HAVE TO COMPENSATE THE SHAREHOLDERS IN CASE THE FRESH VALUATION IS HIGHER THAN THE PREVIOUS ONE’ press interviews, despite hundreds of TV shows having discussed the KASB saga between then and now.

Speaking to Profit on the condition of anonymity, a source close to the group sponsors said the battle for shareholders’ right to KASB Bank is still not over.

“Around 15 shareholders have gone to the Sindh High Court (SHC). As a citizen, I have a fundamental right to my property. No quasi-judicial authority (SBP) can usurp this right,” he said.

In the third week of April, the SHC ordered the SBP to reconsider the valuation of the defunct KASB Bank, saying it did not adequately fulfil its statutory duty to protect the interests of all stakeholders.

Flawed valuation

T

he past sponsors of the bank maintain a strong difference of opinion with the SBP and BIPL on literally every aspect of the KASB Bank saga.

For example, they don’t accept the SBP-mandated valuation of the bank by PricewaterhouseCoopers on both legal and technical grounds. He said the valuation has not been shared with the past sponsors of the bank even after three years of the forced amalgamation. “The board of directors was never shown the valuation.”

As for technical flaws, he said the valuation by PwC assessed the net worth of the bank based on the book value of assets purchased many years ago.

In other words, the valuation exercise by the audit company did not take into account the price appreciation in assets, such as real estate and shares in other listed and unlisted companies.

Had the valuation been conducted on the basis of mark-to-market, a system of assessing the value of assets by the most recent market price, the net worth

of the bank would’ve been tens of billions of rupees, he said.

For example, KASB Bank invested Rs620 million 12 years ago in Good Milk, a product by an unlisted dairy company that has grown substantially since then.

Using the valuation that Engro Foods received recently on the Pakistan Stock Exchange (PSX) as a benchmark, it can safely be assumed that the share price of the unlisted company should now be around Rs100, he said.

This means that the current price of the bank’s investment of 12 years ago should hover around Rs6.2 billion. Good Milk is just one such example. “Investments at cost” in the ordinary shares of unlisted companies amounted to more than Rs1.1 billion on Sept 30, 2014.

“Even a qaroon ka khazana would amount to nothing if you calculated its net worth at prices recorded on books,” he said.

In its latest order, the SHC ordered the central bank to share the external auditors’ report on KASB Bank’s valuation with shareholders.

As for the valuation done by Ernst & Young, he said the SBP brought it in to close the accounts. The firm served as the bank’s auditor and the SBP needed its certificate to go ahead with the forced amalgamation. “We still have Ernst & Young’s valuation report of Rs13 billion that it made in 2014,” he claimed.

Instead the audit by Ernst & Young that it carried out in early 2015 on behalf of SBP held that KASB Bank’s book value was a negative Rs5.8 billion.

No regard for stock price

U

sually, the starting point to arrive at the net worth of a listed company is the stock exchange.

Multiplying the share price on a given day by the total number of shares outstanding gives investors a basic idea about the approximate worth of the company.

But the market price was completely ignored in this case. The bank was sold for Rs1,000 although retail investors were trading the share at around Rs3 a piece. With 1.95 billion outstanding shares, the net worth of the bank – in the eyes of stock market investors at least – should’ve been around Rs5.85 billion. But the logic of valuing the bank based on the stock price is rejected by Bilgrami. “One must take note that on the basis of the market priceto-book value (P/B) ratio, KASB Bank was more expensive than MCB Bank, which was the most capitalised bank in Pakistan,” Bilgrami said.

A P/B ratio that is higher than other players in the same industry reflects that the stock is overvalued. Simply put, Bilgrami as well as the regulator believed investors trading the stock on the PSX were clueless about the actual financial condition of the bank.

According to the former senior official of the SBP, the central bank believed that the shareholders of the bank had already lost their investments when the bank’s equity became negative as per the valuation conducted by PwC. The regulator also believed that its primary responsibility was to protect the interests of the bank’s depositors, not shareholders, he said.

NPLs, provisions and reversals

T

he source in the KASB Group insists that having a negative CAR constituted a weak basis for its forceful sale to another bank.

“Why did they let us operate for so long then?” he said, noting that not a single depositor ever had to return without their cash.

There was no concern about the bank lacking liquidity, which includes cash and cash-like assets. In line with the regulatory requirement, the bank’s ratio of liquid assets and liabilities was 51 percent at the end of the third quarter of 2014.

“A bank collapses only when it lacks capacity to pay depositors. Our CAR was negative for a single reason: our provisioning against NPLs. But their recovery was already well under way,” he said.

Banks are supposed to set aside funds, called provisions, against potential loan losses. But provisioning is only an accounting adjustment. It incorporates changing projections for expected

Salient Points

(Emerging from PAC meeting on April 25, 2018)

PAC to Chief Justice: A case fit for suo motu? n The hearing made the PAC the fourth state institution to have found serious flaws in the amalgamation deal. Prior to this, the NAB, the AGP and the Sindh High Court had raised objections to the propriety of the deal. n In the third week of April, the SHC had directed the SBP to share the external auditors’ report on KASB Bank’s valuation – which has until now been kept confidential. n The Public Accounts Committee (PAC) on April 25 made an extraordinary request to the Supreme Court: To take suo motu notice of KASB Bank merger deal, terming it the biggest scandal in the SBP’s history that had tainted its image. n At the same time, with the issue already under investigation by the Bureau, the PAC chairman also asked the NAB chairman to make it an exemplary case. n Such was the tension in the proceedings one could cut it with a knife when the Auditor General of Pakistan (AGP) started disclosing chapter and verse of how the SBP favoured BankIslami in allowing the merger of the defunct KASB Bank into it. n The PPP senior leader and MNA, Syed Naveed Qamar had already termed it as ‘a sweetheart deal’ and ‘the biggest scandal in the whole history of the central bank’, with the SBP giving away an entire bank for Rs1,000, and following it up with Rs20 billion. n The director general audit informed PAC that the central bank caused a loss of Rs3.5 billion to the exchequer by giving two loans totalling Rs20 billion at interest rates of 0.01% and 4.7%. “NAB has already declared the deal as non-transparent,” he said. n Almost yelling at SBP Deputy Governor Jameel Ahmad, Shah ask him to defend the deal. Ahmad emphasised that the SBP had not favoured BankIslami and the deal was in accordance with relevant laws. The SBP, he claimed, had also given similar concessionary loans to other banks. The fly in the ointment was that he but could not cite any case in support of his contention. n When Senator Sherry Rehman taunted the federal finance secretary Arif Ahmad Khan for keeping quiet, he endorsed the PAC chairman’s inviting “attention of the Supreme Court and NAB”, dubbing it as “sufficient to explain the whole issue”. n Former finance minister Ishaq Dar’s name was attached to the controversial deal for the first time. The deal was setup by Dar, said Sherry Rehman while asking the SBP deputy governor, “do not be more loyal to the king than the king”.

By Agha Akbar loan losses. So while provisioning puts a dent in a bank’s profitability, any reversals in subsequent quarters also help it grow back.

KASB Bank was heavily capitalised back in 2008. But NPLs rose in later years. This resulted in the bank recording substantial provisions for

those loans in 2011, 2012 and 2013, thus hurting its bottom line.

He said, with growing recovery of loans under way, the bank’s CAR was set to improve in a short span of time.

“In 2014, we posted a net profit of Rs1.4 billion. But the SBP didn’t let us hold the annual general meeting for share-

MERGERS & ACQUISITIONS

‘HAD THE VALUATION BEEN CONDUCTED ON THE BASIS OF MARK-TO-MARKET, A SYSTEM OF ASSESSING THE VALUE OF ASSETS BY THE MOST RECENT MARKET PRICE, THE NET WORTH OF THE BANK WOULD’VE BEEN TENS OF BILLIONS OF RUPEES’ holders’ approval. A profit of Rs1.1 billion came from recovery (of NPLs) only. It was the momentum of our recovery that BIPL has already got Rs5 billion in cash that the valuation had shown to be zero,” he said, adding that NPL recovery was expected to increase next year and get even bigger in the year after.

Chinese investors

B

ilgrami believes the emphasis should be on capitalisation rather than liquidity. Internationally, banks are put under moratoriums for three distinct reasons: lacking liquidity to pay depositors, corporate governance issues, and solvency i.e. the entity losing its capital. “Globally, more banks have been put under a moratorium due to a loss of capitalisation than the loss of liquidity,” he said.

But even if the bank’s lack of capitalisation was a pressing issue needing immediate resolution, the KASB source said, Chinese investors were willing to inject capital into the bank.

The Cybernaut Group of China had shown interest in investing $100 million in KASB Bank. But the then SBP governor reportedly refused to meet Dr Tom Zhang, senior partner of Cybernaut.

Cybernaut agreed to invest $20 million initially which, going by the number of shares on offer, came close to the market price of KASB Bank shares at the time. But the SBP did not allow Cybernaut to open an escrow account, which is a temporary pass-through account held by a third party during the process of a transaction between two parties. This stopped the Chinese investor from remitting $20 million.

“Chinese investors offering money would have solved the CAR issue. The embassy of China wrote letters. They lie when they claim that the embassy refused to support Chinese investors. That correspondence is part of the court petition,” the source said.

As for the bank’s statement released on the PSX denying the presence of any Chinese investors, he said the SBP forced the CEO to issue it as the bank was under the moratorium.

24

However, Bilgrami asserts that the Chinese equity investors could not even produce their business cards although they claimed to have $100 million. “The Chinese embassy refused to extend any help to those investors,” he insisted.

Special credit facility

A

n inquiry report prepared by the National Accountability Bureau (NAB) concluded that the credit line of a total of Rs20 billion that the SBP extended to BIPL at low interest rates showed that the acquirer was “not capable of managing the losses of KASB. So there was no point in merging (KASB Bank) with BIPL as other remedies were also available in the SBP Act and Banking Companies Ordinance,” it said, adding, that similar financial assistance could be given to KASB Bank by appointing an administrator and changing its board structure.

The ex-official of the SBP believes the original sponsors of the defunct bank had ceased to fulfil the central bank’s fit-and-proper criteria -- a set of requirements to ensure that untrustworthy people stay away from the decision-making process at commercial banks. “The central bank didn’t consider any scheme under which the original sponsors could retain control over the bank post-moratorium,” he said.

In response to the charge of availing cheap financing from the SBP to survive the bank run, Bilgrami said it was perfectly in line with the precedents set by different central banks all over the world.“In the United States, the Federal Reserve spent $247 billion to provide liquidity to the banking industry... In Canada, authorities pumped in $114 billion,” he said.

But referring to the liquidity crisis of 2008, the KASB source said about a dozen and a half banks took a credit facility from the SBP at the rate of 18 percent. “This is Pakistan, not America.

How could BIPL receive credit at 0.01 per cent?”

The fact that BIPL faced a bank run as soon as it opened the rechristened branches of KASB Bank proves

that BIPL lacked public trust, he added.

“Would there still be a run had a strong entity like HBL acquired KASB Bank?”

The KASB source also asserted that, contrary to Bilgrami’s claim, the run was actually of Rs23 billion, and not Rs27 billion. BIPL in its annual accounts for 2015 puts the number at Rs 24.9 billion.

He said KASB Bank would’ve absorbed the shock had the regulator let the sponsors be and allowed foreign investment from China in time. Cash and available-for-sale securities, like treasury bills and PIBs, alone amounted to over Rs30 billion, sufficient to survive the run, at the end of September 2014.

The last published quarterly accounts of KASB Bank showed it had cash and balances with treasury banks amounting to Rs4.8 billion. Separately, its investments listed under the available-for-sale securities were worth Rs25.5 billion. This means it had liquidity of more than Rs30.4 billion on September 30, 2014.

According to him, BIPL sold only those treasury bills and PIBs that were lying with KASB Bank to meet deposit withdrawals. “They didn’t spend a single rupee out of their own pockets.”

The NAB report also accuses the SBP of sabotaging the possible sale of KASB Bank to Samba Bank and MCB Bank right before the imposition of the moratorium. KASB Bank’s deferred tax asset of at least Rs4.8 billion could have provided substantial tax savings to a large profitable bank, like MCB Bank.

Yet the central bank ‘favoured’ BIPL, the NAB report concluded.

It called the appointment of PwC an ‘illegal act’ by the SBP. It also highlighted instances of insider trading and “backdoor takeover” of BIPL. The SBP maintains that it committed no wrongdoing and acted only in the interest of the depositors.

Shareholders of erstwhile KASB Bank have still not lost hope. The SHC order entails that the SBP should revisit the process to determine the bank’s valuation as per statutory requirements.

The central bank will have to compensate the shareholders in case the fresh valuation is higher than the previous one. If the fresh valuation is also unfavourable to them, the shareholders plan to knock at the door of the Supreme Court of Pakistan.

“No one has the right to arbitrarily determine the value of my property,” the KASB source said. n

MERGERS & ACQUISITIONS

SHOPKEEPERS’ SCAM ADDS FIZZ TO PROFITS Retail prices of Coke and Pepsi remain unnoticed while retailers overcharge consumers day in, day out by as much as 40 percent – making millions over the top, apparently unnoticed

A

By Aisha Arshad

journalist-turned–restaurateur, Abdul Wali Khan recently quizzed one, “Have you ever tried looking at the price label on the soft drink bottle or can?” The instinctive reaction was trying to locate the price mentioned on a 345ml soft drink bottle placed right in front of me: Rs24.36 + Rs4.14 it said – adding up to Rs28.5 for an unchilled and Rs30 for a chilled offering.

26

For someone who has been paying Rs40 – a good 40% more than the actual charge – assuming it to be the retail price, the label was indeed shocking. As the consumer inside one felt disappointed, the journalist wanted to get to the bottom of it. Out of sheer curiosity – and to some extent in the name of consumer rights – I decided to dig how in spite of the clearly mentioned price the consumers were being robbed blind.

The scale of ‘windfall’ can be measured from everyday sales in Karachi alone: around one million soft drinks!

When Profit made offhand inquiries in the city’s posh and less-posh areas – Clifton, Gulshan, Bahadurabad, North Nazimabad and some university campuses, along with as many restaurants as this correspondent could visit during the course of this article – everywhere the tab on the soft drinks and other chilled beverages was being inflated anywhere between Rs5 to Rs20 on top of the stipulated price.

“Once I inquired from my local vendor about the difference in the printed and selling price. With a sardonic smile, said he, “we have a right to charge extra because our refrigerators are mostly on generator due to electricity issues, making us incur an additional cost”, said Huda Khan, self-describing himself as ‘a Pepsi-guzzling resident of Askari-4’.

Khan’s university canteen also overcharges similarly, with the owner blatantly bringing cost of electricity into play, “since it’s cold, it ought to be expensive.”

Not unlike Khan, when this scribe spoke to a number of regular consumers of PepsiCo (Pakistan Beverages Limited) and Coca-Cola Pakistan – the two with the greatest overwhelming market share – all respondents belonging to various areas of the city confirmed overpricing.

We reached out to both PepsiCo and Coca-Cola Pakistan for their re-

sponse on the issue. While the PepsiCo refused to answer our queries, since June 19 last year despite repeated attempts, Coca-Cola’s response is still awaited.

Why are Cola companies keeping mum?

W

hy are the companies opting to remain quiet? Insider information suggests, the companies were well aware of the overpricing by the retailers.

However, the insiders suggest, since it does not negatively impact their business or brand reputation in public, they have a ‘hear-no-evil’ policy about it.

If the companies decide to enhance prices in keeping with retailers, it would entail an additional tax – possibly affecting sales. On the contrary the current overcharging – in which

‘INSIDER INFORMATION SUGGESTS, THE COMPANIES WERE WELL AWARE OF THE OVERPRICING BY THE RETAILERS. HOWEVER, THE INSIDERS SUGGEST, SINCE IT DOES NOT NEGATIVELY IMPACT THEIR BUSINESS OR BRAND REPUTATION IN PUBLIC, THEY HAVE A ‘HEAR-NO-EVIL’ POLICY ABOUT IT’

the companies have absolutely no hand – does not affect the beverage companies business or their relationship with the retailers.

What role companies can play?

A

bdul Wali Khan, owner of the Four Seasons Foods restaurant in Landhi that sells soft drinks on actual retail price said, “The companies may have a very strong impact if they simply publicise the correct price so that the people know.

Such campaigns could be complemented through printing the actual price on company vehicles, giving newspaper ads and communicating through many other postmodern modes of communication. The exploitation could end if the cola companies take steps with achieving that end in mind.

Whether the companies are quiet on overpricing out of expediency or are simply unaware of the exploitation of consumers, their policy of appeasement for the retailers continues to be extremely lucrative, with both PepsiCo and Coca-Cola Pakistan falling over each other in offering goodies every which way.

Firstly, there are discounted prices for retailers, then there various

CONSUMER RIGHTS

schemes throughout the year where the prices are further reduced to egg shopkeepers on, and if that is not enough both Cola majors offer rewards in case of meeting or surpassing sales benchmarks on a half-yearly basis.

In addition to the above mentioned advantages, which are never passed on to the consumer, the companies also encourage exclusivity contracts; shopkeepers who choose to sell only either one of the two companies products get further discounts and advantages on sales volume.

However, all this is still deemed insufficient for the retailers and restaurateurs who fix their own prices and the end customer seems unaware of the various under-the-table schemes and advantages companies are offering.

Most shopkeepers do not even bring these schemes into account while ranting over their right of charging higher than retail price to meet the refrigeration costs.

“We have so many taxes to pay, then there’s storage cost of cold drinks, maintenance costs etc. we simply adjust prices according to that,” Hareesh Kumar, a store owner in Clifton argued.

Kumar was perhaps having selective amnesia or he would have remembered that the cola companies also provide cold storage such as freezers and special refrigerators, fixing the machines in case of malfunction or picking the tab for maintenance – thus bringing down the cold storage costs to zilch.

Ironically, the margins on original prices are also meant to favour the shopkeepers. According to Wali, who sells beverages on the retail price set by the companies, the minimum profit on each bottle is Rs2 and even after taking out all costs and expenses the shopkeepers can make a decent profit.

“I have done a basic calculation.

If I sell minimum 50 soft drink bottles everyday – which is way too low of an average – I earn Rs100 daily,” said the

SIZE

PRICE FOR

RETAIL PRICE

RETAILERS

(By Company) (By Shopkeepers)

250 ml (glass) bottle

Rs18.5

Rs20

Rs30

250 ml can

Rs28

Rs30

Rs40 and above

300 ml can

Rs31

Rs35

Rs45 and above

345 ml bottle

Rs28

Rs30

Rs40 and above

500 ml bottle

Rs37.5

Rs40

Rs50 and above

Rs58

Rs60

Rs70 and above

Rs76.6

Rs80

Rs85 and above

Rs106.25

Rs110

Rs115

1 litre bottle 1.5 and 1.75 litre bottle 2.25 litre bottle

Source: PepsiCo (Pakistan Beverage Limited) Trade Price Letter

‘WHETHER THE COMPANIES ARE QUIET ON OVERPRICING OUT OF EXPEDIENCY OR ARE SIMPLY UNAWARE OF THE EXPLOITATION OF CONSUMERS, THEIR POLICY OF APPEASEMENT FOR THE RETAILERS CONTINUES TO BE EXTREMELY LUCRATIVE…’ restaurant owner. “Now if at the end of every day I keep Rs50 in my profit and Rs50 for the electricity cost of chiller, at the end of the month I am left with Rs1500 for the cost of chiller which hardly costs me Rs700 in bill actually, so you can see what profit I can earn if my sales are at a bare minimum,” said he.

If this calculation is taken in consideration, a shopkeeper on lowest sales volume may still make Rs2300 every month – without any schemes or promotional activity.

The irony magnifies further when

‘ALTHOUGH, A FEW CONSUMERS SEEMED UNBOTHERED BY THE FACT THAT IT’S MERE RS10 THAT THEY ARE BEING CHARGED EXTRA, MANY OF THEM SEEMED APPALLED WHEN THEY FIGURED OUT THAT THEIR CONSUMER RIGHTS WERE BEING EXPLOITED…’ 28

MARKET PRICE

shopkeepers, who completely keep this earning off the tax books use sales tax – which is already included in company’s printed price – as another justification to the increased prices.

Many shopkeepers unhesitatingly use the sales tax as some hidden pricing to satisfy customers inquiries and uninformed customers consider it a legitimate factor in overpricing of the soft drink.

“I noticed the price printed on a Pakola bottle once and I thought the shopkeeper charged extra because of sales tax or some other tax,” said Saniya Aijaz, resident of Gulshan-e-Iqbal, Karachi.

We requested Aijaz, who buys Pakola (a product of Pakistan Beverage Limited) quite regularly to recheck the price next time she buys a bottle and then figure out the sales tax.

A day later, Aijaz said, “The 500ml bottle is for Rs40 including sales tax and now I realize how I have been paying extra all this time.”

Aijaz is one of those many consumers who unknowingly contribute to the undocumented economy with every bottle of soft drink they buy.

Although, a few consumers seemed unbothered by the fact that it’s mere Rs10 that they are being charged extra, many of them seemed appalled when they figured out that their consumer rights were being exploited but also as many as Rs10 million are going unaccounted for daily in the city and a much larger sum never makes it to tax records as shopkeepers while filing their income in tax records are only accountable for the prices printed on the label – the rest disappearing in pockets deep and wide. n

CONSUMER RIGHTS

HOW RANGERS AIDED ADVANS BANK DOUBLE ITS SIZE IN ONE YEAR

As peace returns to Karachi, losses spread over half a dozen years are now consigned to the past

A

By Kazim Alam

t times, the real measure of dividends of peace can be hard to quantify.

But for Advans Pakistan, one of the 11 microfinance banks with a licence to operate in Sindh, the recent improvement in Karachi’s law and order situation has had a direct bearing on its cash flows – and profitability.

After accruing losses and bleeding capital since its incorporation in 2012, for the last year and a half, Advans Pakistan has been on a three-digit growth spree.

It’s finally going to achieve breakeven this year, thanks to the ongoing paramilitary-led operation in Karachi that improved the overall security situation and to a large extent eliminated extortion rackets.

“There were a lot of security issues in 2013, 2014 and 2015. Lots of strikes.

Operating in Karachi was not that easy.

So during this period, our growth was not that big, as we were based exclusively in Karachi. We had expats, so we couldn’t even go into the field,” bank

30

‘THE AMOUNT OF TOTAL OUTSTANDING MICROFINANCE LOANS IS JUST NORTH OF RS200 BILLION IN PAKISTAN. AND JUST 15 PERCENT OF MORE THAN 200 MILLION PAKISTANIS HAVE ACCESS TO FORMAL BANKING AND FINANCIAL SERVICES’ CEO Zine El Abidine Otmani told Profit in a recent interview.

Microfinance banks aren’t required to release their financial accounts publicly. However, the Pakistan Microfinance Network (PMN), which is a representative body of microfinance providers, publishes key performance indicators on a quarterly basis.

Incorporated with a paid-up capital of Rs1.2 billion, the bank currently has 10 branches in Sindh with an outstanding loan portfolio of Rs700 million and a deposit base of Rs500 million.

But an overwhelming part of these assets and deposits came into being post-2017.

The bank had only Rs200 million of deposits in 2015. It ended the next year with Rs220 million. But by the end of 2017, it had collected Rs500 million of deposits, depicting more than 100

per cent growth in a single year.

Aggressive growth phase

“W

e’re in a more aggressive phase of growth now,” Otmani said in a thick accent revealing his Middle Eastern roots.

Advans Pakistan is looking to more than double the size of its loan book in the remaining months of 2018 – expecting to touch Rs1.5 billion in terms of outstanding loans by December.

Given that it already added Rs200 million in the first quarter to its portfolio after closing 2017 with Rs500 million, Otmani believes he expects to even surpass the 200 per cent annual target for 2018.

On the liability side, he expects deposits to hit Rs800 million by the

end of this year, reflecting a target of 60 per cent growth in nine months.

“Starting from mid-2015, I think Karachi started witnessing an improvement in the security environment. We need to thank the people who worked for it because it’s a real achievement. We restructured the bank in 2016. It was the year when we prepared for the growth phase, which came in 2017,” he added.

Raising capital

N

‘STARTING FROM MID-2015...

KARACHI STARTED WITNESSING AN IMPROVEMENT IN THE SECURITY ENVIRONMENT... A REAL ACHIEVEMENT. WE RESTRUCTURED THE BANK IN 2016.

IT WAS THE YEAR WHEN WE PREPARED FOR THE GROWTH PHASE, WHICH CAME IN 2017.’A

ow that the tide is turning in favour of Advans Bank, Otmani plans to go for a national licence. But upgrading the license requires capital, which Advans Pakistan lacks at the moment.

The regulator demands that a microfinance bank operating nationally should have more than Rs1 billion in paid-up capital. But heavy losses for more than four years have eaten into the bank’s capitalisation, which has come down by half to Rs600 million.

In other words, the bank needs to raise money amounting to Rs500-700 million to be able to expand nationally.

“Our current shareholders are willing to invest more. It doesn’t mean we won’t like to bring in more investors.

Probably, we will. But I can say that at this stage our shareholders are willing to put in more money as the market potential here is huge,” Otmani said.

The strategy of Advans SA SICAR – a Paris-based venture capital investment company that owns 75 per cent shares in Advans Pakistan – is not to create new affiliates for the next three years while strengthening the existing ones across the world. The rest of shareholding in Advans Pakistan lies with the Netherlands’ Development Finance

Zine El Abidine Otmani, CEO, Advans Bank

Company (FMO).

“Our shareholders know that we’re going to call for capital. Our Nigerian affiliate is also calling for capital. Two to three big affiliates with big potential need an inflow of capital. But I think they’ll prioritise us,” Otmani said, adding that the sponsors of the bank consider Pakistan among the most attractive markets for microfinance players.

High markup

T

he amount of total outstanding microfinance loans is just north of Rs200 billion in Pakistan. And just 15 percent of more than 200 million Pakistanis have access to formal banking and financial services.

‘INCORPORATED WITH A PAID-UP CAPITAL OF RS1.2 BILLION, THE BANK CURRENTLY HAS 10 BRANCHES IN SINDH WITH AN OUTSTANDING LOAN PORTFOLIO OF RS700 MILLION AND A DEPOSIT BASE OF RS500 MILLION. BUT AN OVERWHELMING PART OF THESE ASSETS AND DEPOSITS CAME INTO BEING POST-2017’

Microfinance players insist that their products and services can play a major role in ending poverty – an assertion that many development economists don’t agree with. Microfinance lenders are known for charging exorbitantly high markup rates – sometimes up to four times the rate that conventional banks usually charge their customers with a sound credit history.

The average lending rate that Advans Bank charges its 8,000 borrowers is in the range of 30-35 percent, Otmani said. In contrast, the benchmark interbank rate that conventional banks charge for lending each other shortterm loans is less than 7 per cent.

Otmani blames high interest rates charged by the microfinance industry on its cost of doing business. “Our clients don’t come to our branches to do transactions. Our staff goes out to meet clients, which costs a lot,” he said.

Moreover, the source of funds also plays a key role in determining the markup rate that a microfinance bank charges its borrowers. It can raise cash through either shareholders in the form of equity (which Advans Pakistan

MICROFINANCE

is already doing) or mobilising deposits.

But the problem with deposits is two-fold: one, they take time to build, and two, they’re expensive.

More than one-third of the customer deposits in conventional banks were non-remunerative at the end of 2017. This means a substantial amount of cash was available with conventional banks at no cost at all to give to borrowers. This is unlike microfinance banks though. “The share of interest-free deposits in our total deposits is 20-25 per cent. A majority of people deposit money in savings account,” Otmani said of his 16,000 depositors who receive an average profit of 8.5 per cent annually on their deposits.

Another source of long-term funds for a microfinance bank is institutional lenders, such as conventional banks or development finance institutions, like Pakistan Microfinance Investment Company (PMIC) that was created to help microfinance providers meet their liquidity needs.

“We approached the PMIC (for a loan) and are now in the due diligence phase. We want to raise funds amounting to probably Rs300 million,” Otmani said, noting that the funds will be borrowed for three to five years at an annual interest rate of approximately 10 per cent for onward lending.

This will be a debt and won’t count towards paid-up capital that the bank is trying to raise. Although PMIC has been actively trying to inject capital in different microfinance banks

to gain an equity stake and a seat on their boards, Otmani believed his bank would like to maintain the lender-borrower relationship with the investment company.

“I am not sure if PMIC having equity stakes in different microfinance banks and enjoying access to their strategies at the same time is a good idea,” he said.

Modus operandi

L

ocal microfinance banks extend a major part of their loans under the individual and group lending methodologies. In the last quarter of 2017, for example, about 64 per cent of the industry’s gross loan portfolio was in the individual category.

Group lending, which involves a microfinance bank loaning money to a number of individuals against a collective repayment pledge, had a share of almost 30 per cent in the industry’s gross loan portfolio.

These two kinds of lending are relatively easy for microfinance banks because they use either collateral or peer pressure to ensure timely recovery of loans.

But there’s a third category of lending, which is not too common in Pakistan. Lending under the micro and small enterprises (SME) category had a share of only 6 per cent in the country’s gross loan portfolio at the end of 2017.

It involves lending to small businesses, such as kiryana stores and roadside chapatti makers. This seg-

Swamped with heinous crime, security issues and terrorism of all hues, Karachi was cleaned up with a thorough and relentless Rangers operation since mid-2015 that has infused a new life in the City of Lights

32

‘WE DON’T HAVE COLLATERAL. OUR COLLATERAL IS THE ANALYSIS OF BUSINESS. I ALWAYS SAY TO MY TEAM: THERE ARE NO GOOD OR BAD CLIENTS. THERE ARE ONLY GOOD OR BAD LOANS’ Zine El Abidine Otmani, CEO, Advans Bank ment of borrowers elicits little interest from most microfinance banks for a variety of reasons, particularly the absence of formal records and books.

Advans Pakistan is focusing on the MSE segment. It doesn’t demand collateral and solely relies on a cash flow-based analysis of small businesses to determine their credit worthiness.

“We go to the businesses that don’t generally have books. We take all their bills, all in and out avenues of cash and stocks, and start building their cash flows, their income statement, their balance sheet. This takes time. And the client is not paying us for that,” Otmani said, noting that the bank gets nothing out of the whole exercise if the client refuses to borrow at the end.

Borrowers in the MSE category tend to have a bigger ticket size: the industry-wide average loan size in the individual and group lending categories was approximately Rs52,000 and Rs42,000 at the end of 2017, according to PMN data. But the same figure for the MSE category was Rs178,000, three to four times higher than the other two categories.

The average loan size of Advans Pakistan is Rs150,000 with a recovery rate of 98 per cent, which is in line with the industry average.

Otmani said the key to his bank’s recent success is the right appraisal of potential businesses to identify the right kind of borrower.

“We don’t have collateral. Our collateral is the analysis of business.

I always say to my team: there’re no good or bad clients. There’re only good or bad loans.” n

MICROFINANCE

WHY SHOULD IMPROVE ITS MODELS, IF PEOPLE CONTINUE TO PATRONISE

?

Hirofumi Nagao, former Suzuki CEO having served the last of his third stint in Pakistan, fires a shot across the bow for new entrants: ‘Talk is cheap, in practice competing is difficult’

S

By Agha Akbar

ince handing over the helm to the new man in charge for the past one year or thereabouts, former CEO of Suzuki Pakistan Limited, Hirofumi Nagao’s task for almost a year as the senior advisory director has been to ensure a smooth transition.

Apparently, the new CEO has by now familiarised himself with the lay of the land enough for Nagao to wrap up from here and head back to Japan.

Before leaving our shores at the end of April 2018, Nagao stopped over in Lahore as part of his valedictory tour, saying his goodbyes to the company apparatchik across the country – covering well in excess of 3,000 kilometres on the wheels, in one go.

Clad in a shalwar-kameez and

36

waistcoat (he finds the indigenous dress “convenient, less stiff” – hence, it is the travel dress of choice, not just for him but other Japanese colleagues of his as well) a palpably-exhausted Nagao sat down for this little tete-a-tete with Profit. The extent of Nagao’s influence on Suzuki’s staying the market leader in terms of volume and lording the small segment, can be measured from the fact that out of the company’s Pakistan operations spread over nearly 40 years, he has served it for about half – 20 years in in three separate stints, twice as CEO – with the last 10 since 2008 in one go.

Apparently a down-to-earth and self-effacing man of impeccable courtesy that you expect from a Japanese, he shares: “Suzuki started its operations in Pakistan in Oct 1979.

I was posted at Karachi for nearly four

years, from 1983 to 1987. Barely seven years later I was back at Karachi for six years – between 1994 to 2000 – as the managing director of Pak Suzuki.

For this latest term lasting almost a full decade, in 2008, I was transferred from India to Pakistan as managing director of Pak Suzuki again. Then in July 2017, the position was transferred to Masafumi Harano. After that, I am acting as an adviser in Pak Suzuki.”

Politically correct

C

all it making politically correct noises, or gratitude at Suzuki staying on top of the auto totem pole, Nagao sounded genuinely grateful to Pakistani people. “I appreciate and thank the Pakistani citizens.

They have loved Suzuki products for more than three decades. Amazingly in these three decades, Suzuki has

achieved the highest market sales continuously. So, I really appreciate the Pakistani people... We Japanese have always had good relations with the Pakistani people, going back to since Pakistan's independence in 1947.”

As for his own future, “I am nearing 65 – a good age to retire. I have spent 20 years in Karachi, and, I feel, it has become my first hometown. I would back at the end of this month, but even from Japan I would remain concerned about Pak Suzuki’s growth.”

Would there be a policy shift under the new CEO, Masafumi Harano, in investment approach and strategy?

Nagao insists the change at the top in Suzuki Pakistan does not herald any change in policy, or at least he was not going to divulge it – leaving it to Harano to make it public. Instead, he diverted the conversation to how Harano was best-suited to the job.

“Having joined Suzuki Motors in 1988, he’s younger to me by 10 years. I have been in-charge of either Pakistan or India – or both. In case of Harano, he used to be in the United States or Canada. Immediately prior to his being nominated as the Managing Director of Pak Suzuki, he used to be the general manager for Thailand and Indonesia.

We have chosen some better models for Pakistan from Indonesia and Thailand, and also from Japan. So, it’s a good call on the part of Suzuki’s top management to nominate Harano as managing director in Pakistan because we would be importing parts from Indonesia for our new offerings and from Thailand for the new Cultus. He has been in charge of both countries recently,” said Nagao.

On the growth trajectory

P

akistan’s automobile industry is said to be set for growth and expansion like never before.

Nagao concurs with that projec-

Hirofumi Nagao, former CEO, Suzuki Pakistan Limited tion: “I feel the growth of automobile industry is supported by higher growth of the country and economy. Automobile demand in this country is definitely growing. We have achieved almost 20 percent growth. Compared to other parts of the world this percentage is quite high.”

‘OF THE HALF A DOZEN MODELS PRODUCED BY SUZUKI – MEHRAN, WAGON R, CULTUS, SWIFT BEING THE FOUR PASSENGER CARS, RAVI THE PICKUP, AND BOLAN THE VAN – THE HIGHEST PERCENTAGE OF LOCALISATION ACHIEVED HAS BEEN FOR MEHRAN, WHICH IS AROUND 73 PERCENT, FOLLOWED BY 65 PERCENT FOR RAVI PICKUP AND BOLAN VAN, AND 50 PERCENT FOR WAGON R’

Has CPEC contributed towards this phenomenal growth? “Lots of investment from China is coming into Pakistan, which is very good. The government too is working on building highways and motorways – which again is good for the automobile industry. Also, through CPEC quite a few power generation units have started to operate. I was told that by the end of 2018, load-shedding all over the country will be over, which is also not just good for the [auto] industry but the entire economy.”

What is the volume of fresh investment that Suzuki intends to bring into Pakistan? “Our present production capacity is 150,000 units per year.

Last year we achieved sales of 132,000 units. The demand is on the rise. In a couple of years, the demand would

AUTO

surpass our capacity. In such a situation, we have two options. One is to enhance the capacity of the current plants, while, the second is to build new plants. We have already opted for the latter and acquired 80 acres of land for the second plant. In such a case, the amount spent on the construction of the new plant will be in the shape of fresh investment from Suzuki Japan.”

This would obviously add to employment. “In Suzuki, around 3,000 or so direct jobs, but it will increase the number of vendors by about 10 times.

Currently we a are dealing with 110 vendors in Pakistan.

The indigenous contribution

O

f the half a dozen models produced by Suzuki – Mehran, Wagon R, Cultus, Swift being the four passenger cars, Ravi the pickup, and Bolan the van – the highest percentage of localisation achieved has been for Mehran, which is around 73 percent, followed by 65 percent for Ravi pickup and Bolan van, and 50 percent for Wagon R. “We are still trying to enhance further localisation.”

Mehran has survived in the Pakistani market for well over a quarter century. Given that it is such a basic automobile, does the longevity surprise him? “Since the car was designed in the 1980s, so we could achieve the highest localisation. Nowadays, whenever we introduce a new model, it is rather difficult to localise it. Even same parts which have been localised for 800cc models are not easy to localise for other models. We tried to bring Japanese vendors, but the problem is that the total automobile demand is hardly 200,000 units. Most Japanese vendors are reluctant to come to Pakistan owing to lower volumes. We expect that the total volume demand of Pakistani market will reach 500,000 in a couple of years. Then many of the Japanese vendors will reconsider com-

‘IF WE CAN PRODUCE [A MODEL] FOR LONGER PERIODS, THEN IT IS POSSIBLE TO REDUCE OUR COSTS. WHENEVER, WE INTRODUCE A NEW MODEL, NEW INVESTMENT IS NECESSARY. BUT WHENEVER WE INTRODUCE A NEW MODEL, COST IS HIGHER, BECAUSE IT IS DIFFICULT TO GET SIMILAR LOCALISATION FOR NEWER MODELS COMPARED TO THE CURRENT ONES.’ Hirofumi Nagao, former CEO, Suzuki Pakistan Limited ing to Pakistan.”

All said, Mehran remains at best a very basic car, and surviving for so long in the market, does it surprise him? Nagao has different yardsticks to go by. “In my opinion, as a manufacturer, it’s our duty to continue producing the same model, whenever there is demand. You can see that in the local food industry they have been producing some items for long periods, such as in ice creams. That’s the same thing.

If we can produce [a model] for longer periods, then it is possible to reduce our costs. Whenever we introduce a new model, new investment is necessary. But whenever we introduce a new model, the cost is higher, because it is difficult to get similar localisation for newer models compared to the current ones.”

‘LOTS OF INVESTMENT FROM CHINA IS COMING INTO PAKISTAN, WHICH IS VERY GOOD. THE GOVERNMENT TOO IS WORKING ON BUILDING HIGHWAYS AND MOTORWAYS – WHICH AGAIN IS GOOD FOR THE AUTOMOBILE INDUSTRY’ 38

But greater competition is just around the corner, and it is good news for the Pakistani consumers for it would offer new choices and perhaps competitive pricing. “Yes, that’s great.

Currently, we are monopolising the 1000 cc passenger car category but now new players are joining the fray.”

After the protection afforded to Suzuki and the other two leading Japanese brands for long years, how does Nagao see the change coming now, with so many automobile manufacturers coming in? “We should provide a better product, at an affordable price.

This is our goal. Talk is cheap but in practice, competing is difficult. We have an advantage of vendors, around 110 of them and 140 dealers. It will take some time for the new entrants to have a similar setup.”

In other words, Nagao is confident that Suzuki shall continue ruling the roost in its area of strength – mall to medium-sized hatchbacks.

Nagao refused to disclose the new models up for offer “right now”, but his parting shot across the bow was: “It is not easy to introduce new models so frequently.” n

AUTO

FOR THE AVERAGE JOE,

WHERE TO INVEST IS THE QUESTION Should one dabble into stocks, venture into the real estate or stay with the good old banks for a next-to-nothing yield?

40

By Arshad Hussain

T

he weatherbeaten Memon men with diminishing reflexes but still razor-sharp savvy where a fast buck is to be made have for long been regular visitors to the Karachi Stock Exchange – since rechristened as the Pakistan Stock Exchange. Since their adolescent days, they have beaten a path from the nearby Kharadar and Mithadar to the Exchange door every morning, spending the workday there looking for shares to buy and offload by the closing – their margins with meagre amounts of investment yielding around Rs2,000-3,000, on a good day.

Memon and Chinioti communities have had the PSX under their radar since it was established in the wake of Independence in 1947. Some of them have made considerably huge fortunes from here – Aqeel Karim Dhedhi, Arif Habib, Jahangir Siddiqui, Haji Majeed and Azeem Bilwani and a host of others being cases in point. With the stock market the avenue of choice for striking it big, they have now diversified into real estate and other industries.

And for a young buck cutting his teeth on the trade, they remain the iconic figures.

These days regardless of one’s vocation – be it business, a job, minding one’s shop or peddling stuff as a vendor – everyone wants to supplement the regular income with a bit extra. The opportunities are not limitless: stocks and mutual funds, banks and insurance or the real estate.

Owing to the government regulators being a rather indifferent watchdog, leaving their investment at the mercy of unscrupulous characters at the Exchange, or the cumbersome and lengthy paperwork, procedures and taxes involved scare them away.

Limited knowledge-base is also an

‘IF YOU HAVE A SIZABLE CHUNK OF MONEY, THE REAL ESTATE GIVES A PRETTY HANDSOME PROFIT – A MINIMUM OF 15 TO 20 PERCENT YEAR AFTER YEAR. AND IF ONE HAS A WINDFALL, THE RETURN ON INVESTMENT COULD EVEN BE HIGHER – WAY HIGHER’ impediment: Most of them would not know what mutual funds are, or how to get in to the share market and survive in the proverbial pit or trading from the outside on the phone.

Stocks, lack of knowledge and trust

A

ccording to this scribes investigations spread over the last two weeks, almost everyone is searching for a place to invest their hard earned money, but most of them don’t know where they should invest. Those, who know where to put their money, ironically do not trust the system.

Behind this lack of trust again is many an investor having been burnt periodically, with the lack of accountability allowing big stock brokers to manipulate the market with impunity – and the regulators (the Securities and Exchange Commission of Pakistan and the then Karachi Stock Exchange management) interceding but only feebly.

The PSX has seen two crashes in the last 10 years, three in the last 17 – in 2008 and 2017, with the one at the advent of the millennium – with the middle one wiping Rs1.4 trillion off the market capitalisation, the dip from Rs2.881 million on Aug 8 to Rs.1.578 trillion on Jan 24, 2009 when the market started the process of recovery. So bad was the situation that the floor remained in place for as long as 108 days.

While a very large segment of the investors took the hit, neither the stock

‘BEHIND THIS LACK OF TRUST AGAIN IS MANY AN INVESTOR HAVING BEEN BURNT PERIODICALLY, WITH THE LACK OF ACCOUNTABILITY ALLOWING BIG STOCK BROKERS TO MANIPULATE THE MARKET WITH IMPUNITY – AND THE REGULATORS (THE SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN AND THE THEN KARACHI STOCK EXCHANGE MANAGEMENT) INTERCEDING BUT ONLY FEEBLY’

brokers nor the mutual funds making any tangible losses. If anything, despite the steep fall, they made windfall profits. Though their equity may have been way insignificant compared to the big sharks, the small investors took such a pasting, many of them never mustered enough dough or courage to trudge their way back to the market again.

Decrease in number of investors

P

rior to signing a sell-off of 40 percent with a Chinese consortium in 2017, the same big fish stock brokers created the feelgood factor by jacking up equity prices, taking the market to 53,143 points. It was too good to last. And just after the deal was signed, the balloon busted and the PSX market came crashing down to 41,000 points level in 2017.

Nobody asked why the market went up and why it came down. Above 200 brokers got their share in the divestment of PSX, while billions of rupees of small investors were wiped out.

Similarly, a case of misappropriation was also unearthed in February 2017, when Federal Investigation Agency (FIA) arrested a Zafar Moti Securities frontman, in which more than Rs1.5 billion of public’s money was embezzled. The FIR was lodged by FIA Crime Branch in Karachi. The said case is still pending before the court, with the main accused still at large. According to the FIA reports, only Rs40 million could be recovered from the bank accounts of the Zafar Moti frontman, while the major portion remains unaccounted for.

Such opaque practices meant that the number of PSX investors decreased by more than a quarter, 28 percent to be precise, between Dec 2012 to Dec 2017 – falling from 314,667 to 244,114.

“Our investment is not safe in the PSX as few stock brokers are playing in the market with their huge funds,” said a small investor, who happened to be a banker.

Owing to this reverse in 2017, after

PERSONAL FINANCE

four profitable years – 49.4 percent in 2013, 27.2 in 2014, 2.2 percent 2015, 45.6 per cent in 2016, the investors were again stung again with a negative growth of -15.3.

Mutual Fund, the best avenue for the newbies

E

veryone knows that investing in the stock market has historically paid off, but there are many who either neither have the nous nor the knowhow and time to be direct investors.

“The mutual funds are the best thing for newcomers who want to invest into the stocks as direct investment is a little dangerous for the new investors,” said the former managing director of PSX Nadeem Naqvi. In essence, the mutual funds are managed from the collective amounts from small investors and this money is put into the big businesses to earn huge profits.

The mutual funds have their own team of market experts, analysts, and brokers, who work day in, day out on finding ways to optimise the earnings from the investment under their watch and after a given period proportionately share the spoils with the investors – after deducting costs and a chunk of the profit.

Some investors have complaints such as the profit ratio being low etc. but generally speaking, mutual funds are a pretty decent outlet.

The assets under management of mutual funds have increased from Rs490 billion in June 30, 2016 to Rs622.35 billion in June 30, 2017.

During the year, 40 new open-ended mutual funds were launched.

Due to low interest rates substantial outflow was witnessed in the income category, with majority of it being shifted towards the equity and asset allocation categories during

‘THE MUTUAL FUNDS HAVE THEIR OWN TEAM OF MARKET EXPERTS, ANALYSTS, AND BROKERS, WHO WORK DAY IN, DAY OUT ON FINDING WAYS TO OPTIMISE THE EARNINGS FROM THE INVESTMENT UNDER THEIR WATCH AND AFTER A GIVEN PERIOD PROPORTIONATELY SHARE THE SPOILS WITH THE INVESTORS...’ fiscal 2017.

The equity fund category (both conventional and Shariah compliant) constituted of Rs270.69 billion, up 37 percent from the last year followed by income fund category at Rs101.46 billion down (20 percent) and money market category at Rs77.88 billion, up 40 percent from the previous year.

Around 51,000 individual investor accounts were added during the year.

In percentage terms, the holdings of individuals in open-end mutual funds in term of AUMs now stands at 40 percent versus 34 percent last year. Over the last year, the Money Market Fund category (both Conventional and Shariah Compliant) increased by 40 percent, followed by Equity Fund category by 37 percent, while Income Fund category declined by 20 percent.

Real Estate, lucrative countrywide

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f you have a sizable chunk of money, the real estate gives a pretty handsome profit – a minimum of 15 to 20 percent year after year. And if one has a windfall, the return on investment could even be higher – way higher.

In terms of investment that makes it lucrative enough – ahead of the stocks and mutual funds. The only drawback, other than sizable amount involved, is that the investment remains tied up in its entirety between buying and selling the property.

While in terms of return on invest-

‘ANOTHER INVESTMENT OPTION IS SAVING ACCOUNTS OR CERTIFICATES OF NATIONAL SAVINGS OR VARIOUS BANKS. ITS A NO-RISK INVESTMENT, BUT THE YIELD IS LOW – BETWEEN 4 TO 6 PERCENT. IF WE CALCULATE AN AVERAGE OF THE LAST FIVE YEARS, IT HAS REMAINED AROUND 5.50 PERCENT TO 6 PERCENT’ 42

ment 15 to 20 percent is more or less a countrywide phenomenon, but in Karachi off late there has been an upsurge in investment in construction of up to six floors, excluding shops and parking floors etc.

And there are plenty of ways to invest in real estate if you are connected. Such as, a clutch of investors buy a vacant piece of land, constructing flats over it, and then divest it for a sizable return.

Then a bunch of investors can also get together to manage properties and pay a dividend or interest off on that money. This has been an attractive way to invest money without having to be a landlord or dealing with tenants. The same process is being used in Pakistan.

A man, if he has a decent permanent job, he can purchase a flat or a shop on installments and pay off a small amount to the builders and developers.

Banks, National Savings – Safe, but low-yield

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nother investment option is saving accounts or certificates of National Savings or various banks. Its a no-risk investment, but the yield is low – between 4 to 6 percent. If we calculate an average of the last five years, it has remained around 5.50 percent to 6 percent. A point to note is that banks pay interest only on few accounts, and none on current and salary accounts.

The procedure to deposit in the banking system is very easy. By the end Dec 2017, there were around 40 million account holders nationwide, with overall deposits around Rs11 trillion.

Post the imposition of 6 percent ‘Withholding Tax’ on withdrawal of above Rs50,000 by a non-filer, to avoid the tax, most businessmen resorted to bypass the banking system, dealing in cash or high denomination prize bonds. n

PERSONAL FINANCE