Chinese Interest in Pakistan's Banking Sector

Chinese interest in Pakistani banks
Syed Fazl-e-Haider: The Statesman, Peshawar, June 21, 2007

The Industrial and Commercial Bank of China (ICBC), the world’s second-largest bank, is looking to start operations in Pakistan.

It is exploring the possibility of establishing its presence in Pakistan to provide financial support to Chinese companies investing in the South Asian country and other development partners engaged in infrastructure development and financial business.

The National Bank of Pakistan (NBP) and the ICBC have agreed to cooperate in the banking and financial sectors in both countries. A declaration calling for exploring the possibilities for mutual cooperation between the two entities was signed last Friday by the chairman of the ICBC board, Jiang Jianqing, who led a seven-member ICBC delegation.

The ICBC intends to explore the possibility of establishing its branches and acquiring Pakistani banks to provide financial services.

According to Jiang, Pakistan’s sustained economic growth of 7% has prompted the ICBC to establish an economic link by opening branches in the country. He said that if Pakistan maintains its economic growth momentum, it will become an economic powerhouse in the region, attracting substantial foreign investment. He said he appreciated the reforms introduced by the Pakistani government and held separate meetings with the presidents of NBP and Habib Bank Ltd (HBL) and discussed ways to expand cooperation.

The financial sector has significantly contributed to the overall growth of the Pakistani economy and led to the country’s improved international credit rating. The recent successful launching of Pakistan’s sovereign bond is seen as a manifestation of investors’ confidence in Pakistan’s policies. NBP, HBL, Muslim Commercial Bank and Allied Bank of Pakistan have shown high growth in recent years. It is expected that consumer lending will continue to gather momentum as more banks focus their energies on gaining a share of the market, which is largely unpenetrated.

With 311.8 billion yuan (US$41 billion) in assets, the ICBC is the second-largest bank in the world and growing at 30% per annum. It specialises in infrastructure finance, corporate banking, personal banking, cash management, asset management, Internet banking and international banking. It is also a leader in financial services and product innovation based on advanced information technology, corporate governance and risk management.

It has a large network of 18,000 branches in China and around the world. It is a leading financial player in China with a large customer base and multi-dimensional business structure. In October 2005, the ICBC was officially transformed from a state-owned commercial bank into a shareholding company and renamed as the Industrial and Commercial Bank of China Ltd. The new entity has a registered capital of 248 billion yuan and 248 billion shares.

Pakistan and China already enjoy strong economic and trade relations under their free-trade agreement. Pakistan, under an institutionalised arrangement of the Pakistan-China Joint Economic Forum, is in the process of identifying infrastructure projects, including the development of hydropower and large dams. Similarly, Pakistan has established a joint investment company with China Development Bank to support Chinese firms that are establishing joint ventures with Pakistani companies and the large number of infrastructure projects in the country.

The ICBC can explore the possibility of investing in the Pakistan-China Special Economic Zone, where most Chinese companies would set up their businesses for contract manufacturing to market their products in West Asia. The ICBC’s operations in Pakistan will act as a bridge between the two countries as the two countries strive to benefit from the expertise of Chinese and Pakistani banks.

Pakistan is tipped by foreign investment bankers as a potential hotbed of equity issuance activity because of its high economic growth and the government’s aggressive privatisation policy. The $129 billion Pakistan economy is expected to expand 8% annually over the next five years. Foreign portfolio investment in the local bourses has also shown an upward trend, signifying an increasing foreign interest in the country’s capital markets. Foreign portfolio investment, as represented by the Special Convertible Rupee Account, showed a net inflow of $104 million in January alone; an inflow of $23 million was recorded on just one day - January 31. Interest exhibited by foreign companies in buying stakes in Pakistani companies has also been well received by the market through the country’s privatisation programme.

China’s banking sector is moving toward diversification. The sector has introduced various service delivery models, and a range of product and service offerings are available for retail and corporate customers. For the past five years, economic growth in Asian markets has been driven by strong consumer demographics, political and market reforms and economies of scale in production. The Asian markets are likely to provide the greatest opportunities for global financial-services companies looking for future growth. This trend is likely to continue in the Chinese market after the opening of its banking sector in accordance with World Trade Organisation requirements. It presents both domestic and financial institutions with challenges and opportunities.

As in other Asian markets, financial globalisation in Pakistan has led to increased liquidity and lowered the cost of capital, thus leading to better allocation of financial resources and more productive investments. It has also spurred competition and led to a new age of financial-sector development by improving screening of credit risks, monitoring of borrower activities, diversification of financial portfolios and substantially increasing the outreach to customers. Foreign financial institutions have also brought about improvements in the system by bringing in highly diversified financial tools and best practices from more developed economies. Pakistan’s banking-sector boom has attracted considerable interest at foreign banks.

The share of foreign banks has reached 11.4% of total banking-sector assets in Pakistan. Foreign banks’ share in profitability is about 11% of total banking-sector profits. According to Jeroen Drost, chief executive officer of ABN Amro Asia, Pakistan is a key growth market for his firm.

Pakistan has assured that it will provide all possible support and facilities to Chinese banks in the country. Prime Minister Shaukat Aziz on Friday told the ICBC that a big menu of financial services is available in Pakistan.

He said the government believes in providing a level playing field for all entrants to the market to promote healthy competition and provide consumers with the best and most affordable services.

Pakistan’s financial sector is attracting heavy foreign investment and is among the top three sectors with respect to foreign inflows. They are: telecommunications, $1.2 billion; financial business, $572.8 million; and oil and gas exploration, $352.7 million during July-February in fiscal year 2007. The government intends to play the role of regulator and facilitator in the financial sector, sustaining the momentum of reforms so far achieved through the maintenance of a growth-enabling environment.

The existing foreign banks have by and large enhanced their presence and stake along with new foreign banks that have entered the Pakistani market for the first time. For example, Standard Chartered Bank has acquired Union Bank, ABN Amro has acquired Prime Bank, and Temasek of Singapore has established NIB Bank. ABN Amro’s acquisition of Prime Bank made it the second-largest foreign bank in Pakistan.

There are other transactions in the pipeline and they reflect the robustness and profitability of Pakistan’s banking sector. The government is planning to sell its 45% stake, worth up to $300 million, in United Bank Ltd (UBL) through a global share sale, and it has invited six investment banks to pitch for the deal. Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan and Merrill Lynch are all bidding for the $200 million to $300 million global depository receipt sale. The deal is expected to be completed by the end of this month.

Foreign banks are rapidly expanding their networks in Pakistan by opening new branches and acquiring small and medium-sized banks, especially ones that are financially weak.