BankIslamis potential acquisition of Citibank N.A. Pakistans mortgage and auto loan portfolio can help the bank deploy its dormant deposits to more lucrative earning assets. And if the deals go through, it can potentially add roads to Islamic consumer banking in Pakistan amid global recognition of Islamic mode of financing as an alternative to conventional leveraging in the new financial era.
BIPL has shown its interest in buying Citis auto loans with an estimated worth of Rs 2.3 billion, which is currently in due diligence stage, in addition to Citis already scrutinised mortgage portfolio, worth nearly Rs 1.3 billion. These deals can increase the banks advance-to-deposits ratio (ADR) from a meager 41 percent to 64 percent.
Although, that would still be lower than the banking industry average of 77 percent, it will at least be at par with the Islamic banking average of 66 percent. Citibanks motive is to rationalise its Pakistani operations in line with its global strategy and has already started squeezing its size in Pakistan - with plans to reduce its branch network from 23 to 17 while also scaling down its consumer and SME banking businesses.
For BIPL, this sounds like a great opportunity to grab Citis old portfolio at the time of dearth in private sector credit off-take, especially in the consumer segment. Besides, it is in accordance with its expansionary plans as evident by its rising number of branches which rose by 66 to 102 in 2008.
At the end of March 2009, BIPL had kept 25 percent of its assets in cash and balances with other banks against the industry average of 10 percent. If the bank re-positions its assets to the tune of Rs 3.6 billion, assuming that it buys Citis portfolios at par, it will still be adequately liquid (9% to total assets). This can help the bank capitalise on premium pricing of consumer portfolio.
However, on the flip side, this could also add risk to BIPLs assets considering the infectious nature of consumer portfolio. Although, all those risks should be priced in the deal; even if its not, BIPL has enough space to cushion itself against any inherited delinquency as its non-performing loans (NPLs) are at mere 2.7 percents of gross advances versus industrys NPLs of 7.3 percent.
Banks total exposure to consumer portfolio was Rs 1.1 billion (17% of total advances) as of March end and the proposed acquisition can increase that number to Rs 4.8 billion (47% of total advances). Nonetheless, excess liquidity in the system, which must have increased BIPLs deposit base, can be converted to relatively easily available corporate loans that might reduce its exposure to consumer segment.
Interestingly, the deal will be one of a kind, with the conversion of conventional portfolio into Islamic - the only precedent being that of Meezan Banks acquisition of Societe Generales Pakistani operations at the time of its inception. If this acquisition is successfully completed, it will open doors for more conversion of conventional assets into Islamic, which has grown by heaps and bounds to hold 4.8 percent of banking assets as against mere 0.3 percent at the end of 2003.
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