The sight of RBS is good for Faysals sore eyes

The sight of RBS is good for Faysals sore eyes
Unlike MCB, Faysal Banks purchase of RBS Pakistans operations will make much more banking sense. MCB could have spun around RBS operations in due course of time by capitalizing on its fairly cheap bid. But regulatory impediments came in their way. So, thats history now.
However, owing to the risky off-balance sheet items to the tune of Rs40 billion in RBS Pakistan being hedged with its parent company, RBS UK would prefer a strong institution to buy its local operations.
Thats one of the reasons, why the seller preferred MCB Bank over JS Bank, earlier. Hence, if any other big lender, like Allied Bank makes a competitive bid, it may be preferred. But then, since ABLs sponsors have close relations with MCBs, such a deal may invite some objections from the regulator once again.
Lets keep the discussion confined Faysal Bank. Although, Faysal Bank (FABL) may not be able to strike a similar deal as valuations of the banks have changed, acquiring a decent multinational corporate and excellent consumer portfolio including credit cards of ABN-AMRO may bode well for the intended acquirer in the face of tough economic conditions, which provide little room for organic growth.
This is because Faysal corporate portfolio is mostly local and it does not have credit card business at all. Moreover, FABLs commercial loans are concentrated in retail segment whereas Prime Banks commercial traders portfolio previously acquired by ABN-AMRO would give a niche to the acquirer.
Without any ownership in the real sense, owing to the delay in selling the bank, good human capital might have drained from RBS and could have plagued their systems. This, coupled with RBSs urge to pack up soon from Pakistan gives Faysal Bank an opportunity to price the deal in its favour.
But lets not speculate on pricing; Faysals management is considered to have a bigger risk appetite compared to their peers with higher concentration in non-core banking businesses, including investment banking and corporate finance.
Nearly thirty eight percent of FABLs operating revenues came from other income; versus an average of 24 percent for other big five banks as of September. Despite its higher concentration in other businesses, the banks advance-to-deposit ratio was at 92 percent versus 70 percent for the industry as of last available accounts.
In contrast, Bank Alfalah, which has a similar sort of other income concentration in operating revenues, has an ADR as low as 64 percent.
However, high risk translates into greater volatility in earnings for Faysal. Its return-on-equity, which was as lofty as 43 percent (industry average: 26%) in 2005 reduced to mere 11 percent (industry 7.8%) in difficult times. Nonetheless, the bank still managed to offer decent return to its shareholders.
If the Faysal-RBS deal materializes, the bank while maintaining its other operations won just be able to enhance its corporate and consumer portfolio, but can also enhance its size considerably. FABLs deposits size might increase by Rs73 billion (67%) and branches will increase by 78 to 211 to become the ninth largest bank in Pakistan.
This will also rationalize its ADR from existing 92 percent to 87 percent, but RBS Pakistans higher NPL ratio comes with the package. The merged entitys gross infection ratio will increase by 309 bps to 12.4 percent from Faysal Banks stand alone operations.
Overall, the merger-to-be can potentially create synergies with some real economic benefits, unlike the previously planned ill-fated MCB-RBS deal. Faysal Bank might not be able to buy RBS at 0.7 times the book value, but the price is likely to be below the book value of the acquired entity.
And it seems that investors at the Karachi Stock Exchange have the same opinion. KSE investors, who didn show any love for MCB shares even when it struck a fairly cheap deal, pushed Faysals stock price to upper limits on the day it disclosed its intention to buy RBS.