NIB in the spotlight

Rumor has it that Industrial and Commercial Bank of China (ICBC), one of the largest banks in the world, is eyeing expansion in Pakistan. What is fueling the markets belief? The governments of both Pakistan and China have recently shown intent to strengthen bilateral trade. Speculators suggest that the Chinese bank will not squander an opportunity to increase its footprint in the domestic banking industry. With international trade being the likely forte for ICBC in Pakistan and given that the bank has a wide international presence, along with strong reputation; the Chinese banks expansion in Pakistan would raise an air of tough competition in the local banking industry. Speculators are singling out NIB Bank Ltd as a potential acquisition for ICBC in Pakistan. This begs question that what factors have compelled the market to assume that ICBC could add NIB to its acquisition cart? First and foremost, the news reported by an international agency that Temasek- a Singapore state investor- is considering off loading its investments in NIB. Secondly, the banks wide branch network, given that the bank is operating through a network of 179 branches and is the eight largest mid-sized bank in the country by asset size. NIBs share price touched a year low of Rs1.25 on December 2, 2011; falling by 57 percent since the start of the year. However, following news reports regarding NIBs potential suitor, the market lifted NIBs share price to as high as 1.73 at the end of December, 2011. But opponents of this idea speculate that ICBC would not acquire a mid-size bank, given that the likely intention of the bank is to capitalize on trade business which could be facilitated through a network of fewer domestic branches. A sizeable expansion could be on cards only if ICBC looks beyond trade facilitation and aims to cater to the lucrative domestic commercial and corporate banking market. Moreover, the market should not overlook that another key factor that might throw a wrench in the works is the high price tag. At the current price to book value multiple of 1.1X, acquisition of NIB sounds a bit steep since the industrys average (sample of 21 banks) P/BV is hovering around 0.80. Savvy acquirer will also take into account the impact of a huge pile of non-performing loans on NIBs books. The banks equity stood close to Rs16 billion as of September 30, 2011, but after adjusting unprovided toxic loans, the banks P/BV stands above 4X. Besides, any acquisition in the banking industry will be benchmarked to Faysal-RBS deal, which took place at 0.57 times the book value. Last but not the least, for ICBC, there are a number of other banks on efficient curve for sale, who are finding it difficult to meet minimum paid up capital requirement, with relatively better asset quality and gross spread ratio. Let the buyer beware.