Home-ownership must for better democracy - An interview with Syed Ali Raza, President & Chairman, National Bank of Pakistan

In this interview, Ali Raza highlights the need to develop bond markets while lamenting the lost years of financial innovation in Pakistan. Talking about the financing structure in Pakistan, Raza stresses on public-private partnerships to raise finances for projects and also to execute the projects. The following is the edited transcripts.
BR Research: Please walk us through your outlook of the banking sector?
Ali Raza: The health of the banking system is related to the state of industries and economy. So, if a country is not doing well, banks don't do well.
Global economic crises, high interest rates in the local economy, law and order situation -- all of these pressures had led to increases in non-performing loans. Now, though the absolute number is still increasing, I would imagine we are past the peak in NPLs.
Two years on from the economic crisis, the banking sector has done remarkably well in the light of these stresses. Banks' numbers are looking good this year compared to the last.
There will be more consolidation in the market. Small banks have realized that their stock prices have gone down quite substantially. Some sponsors are not willing to put in more finances. We are already hearing about a few deals but that momentum will probably pick up.
Scale is becoming a critical prerequisite for success in the banking sector.
BRR: What kind of synergies or business niche can small banks offer in any M&A story?
AR: Banks that want to compete need a sizeable balance sheet and delivery capability in the form of branches. A bank that has less than Rs100-120 billion in assets and has less than 250-300 branches just cannot compete. So, for small banks to compete they have to increase their asset size.
In Pakistan, we do not have small banks that are specialized in niche businesses. There are other sectors currently in Pakistan where specialized banks can make their niches.
Take Agriculture and SME for example. ZTBL is a bank that exclusively finances the agricultural sector. Agriculture being the back-bone of Pakistan's economy and presenting the greatest growth potential. Yet, for the past few years it has been in a very difficult financial position.
BRR: Is NBP interested in buying a small bank?
AR: We looked at all the smaller financial institutions and we arrived at the conclusion that acquiring a small bank does not add value to our shareholders. We already have 1250 branches. So if we buy a bank that has 80 branches -- mostly in the same places as ours -- where is the synergy?
We are almost a trillion rupee bank and to buy a Rs60 billion bank (which is 6 percent of our size) doesn't make sense when you factor in the incremental earnings from a shareholder's point of view.
Secondly, you have to take on a fair amount of staff, which you then have to restructure through golden handshakes and retrenchment, which is not a very pleasant thing to do. Plus, there isn't any lucrative small bank with specialised or attractive business niche in the market.
BRR: Your opinion on financing structure in Pakistan?
AR: A major risk to our economy is that our businesses are overly dependent on banks. Raising of capital in Pakistan is highly restricted. A classic example of that is how the dichotomy in the financial services sector is manifested. From 2004-08 Pakistan was regarded as the best performing stock market in Asia.
In a scenario where the stock market was skyrocketing, new companies should have been going public in droves in that era. But, during that time, there were only 6 IPOs and 12 de-listings.
Back in the late 1950-60s Pakistan was a hub for financial innovation in Asia. Countries that are power houses now sought working relationships with Pakistan. But over time, that innovation has withered away.
In other countries, diversified sources of capital are available to companies. Bank financing, corporate bonds and private equity are just some of the avenues. That makes them somewhat insulated to interest rate shocks.
BRR: Capital markets are then the answer?
AR: Yes, until there is depth in the capital markets, there will never be sizeable project financing activity in Pakistan.
Banks' appetite for long term loans is low because our deposit base is of a rather short term nature. By capital markets I don't just mean the stock markets but other avenues as well, that need to be activated.
BRR: Are capital markets then the panacea for infrastructural financing?
AR: Improving and developing infrastructure like highways, ports, desalination plants, mining -- are multi-billion dollar projects and the model for financing is a marriage of public private partnerships and the capital markets. The role of the banking system comes into play only in the first 3-4 years. Even if they partake, their lending is for the shorter term.
I headed the Middle East and Africa division of Bank of America in the mid to late 90s, when a lot of infrastructure development was taking place in the region. All of these projects were financed on this model. Capital markets were not developed enough in the Middle East at the time, so capital markets in London were involved. Of course, all of these countries have higher credit ratings and lower political risk.
Pakistan has high political risk and a lower credit rating. Yet, we need all of these things and we need to figure out ways to get them; the central bank, the finance ministry and large private banks ought to brainstorm.
BRR: So Pakistan's capital market is not highly developed, the DFIs are dying, and it's difficult to raise financing from global capital markets; does the onus lie with commercial banks, or multilateral agencies?
AR: Commercial banks have a very important role to play in the development of the economy. That is very different from saying that the highest priority of a bank's management is working for the shareholders.
Recently, NBP took a lead in arranging finances for Fauji-Akbar terminal, which is a public private partnership. We have taken both equity and a stake on the debt side of the project. When the cash flows start flowing in, the project will go for an IPO, and that will be our exit on the equity side. This is the only PPP project in the last 12 months.
Looking towards multilaterals is futile, because their focus has now shifted towards the social sector. They will give money towards literacy, education and reforms, but not towards building factories.
BRR: There is a proposal for an infrastructure bank making the rounds. What is your take on it?
AR: I think much more needs to be done, not just in infrastructure financing but also mortgage refinancing. Unless we encourage home ownership, we will remain a stake-less society. Someone who doesn't own a house doesn't have a stake in where they are living.
One of the reasons countries in the West were able to take off as industrial economies was that right from the 30s and 40s they had started providing products for home financing.
Mortgage Finance Corporation is essential; consumers need to be able to fix their rate. With a fixed mortgage, the consumer will know what the expected rate is going to be for a number of years. At the end of the day the micro economy is connected to macroeconomics. And until, we resolve issues at the macro level, pressures will still remain.
BRR: Do you think NBP should be privatized?
AR: Privatized? If by privatization you mean that the NBP should be handed over to an anchor investor such as the other banks, I would argue that the model we are following right now is working just as well.
We are performing as well as the private banks, despite all the pressures. In our model, the government is reducing its shareholding through the stock market. Our board is a combination of government and private shareholders. I think it's a good model.
BRR: Technology enhanced banking services have started emerging. What is the NBP doing about this?
AR: We are upgrading our technology platform. We are about 8-10 months away from achieving the technological platforms already acquired by our competitors. But the amount we are investing and the technology we are bringing in, is probably the single biggest differentiator. In fact, I am taking charge of this project myself.
BRR: In the last eighteen months, banks have parked their funds in government securities, what's your take on private sector crowding out?
AR: Banks respond to credit demand. If the private sector is shying away from taking on more credit, there is not much that banks can do about it.
If the need from the private sector picks up, which it should, bank will facilitate as they are intermediaries. The demand for credit will go if there is macroeconomic stability. If the differential between lending to corporate and sovereign is at least 3-4 percent then banks will move back. Currently it stands at 1.5 percent so they would rather put their money and take less risk.
Profile: Syed Ali Raza
A seasoned banker with more than 30 years of banking experience, Raza has been the Chairman and President of National Bank of Pakistan since July, 2000. Prior to joining the NBP, Raza had held several senior positions including Regional Manager, Pakistan, Middle East and North Africa at the Bank of America (BOA).
He also holds directorship of many domestic and international organizations like Hub Power, Pakistan Refinery, National Investment Trust (NIT), National Academy of Performing Arts (NAPA), Institute of Business Administration, Karachi, Higher Education Commission, and the Task Force on Remittances.
In recognition of his outstanding and meritorious services in the banking sector of Pakistan, Raza has been honoured with a number of prestigious awards and accolades by different fora. He was awarded 'The Asian Banker Leadership Achievement Award 2007' by Asian Banker in its issue of June 2007.