Over the past few years, RBS Pakistan has lost its value like an excessively exposed showbiz girl. Net assets of RBS Pakistan eroded by $26 million in the last year alone - giving Faysal Bank an opportunity to strike a deal at a discount of $37 million to what was offered by MCB.
Aside from the deteriorating quality of assets owing to economic slowdown and absence of shrewd guardians, drain of good human capital, lack of buyers for the desperate sale and firsthand knowledge of RBSs premium operations of Faysals CEO helped FABL to strike this low-priced deal.
Faysals president Naveed Khan who was previously the head of RBS (ABN-Amro at the time) might know the to-be-acquired entity more than Mansha and others. This helped him in the second round of negotiations to strike a deal at 0.57 times the book value.
Global recession and the decision to wind up business in Pakistan by the parent RBS turns out to be good for Pakistan as far as this deal is concerned.
In 2007, ABN-Amro bought Prime Bank for $227 million and in three years time, even with around 40 percent depreciation of rupee against the greenback, the money going out of the country for the merged entity will be a mere $50 million.
For Faysal Bank it is even more exciting; buying RBS at 43 percent discount to book value might yield FABL Rs3.3 billion in the profit and loss account. This will have a positive post-tax one-off impact of Rs3.6 per share for the acquirer.
In order to finance this Rs4.3 billion transaction, the bank might use part of its cash reserves (Rs8.3 bn) and may offload some of its investments in the equity market as it had Rs4.8 billion in ordinary shares, mutual funds and modarabas (by the end of March 2010) classified as available for sale of securities. Mind you, Faysal bank had been a major seller in last months stock market correction.
However, sources close to FABL have revealed that the bank might raise financing through subordinated debt, in order to maintain its capital adequacy ratio.
Acquisition of a decent multinational corporate and an excellent consumer portfolio, including credit cards of ABN-Amro, may bode well for the acquirer in the face of tough economic conditions that currently provide little room for organic growth.
This is because Faysals corporate portfolio is mostly local and does not have credit card business at all. Moreover, FABLs commercial loans are concentrated in the retail segment, whereas Prime Banks commercial traders portfolio, previously acquired by ABN-AMRO, would give a niche to the acquirer.
Faysals management is considered to have a higher risk appetite compared to its peers with higher concentration in non-core banking businesses, including investment banking and corporate finance.
Nearly 36 percent of FABLs operating revenues came from other income in 2009; much higher than the big banks. Despite its higher concentration in other businesses, the banks advance-to-deposit ratio was at 85 percent as against 66 percent of the industry, as of last available accounts.
With this deal, Faysal, while maintaining its other operations, won just be able to enhance its corporate and consumer portfolio, but will also increase its size considerably. FABLs deposits size will increase by Rs65 billion (59%) and branches will increase by 79 to 212 to become the ninth largest bank, by deposits size, in Pakistan.
The only hitch is that without any ownership in the real sense owing to the delay in selling the bank, good human capital has been drained from RBS, which might have plagued their systems.
While this might give some trouble to FABL, finding good human capital, at a time when large banks are wooing retired people, will not be a big issue for Faysal Bank that has historically been a good paymaster.