Faysal eyeing further expansion - An interview with Naved A. Khan, President & CEO, Faysal Bank Limited

Naved A. Khan has his hands full; and from the look of things, he is set to have a busy schedule in the coming years. Talking to BR Research, Khan shares his plans to continue shopping for medium and small banks, while investing in technology to streamline his existing business and to expand his market presence. The following are edited transcripts.
BR Research: The only bank on sale for the past year is now with you; does this mean you are done shopping? Naved Khan: I've not stopped yet; we are looking for more banks to buy or to merge with. My vision is clear, I want to scale up and I am hungry to do business. I am committed to Pakistan, and I believe that 180 million people are not going into the sea.
We can have bad politicians, a poor economy, horrible governance but all of it has to eventually evolve into a stronger structure. I have very strong principals who believe in Pakistan. And at Faysal Bank, we believe that there is tremendous opportunity to do business in this market.
BRR: But merging with a mid-sized could be a painful proposition?
NK: No, it all depends on how the equation works. Mergers are based on book value or discounted cash flows. For market values there is no benchmark in the market. So you go towards discounted cash flows, based on your estimate of potential earnings. I've done it twice before and I know how it can be managed properly.
BRR: When do you plan to get back in M&A action?
NK: I will look for more partners once I have stabilized. I am scoping right now and my troops are going through battle fatigue so let them settle down and we'll be up and running again very soon. I am not interested in carrying a very small entity; it doesn't make sense to me. So it has to be in the mid tier.
BRR: Are you looking to become a top 5 bank in the near future?
NK: I don't know if top five would be my target. I'll need to eat up a lot of mid sized banks before I can get to that level.
I think I would like to be on the top end of the medium size banks. And that is a goal that I can achieve, because I am not very far from it. I'm standing at about Rs270 billion in assets, so that puts me fairly close.
Considering that we've now got RBS, our scale changes. From being in the 12th or 13th position, we are now moving into the top ten. And within that range, we are a wafer away from 7 to 10, because the difference is not much. If I start playing my balance sheet, I can outstrip all of them.
But my strategy is to be profitable. In the last two years, we have been working towards stabilizing our core business and reduce dependence on equity capital markets as a source of earning.
BRR: Are you looking for an Islamic bank?
BR: I can. But my situation is that I will have 40 Islamic branches after the merger and I am not closing any branches. I will either relocate branches or convert them into Islamic ones. As long as I can find the market appetite, I will convert branches.
BRR: How were you able to negotiate such a good price for RBS?
NK: I think we dissected the portfolio really well. I still remember when I went into negotiations and my people started to present, I saw a lot of jaws drop. And I asked them to refute any numbers if they disagree. I had a very good understanding of the portfolio; I had built that bank.
I knew they wanted to exit the market and were debating who would be willing and able to buy it. They knew I had the capacity to close the deal and I think that is what made it happen.
BRR: What were the things you were looking for in RBS?
NK: Retail was definitely a focal point. If I was to setup cards and scale it up, it would have taken me two years. Now we get a portfolio of 150,000 cards. So that's an instant plug.
Then I get ADCs (alternate delivery channels) which are far more established than mine. FABL has a 25-30 seat call centre; RBS has much larger infrastructure. Thirdly I think best practices can be gained and system capacity will be greatly enhanced.
We will also benefit from technology platforms that they are running, though some of which are the same at FABL. I am also trying to consolidate the number of systems RBS was using. They were using way too many, and making things unnecessarily complex.
Lastly, we are also looking at inducting the high skilled human capital that RBS has to offer. Most of those that left RBS came to Faysal, so the flight of human capital pre-sale isn't a problem for me. I have lost people, but none that are regrettable. As far as I am concerned, those people paid for their jobs.
BR: Being a foreign bank many multinationals had accounts with RBS, would they like to work with Faysal as well?
NK: The foreign entities that wanted to exit did that about two years ago when RBS announced that it wanted to sell its operations here.
There are customers who have stayed and have chosen to work with me. We have a great relationship with them. I don't see any entities exiting the business right now.
BR: There were some off balance sheet derivative items in RBS; how are you handling them?
NK: All derivative transactions are hedged back to back and the risk is completely mitigated. So the question you might want to ask is, are you going to do it again? And the answer is, absolutely!
We are building capacity at the moment. The systems are in place and that to me is the product of my future, by the way.
BRR: What projects and new businesses are you working on?
NK: In the past two years, I have been a heavy investor in technology. This bank, when I took over in 2008, had just moved to a new platform. It had a core system but there were many chokes in it. So we started to fix that and incorporated peripheral systems with it.
Now, we are working on a Customer Relationship Management system that will automate all of our front end customer touch points. On top of that, we are now developing a platform for derivatives. In addition to all of that we are trying to create an outreach programme of branchless banking. We are in the phase of testing right now; hopefully next year sometime, we will go live with it.
With a client base of over 290,000 and with RBS adding with another over 150,000 we are looking at a healthy outreach and alternate distribution channels.
The areas that we were looking at, as far as FABL is concerned, was that we wanted to come into the cards business, branchless banking and deepening alternate distribution channels. So with the acquisition of RBS, we've got cards and a fairly large consumer portfolio. As a result, we've got a complete suite of products from high end investment banking to retail focussed products.
With a consolidated view, we should have 220 branches, whereas our target is 250. And we should have a fairly large size of Islamic Banking as well. The vision is to have about 40 Islamic branches, operating independently.
BR: What do you plan to do with the investment banking business?
NK: We have reached a stage such that there is no transaction in Pakistan to which FABL does not get invited to.
We have rescaled ourselves in the last two years. Deploying resources and creating value is what I think of innovation. We were able to buy RBS without raising equity from our sponsors.
Right now, I don't have the time to integrate my asset management with wealth management. I have a fairly large opportunity when I combine RBS's preferred banking and my Solitaire. For now, I don't have the time to do that, but it's definitely on my radar for the next year.
BANKING & ECONOMY
BRR: What's your view on small banks?
NK: If you are not among the top ten, then you are marginalized. I don't think the industry is going to let the small banks survive. So it is going to go into consolidation. It has been part of the strategy for the banking sector for the last ten years.
BRR: What if small banks can't find partners?
NK: Then they must become regional banks and specialize. The problem is that many of the sponsors' egos are too large to accept that their banks will operate in a regional spectrum. Many of them now are looking to merge with others but can't find partners. There is a realization that scale is very important but not very much is being witnessed on ground.
At the same time, you have to break the monopoly of the larger banks -- that itself is the next challenge for the central bank. History tells us that super banks are not healthy.
BRR: What is the problem with having super banks?
NK: Competition is not efficient because banks are divided into blocks. The large banks elbow out the medium sized ones. Efficiency has to come from a more vertical distribution of business and that I think is where the regulator is having a challenge to plug that gap.
We've made the paradigm shift from public sector to private, but what have we done. We still have those large banks and they distort the equation of the banking sector. Everybody talks about high spreads, but it is only in those big five banks.
BRR: What's your view on agricultural banking or banking in the rural economy?
NK: For me to open up a branch in rural areas means that my costs - of connectivity, of technology and of running operations - will be phenomenally high. At what level of deposit can I break even, so it will be a drag. Therefore, we have to find ways to create financial inclusion which are cost efficient and that's where I feel the next set of reforms will be.
BRR: How do think we can boost agri financing?
NK: You see we still have not been able to get rid of the 'arthi' - the middle man -- who continues to be the biggest supplier of funds to farmers. He is also the biggest hoarder. Sadly, we have not been able to fully establish the commodities exchange and haven't been able to integrate it to agriculture. As a result, you don't have warehousing, and in turn warehousing documents are not negotiable instruments. Hence, you need to vertically integrate; futures can play a key role here. You also need to eliminate the middleman - who doesn't want to work with a bank - by setting up warehouses.
BRR: You were chairman of the banking association when MCR was raised. What role did you play?
NK: It was the tail end of when I was chairing it. You know, there are two things where the central bank doesn't consult the market; one is monetary policy and the other is capital adequacy. These are dictated down.
At the time, we reacted against it. But the governor's thinking was very simple. Banks had excess liquidity so they could shore up their positions to become more resilient to absorb shocks. It was a smart strategy at the time and I think it has worked fairly well.
I think it has changed for the right reasons and the Rs10 billion cap is fine. Very low capital requirements bring in very small players that create inefficiency in the system.
BR: Do you think CAR is a better measure of capital adequacy than MCR?
NK: There's no question about it. CAR is better. But there are many other problems that need to be addressed as well. SBP used to allow lower capital requirements for rated entities. When we improved our capital adequacy by encouraging ratings; the central bank said that unless the rating is public, we will not get the benefit. So, consistency in policy is very important.
BR: What is your sense of where NPLs are going in the upcoming months?
NK: If interest rates continue to rise, your NPLs are going to grow. They are absolutely correlated. And it is a case of default not by desire but by circumstances. The other thing is that the energy crisis stokes the NPLs. And neither of those things seems to be nearing resolution, so NPLs are going to rise.
BR: What is your view of the future direction of interest rates?
NK: I think they are going to go up. If inflation persists, which seems likely, it will negatively affect your economy. Moreover, without energy, growth in the economy is nearly impossible.
Naved A. Khan has over twenty-four years of work experience, particularly in Corporate and Investment banking. Former CEO, ABN AMRO Bank, and an MBA holder from the Butler University, USA, Khan had also been associated with senior management positions at the Bank of America, Pakistan, and had been the President of Pakistan Banks Association.
He holds key posts at the Institute of Bankers, Pakistan, ECH Task Force, State Bank of Pakistan, and the Overseas Investor's Chambers of Commerce and Industry (OICCI).