The listing of MCB Bank's Global Depository Receipts (GDRs) at the London Stock Exchange yesterday, makes it the first ever entry of a Pakistani entity in the prestigious bourse. Earlier, the GDR offering had received an enormous response, with the demand exceeding 700 million dollars from over 50 investors globally.
However, the bank preferred to raise only 150 million dollars through the issue of GDRs, each of which was priced at $17.40, equivalent to Rs 1056 underlying four equity shares (Rs 264 per share). The GDR was effectively priced at a 0.5 percent premium to 10-day VWAP and a 2.98 percent discount to last sale.
The information provided during pre-marketing talks and road show have prompted a wave of buying by overseas investors of MCB shares and also the shares of other Pakistani banks listed at the Karachi Stock Exchange with spillover into the oil sector companies as well.
While locally-traded stocks tend to come under pressure when a company issues overseas listed GDRs or ADRs, MCB's price actually surged 20 percent from the beginning of pre-marketing in mid-September to October 10 Book closure and by 50 percent since the GDR issue was first announced in June.
At the final price, the bank is valued at 4.6 times its forward book value, which puts it at a premium against all other banks in Asia, except India's well-entrenched HDFC. Such a high valuation is a well deserved testimonial to the bank's management ably guided by its Chairman, Mian Muhammad Mansha.
MCB was the first nationalised bank to be privatised. Having the lowest level of non-performing loans among the big-five (NCBs), it was the natural choice for attracting the private sector.
Sold to a consortium of 12 leading industrial houses during the premiership of Nawaz Sharif, it became the target of a probe with the change of government. But the bank's the then president, Hussain Lawai successfully shielded the institution due to the influence he carried within the government of Benazir Bhutto.
Soon after her dismissal, Lawai went into exile and Mian Mansha - a textile tycoon - became the first non-banker president, besides occupying the office of chairman. He brought about a change in the top management to accelerate the growth of the institution.
The staff strength was reduced from 15000 to 9000 to trim costs and investment was made in technology, while maintaining strong growth in the loan book. MCB boasts a return on equity above 40 percent, compared with an average of 15 to 20 percent for Asian banks; it has the lowest NPL among its peers at 4.2 percent, and 93 percent of its deposit base comprises low-cost savings or current accounts, enabling the bank to maintain a high net interest margin of seven percent, well above the Asian average of two to three percent.
After the increase of 150 million dollars in the share capital of the bank, its Capital Adequacy Ratio (CAR) will rise to 16 percent. However, after Basle II requirements are fulfilled and operational risk is taken into account, the CAR would come down to 14.5 percent which would still be very healthy.
Nonetheless, no holder will be able to convert GDRs into equity shares if such conversion would result in the holder beneficially owning five percent or more of MCB's shares. In such a situation, prior approval of the State Bank would be required. Now MCB has joined a prestigious group of thirty overseas banks listed at the London Exchange.
We are sure that the 60 odd one-to-one and group meetings held during the road shows provided an opportunity for familiarising a wide group of emerging market funds with the Pakistani economy, its banking scene besides MCB's own merits. Pakistan's economy is very much internally driven and is one of the least geared to global growth and can act as a hedge against a negative development in OECD markets.
Banking sector consumer loan stock at only 3.9 percent of GDP (despite a surge in the last few years), is still less than half of India. The acquisition of Union Bank in August by UK headquartered Standard Chartered Bank having very strong presence in Asia must have also instilled confidence in MCB among potential investors, especially, when SCB paid 5.6 times the value for a Pakistani banking entity, whose assets are only one tenth of MCB.
Despite all the above positives, one needs to appreciate that it was still not an easy sell. MCB Bank is an entity based in a country which is more in the news for terrorism than having one of the best performing stock markets in Asia for the last two years offering untapped scope for pension money wanting to be channelised.
Overseas investors in this country have earned an average return of 25 percent or more on their investment consistently for decades despite the political turmoil and law and order problems. But it is so sad that due to our geo-political situation, we are lumped by the media with Afghanistan and not with China and India for investment opportunities. It is crucial that we encash the investment momentum generated due to MCB's GDR listing by quickly awarding a mandate to sell government stakes in other banks.
Prioritisation and spacing the GDR offers from Pakistan is equally important. But above all more important is awarding a mandate to the right institution. OGDC, GDR's were originally planned for April/June this year. We would be lucky if the listing can be done before the end of the year. MCB Bank and Merrill Lynch have shown how it is done the right way.
A comparison of the GDR process followed by the Privatisation Commission with the MCB-GDR floatation approved by the State Bank of Pakistan and SECP is in order to make GDRs' of NBP, UBL and Habib Bank floatation timely with fine pricing. Ministry of Finance should be entrusted with the task.
While eulogising the MCB-GDR listing it is also important to note that successful launching of GDRs by a certain enterprise also depends on the state of the economy of the country, in particular its solvency or ability to honour its foreign obligations in future. Seen from this perspective, the buyers of GDRs issued by the MCB must have calculated that the present and the future governments of the country will continue to follow the principles of sound economic management and would not mishandle the economy as in the past.
Keeping this in view, it becomes doubly important for the authorities in Pakistan to overcome the emerging weaknesses in key areas of the economy and keep their house in order. Failing this, the long-term expectations attached to such initiatives would not materialise.
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