Banks and non-bank financial institutions (NBFIs) have witnessed around 50 cases of merger and acquisition (M&As), involving more than 150 financial institutions since 2000. Besides eight of the 30 M&A transactions, involving commercial banks, have been executed in 2006 alone, mainly due to the State Bank reforms process.
According to the central bank, subsequent increases in the minimum paid-up capital requirements for banks/NBFIs, restructuring of public sector financial institutions and corresponding changes in the business strategies of the various categories of financial institutions are the main drivers of ongoing M&As in the financial sector.
The Financial Stability Review 2006 revealed that the State Bank of Pakistan (SBP) had taken some measures to facilitate the M&As. The SBP gradually raised the minimum paid-up capital requirements (MCR) from Rs 500 million to Rs 750 million from January 1, 2002; rupees one billion from January 1, 2003; Rs 1.5 billion from December 31, 2004; and rupees two billion from December 31, 2005.
Under the existing roadmap for increase in capital requirements, the banks/DFIs are required to raise their paid-up capital to rupees six billion by December 31, 2009. In addition, the SBP facilitated the M&A transactions by incorporating the necessary amendments to Section 48 of Banking Companies Ordinance 1962, allowing the merger of NBFCs with banks and simplifying the process for merger of foreign banking companies.
The SBP proposed changes in the Income Tax Ordinance, 2001, including reduction in the tax rate for banking companies from 58 percent to 35 percent and tax incentives to facilitate mergers of financial institutions, through addition of a new Section 57-A, which allows carry forward of tax losses of both the amalgamated (target) and amalgamating (surviving) institutions.
The SBP processed most of the mergers and acquisition transactions on a fast track basis to facilitate the market players, while ensuring compliance with the relevant legal and regulatory requirements.
During the 2006 calendar year, some eight mergers, including that of Atlas Investment Bank with Atlas Bank Limited Group consolidation, have been made.
Other notable cases included the merger of Rupali Bank with Arif Habib Rupali Bank Limited due to appetite for commercial banking and the merger of First Allied Modarba Limited with Allied Bank Limited on group consolidation grounds during the last year.
During 2006, Standard Chartered Bank (Pakistan) Limited purchased majority shares of Union Bank ahead of inorganic growth and merger of Habib AG Zurich Pakistan's operation with Habib Metropolitan Bank took place as of business strategy.
American Express Bank merged with Jahangir Siddiqui Investment Bank Limited and converted into JS Bank Limited due to a change in business strategy. The final merger was carried out by Investment Corporation of Pakistan with Industrial Development Bank of Pakistan due to restructuring process in 2006.
The SBP said that M&A transactions in the banking sector were likely to remain in the limelight for the next couple of years as scheduled banks were required to increase their MCR to rupees six billion by the end of December 2009, as compared to an MCR of rupees three billion by the end of December, 2006.
Unprecedented profitability of the banking sector is likely to attract more foreign banks to increase their stakes in the country. Specifically, the after tax profits of commercial banks reached Rs 84.1 billion (1.4 billion dollars).
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