United Bank is only the third Pakistani company to be sold internationally through global depositary receipts (GDRs) since the market made a comeback late last year following almost 12 years with no new issuance. The market was re-opened in October 2006 by a $150 million offering from privately-owned MCB Bank with the government following suit a couple of months later with an $813 million sell-down in Oil and Gas Development (OGDC).
Both deals attracted significant interest and has helped boost the governmentÆs confidence with regard to its privatisation program. Assuming United Bank too is successful in the aftermarket, the government is expected to continue offloading stakes in other state-owned entities, including several more banks, to meet its privatisation fund raising target of about $15 billion over the next five years.
United Bank, which is the third largest bank in Pakistan, attracted $2.5 billion worth of demand, although this included sizeable orders from two existing shareholders. The total demand equalled about 3.8 times the final deal size, which had already been doubled following strong interest during the pre-marketing. Initially the government was aiming to raise only about $300 million, but when the degree of interest became apparent it took the chance to offload a bit more of its 44.5% stake.
The sell-down was made up of secondary shares only and will have a significant impact on the freefloat. The latter was no more than 4.2% prior to the GDR offering as 51% of the lender was held by two independent investors - the Abu Dhabi Group, which represents the Abu Dhabi royal family, and Bestway Group.
The pair submitted a combined order for to buy $600 million worth of shares in the offering, which would have given them an additional 23% of the company. However, the bookrunner didnÆt want that easy a job û or perhaps didnÆt want to upset the other 60 or so investors who came into the book - and consequently Abu Dhabi Group and Bestway together received ôonlyö $250 million worth of GDRs. This still accounted for 38.3% of the entire offering, however.
Including these two existing investors European and Middle Eastern accounts accounted for about 40% of the total demand, followed by 35% from Asia and the remaining 25% or so from the US.
In total, the government sold 50.5 million GDRs, which each accounts for four common shares. The price was set at $12.85 per unit, which adjusted for the exchange rate was equal to 195 Pakistani rupees (PKR) or a 5.3% discount to FridayÆs close of PKR206. Looking at it from a slightly longer perspective, the GDR price equalled a 2.6% premium to the average 30-day close and 9.2%% versus the 60-day close.
According to the source, the final price valued the company at five times its 2006 book value, which is a higher valuation than for any other equity deal by an Asian lender û a pricing that it was able to get away with, he said, because of the strong growth in the Pakistani banking sector.
The offering was led by Merrill Lynch, which was also sole bookrunner for MCB BankÆs GDR. KASB Securities, which is an investment banking and research affiliate of Merrill Lynch in Pakistan, acted as financial adviser to the company.
The share price fell 5.7% during the two-week roadshow, but has risen 72% since early this year and 158% since the beginning of 2006 as the lender has been riding the Pakistani growth story. By comparison, the Karachi benchmark index has gained only 43% in the same period.
The country is seeing annual growth in the gross domestic product of about 7.5% and has a credit market that is still extremely under-penetrated. The consumer loan/GDP ratio is among the lowest in Asia at less than 5%. India is double that, while in a developed market like Hong Kong the same ratio stands at 60%.
ôPeople are for the first time in their lives getting a loan to buy a house, a car, or any other item and when you have 60% of a population of 150 million being below 20 yearsÆ old, you know that the demand for banking services will continue to grow,ö says one observer.
Contrary to MCB bank, which is a corporate bank that is trying to tap into the fast-growing consumer banking segment, United Bank is first and foremost a consumer bank with 1,100 branches nationwide and abroad. It is the number one provider of consumer loans with a 14% market share. Of its total consumer loan portfolio, 32% are auto loans, 12% credit cards (which are only just getting started with about 1 million accounts so far across all banks) and 40% personal loans. The rest is made up of mortgages.
According to observers, it has a capital adequacy ratio of over 12% and good provisioning, making it a solid bank to invest in.
ôWe are expecting UBL to see a net profit CAGR of 20% in the next three years, which is the fastest among the larger banks so there is good earnings growth. The freefloat was always an issue, but that will get resolved here. On top of that, we like the management and we like the country story,ö one observer sums up the arguments for buying the deal.
Interest in the deal was also underpinned by the faith that international investors put in the regulator, which has created an open and transparent banking sector with no ownership barriers for foreign investors. And with regard to United Bank specifically, the management was also said to have made all the difference. Being comprised primarily of ex-Citi and Bank of America bankers, as well as other returning Pakistani expats, the management was able to communicate the bankÆs growth story as well as its plans for the future, and to instil confidence that it will be able to deliver.
This deal shows that Merrill Lynch is becoming a force to reckon with in Pakistan, having now arranged two of the three GDRs in this new wave of issuance. And it was involved as an adviser in China MobileÆs acquisition of Swedish telecom operator MillicomÆs assets in Pakistan. It was also bidding for the mandate to arrange a government sell-down in National Bank of Pakistan later this year, although that deal is now up in the air a bit since Industrial and Commercial Bank of China earlier this month said it had signed a preliminary cooperation agreement with NBP with the aim of making a move into Pakistan. According to bankers it is still unclear whether that cooperation will involve ICBC taking a stake in the Pakistani bank.
M&A activity has been strong elsewhere in the Pakistani banking sector as well over the past 12 months with Temasek buying PICIC bank, Standard Chartered taking over Union bank and ABN AMRO acquiring Prime Bank. These investments are a clear indication of the confidence foreign players have in the domestic banks, analysts say.
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