MCB Bank launches rare Pakistan GDR

The high quality bank from a little explored country attracts a lot of interest, and sees its market cap surge to $2.3 billion on demand from international investors.
MCB Bank, formerly known as Muslim Commercial Bank, early Wednesday morning completed the first equity deal from the private sector in Pakistan in more than 10 years and it did so in style.

Not only did the countryÆs largest private bank attract $700 million worth of demand for its $150 million GDR issue, but the information provided during its four weeks of premarketing and roadshows also prompted a wave of buying into its Karachi-listed shares, which subsequently spilled over into other Pakistani banks.

According to official data, September saw $80 million of foreign cash flowing into the stock market - the highest monthly inflow ever û and 90% of that supposedly went into the banking sector.

While locally-traded stocks tends to come under pressure when a company issues overseas-listed GDRs or ADRs, MCBÆs share price actually surged 20% from the beginning of pre-marketing in mid-September to TuesdayÆs (October 10) close at 271.90 Pakistani Rupees (PKR) and it is up 50% since the GDR issue was first announced in June. As a result, its market cap has increased to $2.3 billion from $1.5 billion only four months ago.

ôIÆm not sure how deep the market is, but this deal should give other entrepreneurs and also the government the confidence to issue GDRs as a way to raise funds,ö says one observer.

The offer comprised 8.6 million GDRs (each accounting for four common shares), which were priced at $17.40 apiece. That translates into a local share price of PKR264, which despite the strong run-up in the stock equaled a discount of no more than 2.9% to TuesdayÆs closing price û just below the mid-point of the 0% to 6% discount indicated during the bookbuilding.

Merrill Lynch was the sole bookrunner for the offering, which will see MCB become the first Pakistani company to list on the London Stock Exchange. KASB Securities, which is an investment banking and research affiliate of Merrill Lynch in Pakistan, acted as financial adviser to the company.

At the final price the bank is valued at 4.6 times its forward book value, which puts it at a premium to all other banks in Asia except for IndiaÆs HDFC. And according to people familiar with MCB such a lofty valuation is not undeserved.

Supported by the strong growth in the loan book, the bank boasts a return on equity above 40%, compared with an average of 15%-20% for Asian banks; it has the lowest NPL ratio of all the Pakistani banks at 4.2%, after a decline from 10.6% in 2003; and 93% of its deposits base are made up of low-cost savings or current accounts, which enables the bank to maintain a high net interest margin of around 7% - well above the Asian average of about 2-3%.

MCB is controlled by one of PakistanÆs most charismatic businessmen, Mian Mansha of the Nishat group, which also has interests within the textile and cement industries, and managed by expatriate executives. As of the end of 2005 it had total assets of $5 billion, a deposit base of $3.8 billion, 959 branches and a 50% market share of the countryÆs ATM market.

Established in 1947, nationalised in 1974 and re-privatised in 1991, the bank has undergone a significant internal restructuring to trim costs in recent years, including a staff reduction to about 9,000 at present from 15,000 in 1996. In the six months to June this year, its net profit was up 90% to PKR5.74 billion ($95.5 million).

In addition to MCBÆs own merits, however, investors were also drawn to the fact that the lender offers a leveraged exposure to PakistanÆs economic growth, which is expected to remain in the 7-8% range in the coming five years, according to government forecasts.

ôThe Pakistani economy is also one of the least geared to global growth as it is very much internally driven and that means it could well act as a hedge against negative surprises in markets like the US and Europe,ö notes one Asia-based analyst.

The growth opportunities are suggested by the fact that the nation of 162 million people still has only 1.5 million credit card users, compared with 13 million mobile phone users. Another sign that Pakistan is a consumer boom in waiting is the surge in the number of cars to about 200,000 this year from 20,000 five years ago, which has been made possible thanks to the gradual development of auto loans in recent years.

ôThe growth profile of Pakistani banks is very similar to that of the Indian banks a few years back with tremendous credit growth opportunities,ö the analyst says.

At present though, the countryÆs combined consumer loan stock accounts for only about 3.9% of GDP, which is less than half the level seen in India. And that is despite the surge in consumer lending to about PKR252 billion ($4.2 billion) in 2005 from a mere PKR74 billion in 2003.

With 80% of the banking system already in private hands, the targets of the owners and the minority shareholders are also well aligned, while a solid regulatory environment is seen to make up for the political uncertainties to some extent.

Standard CharteredÆs acquisition of an 80.9% stake of Union Bank in August for $413 million also instilled confidence among potential investors about the perceived growth opportunities in this market. Especially since the UK-headquartered bank paid 5.6 times book value for a Pakistani lender, whose assets are only about one tenth of MCBÆs.

Indeed, the about 60 or so one-on-one and group meetings held during the road show attracted a lot of interest from a wide group of emerging markets funds, FIG funds and other general buyers of Asian equities, which shows there is at least a clear desire to know more about investing in this South Asian country which typically features more often on CNN than on Bloomberg.

Karachi has been among the best performing stock exchanges in Asia in the past two years, but this is a fact that has been ignored by the average investor for whom Pakistan is still more likely to come up as part of a discussion on terrorism than as a potential home for future pension money.

ôSince it accounts for only 0.3% of the MSCI Asia ex-Japan index, this is simply not a market that you have to own,ö argues one observer.

According to a source close to the deal, approximately 60 global investors bought into the bank through the GDR issue. About 40% of the deal was allocated to Asian investors, while the remainder was split evenly between European and US accounts.

Whether or not it will act as a door opener for more deals out of Pakistan, MCB has at least helped broaden Merrill LynchÆs already wide-spread franchise in Southeast Asia. Over the past six months the bank has been very active, bringing a selection of deals to market, including IPOs for ThailandÆs Rayong Refinery and Thai Beverage, ringgit-denominated equity-linked deals for MalaysiaÆs Berjaya Land and Resorts World, and a $279 million leveraged buyout of IndonesiaÆs fourth largest coal miner, Berau Coal.
¬ Haymarket Media Limited. All rights reserved.
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