Pakistan's Homegrown Banks Grow Up


With their luxurious offices and fat salaries, foreign bankers have long been the envy of the rest of Pakistan's financial sector. They lapped up the corporate business while customers lined up to deposit their dollars in lucrative foreign-currency accounts. Plus, foreign banks enjoyed a reputation as bastions of quality service.

That seems to be changing. Sure, the pinstriped brigades from multinational banks still have the plush workplaces -- at least those who have stayed on. But look at the numbers: Two years ago, the 16 or so foreign banks controlled 20% of the total deposits and loans in the banking sector. Today, their share is down to 14%, and analysts say it could drop to just 3% within the next five years.

Why the change? During the '90s, foreign banks profited from arbitrage and foreign-currency exchange, thanks to a fast-depreciating currency. Back then, depositors wanted to open foreign-currency accounts, which allowed then to earn a 5% return per year plus an additional 10% to 15% thanks to the greenback's appreciation against the battered rupee. With the rupee now stable, the U.S. dollar dropping, and Pakistan's economy stronger, the incentive to save in dollars has vaporized.

HEADING FOR THE EXIT. Meanwhile, the State Bank of Pakistan, the country's central bank, has set higher minimum capital requirements for commercial banks, from 500 million rupees (just under $9 million) to 1 billion rupees (about $17.5 million), effective January 1, 2003. This has forced those foreign players with small but profitable presence in Pakistan to either seek local buyers or exit altogether.

During 2002, French bank Société Générale, the UAE-based Emirates Bank Intl., and American Express (AXP) all sold out to local banks. Others, including French Credit Agricole Indosuez, the Sri Lankan Bank of Ceylon, and the Gulf-based Mashreq Bank, are all finishing deals to be bought out.

Foreign banks in Pakistan also have felt the pinch of falling interest rates. The State Bank has cut the discount rate at which it lends to other banks by 650 basis points, to 7.5 % since July, 2001. That's a record low. During the same time, the yield on six-month treasury bills has dropped from 12.5% to 2%.

"THE REAL PAIN." So, foreign banks that were accustomed to parking massive portions of their assets in government securities and getting double-digit returns can no longer even beat inflation, which stands at around 4%. "We did pretty well in 2002, but the real pain has started now," says Azhar Hamid, chief executive at the British Standard Charted Bank in Pakistan.

There has been intense pressure from an unlikely corner, too. Pakistan's nationalized commercial banks, long considered inefficient, have been transforming themselves with the help of World Bank funding. These institutions have emerged as strong competition for the foreign banks.

Profits for the National Bank of Pakistan, the country's largest bank, doubled in 2002. S. Ali Raza, the bank's president, sees a trend: "As local banks become more efficient, foreign banks find their market base getting smaller and smaller, until, eventually, they close up and go away."

TURNING THE TECH TABLES. Foreign bankers admit they're feeling the heat. "We've had a good run," says Hamid. "But we can't even think of competing with these [nationalized] banks. By their sheer size, they can run us over, and we won't even know."

Now, the nationalized banks are gearing up to acquire the best information technology, traditionally the preserve of foreign banks. Habib Bank, Pakistan's No. 2 bank, will interconnect 1 million customers in 350 branches across 50 cities within the next 12 months. "We have state-of-the art technology, and no one else is going to be even close in terms of scope," says Habib President Zakir Mahmood.

The consolidation wave will likely continue in 2003, with all but a handful of foreign banks pulling down their shutters. Citigroup (C) will likely stay, bankers say, because of its global embedding strategy. Standard Chartered continues to consolidate in Pakistan with the merger with ANZ Grindlays in 2002. HSBC (HBC) also maintains a small operation in the country and hasn't announced any intentions of exiting.

BIGGER FOOTPRINT. Dutch bank ABN AMRO (ABN) is another foreign institution bucking the trend. It spent 2002 making inroads into the Pakistani consumer-finance business, beefing up consumer lending from 15% of assets to about 35%. It has also introduced a debit card, with a big marketing push in Pakistan, as well as personal-loan products and mortgage lending.

As a result, ABN's profits from consumer lending rose from 25% of the national market in 2001 to 40% in 2002. Says Naved Khan, ABN AMRO's top representative for Pakistan: "We have to increase our footprint in consumer banking through multiple products and distribution channels."

Consumer lending remains a fairly small segment of the banking sector in Pakistan, however. Until the economy picks up, credit demand improves, and interest rates start rising again, foreign banks may have little choice but to get out -- or hunker down and fight harder than ever for a smaller share of the pie. By Naween A. Mangi in Karachi


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