SECTOR OVERVIEW: THE EXIT OF FOREIGN BANKS

The recent confirmation of HSBC Bank Oman selling its Pakistan business to Meezan Bank should not come as a surprise to those who have been following financial media and developments of the banking sector in the country.

Meezan Bank has already acquired HSBC Group’s Pakistan operations in 2014. To clarify a possible confusion, HSBC Group owned a separate bank in Pakistan through its subsidiary, HSBC Bank Middle East, which was sold to Meezan Bank last year.

This year, Meezan Bank has decided to buy HSBC Bank Oman’s sole branch in Karachi, in addition to the previously acquired branches of HSBC. The bank has an even longer history of taking over foreign banks in the country. Back in 2002, it acquired local operations of Societe Generale that decided to shut its 4 branches in Pakistan.

Meezan Bank is not the only local bank that has acquired foreign banks operating in Pakistan. Previously, Royal Bank of Scotland (RBS) sold its Pakistani business to Faysal Bank, another bank with substantial Islamic banking operations in Pakistan. RBS had acquired ABN Amro Pakistan in 2007 as part of its rather disastrous purchase of global operations of ABN Amro. More recently, Barclays Bank also exited Pakistan by selling its local business to Habib Bank.

Citibank Pakistan has also shut down its consumer banking operations in Pakistan to limit its exposure to corporate banking only and decreasing its branch network from 13 to just 6.

Reasons behind exit

Why foreign banks have decided to exit Pakistan? The most fundamental reason for this is that it is no more sufficiently profitable for foreign banks to continue to operate in Pakistan. There are a number of factors that have contributed to lack of scale and profitability for such banks.

Naming a few would include, increased competition from local banks; shift of wealth management and premier banking business to the more distant Dubai; deteriorating macroeconomic conditions in the country and unfavourable changes in the global strategies of foreign banks.

The 5 major banks of Pakistan (Habib Bank, United Bank, Allied Bank, National Bank and Muslim Commercial Bank) have been making great strides. With the size of their network and outreach, they have not allowed foreign banks to expand meaningfully to the width and breadth of the country.

Furthermore, the comparative advantage enjoyed by foreign banks in the past through heavy investment in technology and improvised standard of service no longer exists, as local banks have also gradually caught up with them.

Wealth management business in Pakistan is rather limited and the exiting foreign banks can easily shift clientele to Dubai or a similar jurisdiction. Also, an increasing number of premier banking customers are being serviced from more tax friendly jurisdictions in the Gulf countries.

Perhaps the single most macroeconomic factor that has lured foreign banks away from Pakistan is the deteriorating exchange rate of Pakistan rupee against global currencies like US dollar and British pound. A very significant proportion of the income of foreign banks is eaten away during profit expatriation to their home countries, due to deteriorating exchange rate of the local currency.

Following the recent financial crisis in the Western markets, a number of banks have started consolidation of their global businesses. Pakistan has been adversely affected by the changes in global strategies of many such foreign banks.

The verdict

Whether exiting of foreign banks from Pakistan is good or bad, it is certainly going in favour of Islamic banks that are acquiring conventional banks as part of their brownfield growth strategies. In May 2015, Bank Islami, the second largest Islamic bank in Pakistan after Meezan Bank, acquired the troubled KASB Bank and its subsidiaries like KASB Securities.

Share of Islamic banking stands at 11% of the total banking sector in Pakistan. According to the recently released Global Islamic Finance report 2015, it becomes increasingly challenging for Islamic banking windows of conventional banks to expand their operations beyond a threshold of about 20%.

It is primarily due to fear of cannibalisation of conventional business by Islamic operations within conventional banks that tend to resist growth of Islamic banking beyond a certain point. Acquisition of foreign and conventional banks’ operations by Islamic banks is expected to help Islamic banks to follow a smart strategy of brownfield growth.

In particular, Meezan Bank and Bank Islami are the main beneficiaries of the trouble faced by local conventional banks (e.g., KASB Bank) and foreign banks (like HSBC) in Pakistan.

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