What Faysal Bank gets out of the RBS deal

KARACHI: Faysal Bank’s interest in RBS stemmed largely from two concerns: a desire to increase its market share and to develop a premium banking product.

In its successful bid for RBS Pakistan, the bank has been able to get a little bit of both, though the price tag may not necessarily be worth it. The details of the financial agreement between Faysal Bank and RBS have not yet been disclosed, but analysts expect the price to be higher than last time. “We expect the transaction to be worth substantially higher than the US$87mn (Rs7.3bn) agreed by MCB Bank,” said Mustafa Bilwani, analyst at JS Global Capital in a research note released to clients on Thursday.

According to the latest available financial statements, dating September 30 2009, the bank has approximately Rs37 billion in unpledged investments, about Rs25 billion of which is in highly liquid government securities. Should the bank have to, it could theoretically liquidate some of those securities to complete the transaction, though it would then have a less stable balance sheet, not quite a wise idea given the high rate of non-performing loans on RBS Pakistan’s balance sheet.

This is especially relevant when considering the fact that the bank’s Bahraini parent company, Ithmar, has made it abundantly clear that the funds for the transaction will be raised locally by Faysal Bank. As for the impact on the financial sector as a whole, the impact is expected to be remarkably little. Faysal Bank will move from being the 12th largest bank in the country by assets to the 10th largest, with Rs256 billion in assets. Perhaps most critically, however, the bank will be within striking distance of becoming larger than Bank AL Habib and Askari Bank, a thought that is no doubt on the minds of Faysal Bank’s management.

The bank’s management has been largely unwilling to comment on anything to do with the RBS transaction, but according to sources familiar with the matter, Faysal Bank has been eyeing RBS for the prestige factor as well. RBS is a globally recognised brand name and has some of the best human capital in Pakistan in terms of banking talent. But the two banks also have very different cultures, a factor that may be cause for some strife once the merger of the two organisations begins.

Standard Chartered Bank faced similar cultural clashes after its acquisition of Union Bank. In addition, RBS has a product for high net-worth individuals called “Royal Preferred Banking.” Faysal Bank has been trying to enter that high-end market, an effort that has so far not gotten off the ground.

The high net-worth business is coveted by banks since it gives them a much greater asset base without having a corresponding increase in their operating costs. Faysal Bank is likely to be keen to integrate RBS’ high-end clients into its own branch network, though for the deal to make financial sense, the bank would probably want to consider shutting down redundant branches.

Published in the Express Tribune, May 21st, 2010.