It was a bank cobbled together by taking three of the smallest banks in the country and hoping that the combined entity had more value than the individual components. But more than two years after completing the merger of Arif Habib Bank, Atlas Bank and Mybank, their successor Summit Bank has yet to turn a profit.
“We did not anticipate the post-2009 deterioration in the quality of our loan portfolio,” said CEO Hussain Lawai, in an interview with The Express Tribune, identifying the poor performance of the bank’s asset book as the major reasons behind the bank’s losses.
Yet the asset side of the bank’s balance sheet is not the only source of its troubles. Lawai admits to two other key challenges. The first is the bank’s deposit base. “We have an extraordinarily high cost of deposits, which is a legacy of the 2008 financial crisis, when our predecessor banks took on very high-cost, long-term deposits in order to meet their liquidity needs,” said Lawai. “Those deposits are only now beginning to unwind and retained at a lower cost.”
Summit Bank, which officially came into existence on August 18, 2010, started off with an average cost of deposits of 14.5%, a number that has now come down to just under 8% according to the bank’s management. The bank is targeting getting that number close to 7% by the end of 2013, which is the year Summit expects to make its first profit.
The second problem facing the bank is a high level of what is known as intermediation costs: the cost of running the branch network and head offices that allow the bank to engage in its deposit-taking and lending activities. Summit Bank’s intermediation costs are equal to about 4.1% of its earning assets. By comparison, most of the largest banks in the country operate at an intermediation cost of well below 3%.
While that difference may not sound high, it is fatal for a small bank like Summit, which has a high cost of deposits, and can only lend at the market rate, meaning it has a low net interest margin: the difference between the rate of interest it charges its borrowers and the rate of interest it pays out to its depositors. Summit Bank’s net interest margin is currently just over 0.6%.
Lawai acknowledges the problem of high intermediation costs, but says that it is a legacy of the merger between the three banks and will soon taper off. “A significant proportion of our high costs is the fact that we have been relocating branches,” he said. “Of the 160 branches we inherited, we have relocated about 43 of them.”
The relocations are part of the bank’s strategy to move its branches towards locations where it can conduct more working capital lending to small and medium enterprises (SMEs) as well as attract more of the remittance business.
The strategy appears to be working: according to data compiled by the State Bank of Pakistan, Summit Bank is the seventh largest provider of remittance services to expatriate Pakistanis and their families. It is the fee income earned from businesses like remittances that help the bank narrow its losses from its core banking function.
Somewhat surprisingly, Summit Bank plans to continue lending to SMEs, even though Lawai admits that when he inherited Atlas Bank, it had a 46% bad-debt ratio in its SME portfolio, the highest in the industry. “The problem with Atlas is that they created a checklist and then gave out loans to everybody who could tick all of the boxes. They did not bother to build relationships with their borrowers and understand their businesses. We plan on avoiding that mistake and focusing our attention on relationship banking.”
Lawai certainly has considerable credibility in the banking sector: as the first CEO of MCB Bank following its privatisation, he helped turn that bank around from a decrepit institution in need of constant bailouts to one of the most profitable banks in the country. For the moment, however, the market appears to be sceptical of his ability to turn around Summit Bank: since the newly merged bank started trading on the Karachi Stock Exchange more than two years ago, the stock has gained only 7.2%, closing at Rs2.97 on Monday.
Published in The Express Tribune, October 16th, 2012.
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