Islamic banking: MCB sets sights on Burj Bank

Acquisition will help increase footprint in Shariah-compliant banking, says analyst.

KARACHI:

MCB Bank said on Wednesday it intends to acquire Burj Bank, one of the five Islamic banks operating in the country.

Subject to the State Bank of Pakistan (SBP) and other regulatory approvals, the most profitable conventional bank of Pakistan aims to acquire 55% shareholding in Burj Bank, according to a notice sent to the Karachi Stock Exchange (KSE).

“MCB Bank has reached an understanding with majority shareholders of Burj Bank to invest in new and existing shares along with additional investment by Islamic Corporation for the Development of the Private Sector, the private-sector investment arm of the Islamic Development Bank (IDB),” it said.

The latest notice follows a statement that the bank issued on January 16, saying it was going to set up an Islamic banking subsidiary with a paid-up capital of Rs10 billion and merge its existing 27 Islamic banking branches into the new entity.

As opposed to the earlier notice that hinted at the establishment of a ‘wholly owned subsidiary,’ the latest announcement says the investment made by MCB Bank will help Burj Bank meet its minimum capital requirement (MCR) of Rs10 billion as required by the State Bank of Pakistan (SBP).

Speaking to The Express Tribune, Lakson Investments Chief Investment Officer Khurram Schehzad said Burj Bank’s acquisition will bode well for MCB Bank by enabling the latter to increase its footprint in Shariah-compliant banking in Pakistan.

The smallest Islamic bank in terms of the number of branches, Burj Bank posted a net loss of Rs645.2 million in the first nine months of 2013, the latest period for which data is available. Its net loss in the comparable period of 2012 was Rs22.45 million.

Burj Bank’s operating expense per branch during the first nine months of 2013 remained Rs24.7 million, which was the highest among all Islamic banks. In contrast, the operating expense per branch during the same period for MCB Bank was Rs11 million, which was the lowest among the five largest commercial banks of the country.

“I think approvals and due diligence will take between three to six months,” Schehzad said.

Referring to the fact that MCB Bank has hinted at investing in new as well as existing shares of Burj Bank, Global Securities research analyst Umair Naseer said the issuance of new share capital may be expected soon.

The authorised capital of Burj Bank is Rs12 billion. But its issued, subscribed and paid-up capital was Rs8.1 billion at the end of September last year. “It is still unclear whether the bank will operate under the same name once its shareholding structure undergoes a major change,” Naseer added.

Bahrain-based Bank Al Khair is the majority shareholder in Burj Bank with a 36.9% stake. Islamic Corporation for the Development of the Private Sector is the second largest stakeholder with 33% shareholding in the bank.

According to Standard Capital Securities Head of Research Faisal Shaji, prospects of the Islamic banking are bright in Pakistan because it enjoys high margins and room for expansion.

Assets of the Islamic banking industry are Rs926 billion, while deposits stand at Rs775 billion, according to latest SBP data. In terms of their market share in the overall banking industry, assets and deposits grew 9.5% and 10.1%, respectively, during the July-September quarter.

“MCB Bank is going to benefit a lot by this deal also because the share of CASA deposits in its total deposit base is exceptionally high,” Shaji said while referring to the bank’s high current and savings account deposits. A high proportion of such deposits typically results in a lower cost of deposits, thus ballooning a bank’s bottom line.

Published in The Express Tribune, February 13^th, 2014.

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