NIB, MCB start merger talks

KARACHI: Singapore state investor Temasek is in talks with the MCB Bank to sell its over 88 percent stake in the NIB Bank and both the parties “are in preliminary, non-binding discussions for a possible merger,” a bourse filing from both the banks said on Tuesday.

“NIB announced today that MCB Bank Limited and Fullerton Financial Holdings Pte. Ltd, being the majority shareholder of NIB through its wholly-owned subsidiary Bugis Investments (Mauritius) Pte. Ltd., are in preliminary, non-binding discussions for a possible merger of NIB with and into MCB,” the statement said.

Temasek owns NIB through its fund management arm, Fullerton Financial Holdings. NIB Bank started operation in October 2003, when national Development Leasing Corporation and Pakistan operations of IFIC Bank were amalgamated. In 2007 NIB Bank bought PICIC for about $300 million.

Media in recent past repeatedly reported that the Singaporean state investor is looking to sell its stake in NIB Bank after heavy losses and the sovereign fund was looking at a paper loss of about $400 million of its $540 million investment.

The statement said the proposed transaction, if taken place, will be subject to a due diligence by the two banks in preliminary stage of discussion.

“Among others will be the receipt of all requisite regulatory authorisations, consents and approvals and receipt of all requisite corporate and other internal approvals of MCB, NIB and/or their respective shareholders,” it added.

Mohammad Fawad Khan at KASB Securities said the consolidation of Pakistan's banking industry received yet another shot in the arm with the announcement of preliminary discussion on the merger of NIB Bank – Pakistan’s 12th largest bank by market capitalisation – into MCB Bank Limited.

“We believe the merger will likely create synergies for both the entities,” Khan said. “For MCB, the key rationale is NIB’s branch network while NIB’s shareholders can count on potential price discovery via the merger. That said, precedents suggest MCB is not known for paying up for acquisition and NIB deal, if comes through, will be first such deal since its privatisation.”

He said MCB bank has been on a lookout for an acquisition of local banks for quite some time and the current discussion for merger marked third such attempt in the past three years.

“Strategically, we see two reasons for the bank: competition in the number of branches, a key source of low-cost deposits for MCB, is heating up as mid-sized banks have rolled out aggressive branch expansion plans, and the need for buying growth for MCB’s Islamic banking arm, MCB Islamic, which is yet to start operation,” Khan said.

Analysts said acquisition of NIB will surely give MCB a major head-start.

In the past five years, MCB has been a laggard in branch expansion and has opened only 125 branches since 2010, or cumulative 11 percent growth in branch network. Acquisition of NIB offers MCB a chance to grow its network by 14 percent, they added.

“Apart from branches, NIB can offer many areas for potential value creation in the merger talks, in our view, including cost rationalisation whereby most of the head office cost will be slashed in the merged entity and recovery of loans (65 percent of classified loans are in textile, engineering and commercial segments),” Khan of KASB Securities said.

He said current market capitalization and book value for the two banks suggest the exchange ratio is likely to fall between 120 to 131 shares of NIB for each share of MCB Bank. “However, we believe the final ratio, if the deal is concluded, is likely to tilt more in favour of NIB bank as it will likely incorporate areas of synergies that NIB offers in a merged entity,” Khan added.