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August 8, 2018

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Local banks to repatriate 50pc of foreign profits to Pakistan: SBP

KARACHI: The central bank has orders local lenders to repatriate 50 percent of their overseas profits to their headquarters in Pakistan during 2018, as it seeks to boost dollar inflows in the wake of dwindling foreign exchange reserves.

The State Bank of Pakistan (SBP) issued a governance framework for banks’ overseas operations late on Monday. The new rules are aimed at strengthening the banks’ capacity to understand, identify, and manage various risks posed by its foreign operations.

“The bank shall, subject to laws and regulations in the host country and after meeting the minimum capital requirements of host country regulator, repatriate at least 50 percent of its profit after tax (PAT) of each jurisdiction to their head office in Pakistan on annual basis starting financial year 2018,” the SBP said.

Earlier, the branches/subsidiaries of the domestic banks operating in the foreign countries were required to remit 34 percent of their earnings to Pakistan.

The SBP also said the bank was expected to maintain return on equity (ROE - profit after tax/total capital) in each jurisdiction at least equivalent to industry or peer average of that particular jurisdiction.

“In jurisdictions where bank incurs losses for two consecutive years or its ROE falls below average ROE of bank’s peer group, a revised board approved business plan will be submitted to offsite supervision and enforcement department SBP, providing, inter alia, reasons of losses/falling ROE and actions taken/planned to be taken to reverse the trend.”

Currently, Habib Bank Limited (HBL), United Bank Limited (UBL), National Bank of Pakistan, MCB, and Bank Alfalah operate branches in different countries.

Analysts said the central bank revised up profit repatriated requirement for the banks having overseas network in the backdrop of fast depleting foreign exchange reserves.

Mustafa Mustansir, a senior equity analyst at Taurus Securities, said, “The country is in dire need of dollar inflows. The repatriated amount by the overseas branches and subsidies of local banks will help improve forex reserves.”

However, the analyst pointed to the threats faced by the banks with foreign operations. “It is a fact that foreign operations of domestic banks are facing earning hits due to lack of compliance with tough regulations of the host countries.” He said overseas expansion of banks was also on the decline, compared with their domestic branch expansion over the past 10 years.

HBL’s second quarter 2018 results showed its domestic business continued exceptionally well, whereas international business underwent a revamp.

“The bank will continue to move forward cautiously in terms of revamping its international business. Consequently, the bank’s overseas balance sheet continues to shrink. In particular, the bank’s home remittance volumes are down 70 percent year-on-year, which overshadows growth in fee income for the quarter,” a brokerage report said.

“The administrative cost of the bank was up amid pension charge, business transformation cost and cost on its New York operation.

The ongoing business transformation cost and consultancy/legal cost related to New York Operation is anticipated to continue till the first half of 2019,” it added.

Similarly, UBL had entered into a new written agreement with the Federal Reserve Bank of New York (US Fed), effective July 2, 2018 upon termination of the earlier written agreement entered into on October 28, 2013, relating to UBL’s New York branch’s international remittance services.

The new agreement requires UBL to take steps to strengthen its bank secrecy and anti-money laundering (AML) compliance, customer due diligence, and suspicious activity monitoring and reporting programs. The FED has not imposed any civil penalty yet on the UBL.

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