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  • 8/8/2019 Banking Industry Problem


    Banking Industry Problem

    The recession of 2008-09 exposed several problems in thebanking industry. In addition to numerous bank closings,

    funds used by the Federal Depositors Insurance Corp.(FDIC) to insure bank deposits shrank by 40 percent,representing billions of dollars. Some of the problems in thebanking industry can be traced to the type of loans they weremaking.

    Failed BanksDozens of banks failed in 2008 and 2009, many of whom

    were heavy into commercial real estate loans, constructionloans and land loans. Commercial real estate loans financethe strip malls and shopping malls that saw decreasingnumbers of customers as the economy declined. Ownerswere not able to make the payments and may haveabandoned the property, leaving the banks on the hook. Thisled to undercapitalization at many banks, which caused themto be taken over by the FDIC.

    Sub Prime LendingMany banks engaged in sub-prime mortgage lending. Theseloans were made to customers who did not qualify forstandard mortgage loans because of weak credit, insufficientincome or an unstablejob situation. A sub-prime customer ismuch riskier because of these factors. Many loans made tothese customers were adjustable rate mortgages, which aretied to certain indexes, plus a margin, that increase

    periodically and raise the mortgage payment. Somecustomers saw their payments increase by hundreds ofdollars, making them unaffordable. Foreclosures reachedrecord levels when homeowners could not make thesepayments.
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    ForeclosuresThe increase in foreclosures caused the value of homes todecline substantially. Many homeowners were left owingmore than their homes were worth. Faced with foreclosure,

    they also were unable to sell the homes without goingthrough a short sale, which potentially could leave themowing a deficiency balance. The increase in foreclosuresalso caused a decrease in demand for housing.

    Bad LoansSome banks made a lot of bad loans. Many customersshould not have been approved for loans in the first place.

    Other banks invested in risky mortgage-backed securities.Then, when the recession hit, many people losttheir jobs and were unable to make loan payments.Delinquency rates for mortgage loans soared, as did lossesand bad debts.

    Reserve RequirementsA lot of banks didn't have sufficient reserves. This is theportion of customers' deposits that banks are required tokeep on hand, in the cash vault or on deposit with theFederal Reserve. These reserves help offset losses andassist with everyday banking transactions. When banks don'thave enough reserves, they cannot lend money until the

    reserves are replenished. Banks can borrow from otherbanks at the Fed Funds rate, which is 0.25 percent. Thesetype of loans are usually overnight borrowing.

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    Mergers & Acquisition: Due to reserve requirementsimposed by statue bank mergers have taken place andsome banks are acquired by bigger banks to save themfrom liquidation.

    Example of Acquisition and Mergers:

    MCB Bank Limited

    MCB is one of the leading banks of Pakistan incorporated in1947. MCB was nationalized in 1974 along with all other

    private sector banks. MCB was privatized in 1991 whenNishat Group bought a majority stake in the bank. MCBsshares are traded on all three exchanges of Pakistan and itsglobal depositary receipts are listed on the London StockExchange.

    During the last fifteen years, the Bank has concentrated on

    growth through improving service quality, investment intechnology and people, utilizing its extensive branchnetwork, developing a large and stable deposit base andmanaging its non-performing loans via improved riskmanagement processes.


    Maybank was incorporated on 31st May 1960 andcommenced operations on 12th September 1960. On 17th

    February 1962, Maybank was listed on the then KualaLumpur Stock Exchange (now known as Bursa Malaysia)and is today one of the largest companies by marketcapitalization in Malaysia.

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    Maybank is the largest financial services group in Malaysiaand the Group offers a comprehensive range of financialservices and products ranging from commercial banking,investment banking, Islamic banking, offshore banking,leasing and hire purchase, insurance, factoring, trusteeservices, asset management, stock broking, nomineeservices, venture capital and Internet banking.

    The Group has over 450 offices in the 14 countries namely,Malaysia, Singapore, Philippines, Brunei Darussalam,

    Indonesia, Vietnam, Cambodia, Papua New Guinea, HongKong SAR, Peoples Republic of China, Bahrain,Uzbekistan, Pakistan, Great Britain and United States ofAmerica

    Recent Happenings in Pakistans Financial Market

    Pakistans Banking industry is the worlds third most

    profitable banking industry.The probable acquisition deal of MCB Bank and the enteringof Barclays Bank into the country are seen as a majordevelopment in the local financial sector.The UK-based Barclays bank transferred 100 million dollarsto Pakistan to fulfill the requirement of maintaining minimumpaid-up capital limit before launching its operations inPakistan.


    Asia-Pacific's largest Islamic banking service provider

    Foreign Stakes

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    1. March 21st 2008: $ 136 million for 15% stake inVietnam's An Binh Bank

    2. March 28th, 2008: $ 2.7 billion for 56% stake inIndonesias Bank Internasional Indonesia (BII) 1

    4.6 times of its book value(510 rupiah per BII share)from Singapore's state-directed Temasek Holdings andSouth Korea's Kookmin Bank

    Maybank is seeking another 44% stake of BII for $1.2


    3. June 2008: $ 680 million for 15% stake in PakistansMCB Bank (May 2008) from Nishat Group 2

    PKR 470 per share

    11% premium to the stocks last traded price

    5.4 times of its book value (Reuters Data) 3

    PE 18 times of 2007

    Maybank secured the right to buy an additional 5%stake in MCB Bank for a maximum of $247 million from

    1Maybank shares have fallen 11 percent since the Indonesian deal was announced. Credit-rating agencies

    Fitch and Moody's have both put its ratings on a negative outlook, amid expectations that it would need to

    raise funds to bolster its balance sheet.

    2The stock was suspended on Friday, pending the MCB announcement. It last traded at 8 ringgit per share,

    giving it a total market value of nearly $12.4 billion.

    3Bank Muscat of Oman and Nomura Holdings of Japan paid 2.8 times book value for Saudi Pak Bank of

    Pakistan in January. In 2006, Standard Chartered paid a lofty 5.6 times for Union Bank.

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    three other institutional investors, potentially bringing itsownership up to 20%.

    4. August 8th

    , 2008: $ 217 million for 5% stake inPakistans MCB Bank

    Maybank was obliged to buy up to another 5 percent ofMCB Bank shares within one year of the firsttransaction.


    January 2008 $3.24 per share

    July 2008 $2.16 per share

    With this drop in share prices, Malaysias Public Bank(Maybanks competitor in Malaysian market) overtookMaybank in market capitalization.

    Maybank Public Bank


    $ 10.4 billion $ 11 billion

    Profit Growth1 15% 23%

    Loan Growth2

    9.7% 22%Market Share

    (as of December31st,2007)


    Customer Base 8.1 million

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    NationwideDistribution in


    (as of December31st,2007)

    450 branches, 2478 ATMs.

    1In fiscal 2007 over fiscal 2006.2For nine months ending Mar. 31, over same period previousyear.


    July 2008 $ 82 billion

    Research Analysts Expected Results

    Net profit to increase by 8.2%

    S&P Ratings

    After announcement of MCB acquisition, Standard &Poor affirmed its 'A-' long-term and 'A-2' short-termcounterparty credit ratings on Malaysia's Malayan

    Banking Bhd. (Maybank) with a positive outlook afterthe company announced it will buy 15 percent ofPakistan's MCB Bank Ltd.

    The rating affirmation on Maybank is based on itssound financial profile and strong domestic franchise as

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    the largest commercial bank in Malaysia, underpinnedby continued improvement in asset quality and strongcore profitability, S&P said.

    MCB Bank

    Maybank is the ideal strategic partner for MCB Bankgiven its emerging markets heritage and strongconsumer and Islamic banking franchise.

    MCB Industry Average

    ROE 38% 23%

    Net Interest Margin(NIM)

    8% 6%

    Source: Affin Investment Bank,Kuala Lumpur

    MCB Bank

    AssetsPKR 400 billion ($

    6.14 billion)

    Branches 1026

    Islamic Banking14

    (8 in Pakistan and6 abroad)

    Deposit BasePKR 280 billion

    ($4.3 billion)

    Asset BasePKR 300 billion

    ($4.6 billion)

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    Source: MCB Bank Website

    Maybank and MCB

    The transaction represents the largest Foreign DirectInvestment into Pakistan in 2008

    This transaction is also the largest ever private sectorcross border transaction in Pakistan.

    The agreement underlines MCB commitment to enterthe next phase of growth by partnering with a leadingfinancial services group thereby expanding its productoffering and improving efficiency to better serve itscustomers.

    Maybank is the ideal s