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Sale of Union Bank to Standard Chartered Bank in process

KARACHI (May 17 2006): The Standard Chartered Bank (SCB) has initialled an agreement with a Saudi combine to acquire 66 percent of its shares in the Pakistani listed Union Bank Limited for 513.76 million dollars.

The, deal upon conclusion, will be the biggest yet purchase in Pakistan's banking history. The Aga Khan Fund was the first to purchase 51 percent stake in Habib Bank for 400.95 million dollars.

SCB is the biggest foreign owned banking entity having 45 branches in 10 Pakistani cities. The acquisition of 338 million shares of Union Bank at 1.52 dollars per share will enable SCB to extend its Pakistan network to 24 cities. The Union Bank has 65 branches in Pakistan and two branches overseas.

After intimation for the intended sale is cleared by the State Bank of Pakistan, a team from SCB will commence due diligence exercise at Union Bank. Upon completion of the exercise, the sale-purchase agreement will be signed between the two parties.

UNION BANK: Former Prime Minister Nawaz Sharif's government had granted banking licence to a Lahore businessman, Nasim Saigol, along with nine licences to other private sector groups to re-enter banking in 1989. Saigol Family had a major stake in United Bank Limited which was nationalised by Zulfiqar Ali Bhutto's PPP regime on January 1 1974.

In its first inspection of Bank of Punjab – as a scheduled bank – SBP inspectors detected a loan against the sponsors shares of Union Bank. Under SBP rules pledging of sponsor's shares in banks to obtain loans was disallowed, and SBP ordered the Saigol family to sell its managing stakes in Union Bank.

Dr Abdullah Basudaan, of Saudi Arabia, having investment in Pakistan in the chemical field (Nimer Chemicals) bought the 51 percent sponsor's stake for 12 million dollars and lodged the same in SBP in 1999. The balance sheet of Union Bank was 233 million dollars (Rs 14 billion) at the time.

In 2000 Pakistan's leading consumer banker, Shaukat Tarin, became the Chairman of the Bank. The bank not only acquired the franchise to market American Express Card (despite Amexco's presence in Pakistan), but soon went on a expansion spree. Tarin acquired the three branches of Bank of America for another 12 million dollars and also later acquired the branch network of Emirates Bank in Pakistan for 6 million dollars.

Under Tarin's leadership, Union became a major force in consumer banking with balance sheet base of over 2 billion dollars (Rs 122 billion), a growth of 45 percent in one year with advances and deposits increasing by 26 and 40 percent respectively and annualised earnings depicting a rise of 35 percent.

However, last year major differences emerged between the Saudi owners and the management on expenditure. The expense-to-revenue ratio was 47 percent in 2005.

Dr Abdullah's group and associates had increased their stakes from 51 percent to 74 percent to improve their voting strength for amalgamation of Bank of America's branch network. Later, the group reduced its stake by selling 8 percent shares for 12 million dollars. If this deal goes through, the group, in a span of six years, would manage to earn 28 times of the original investment, besides obtaining yearly dividends.

Standard Chartered Bank: After the freezing of foreign currency accounts in 1998, a number of foreign banks operating in the country sold out their banking licences and networks to either a local business concern or to another foreign owned entity.

Societe Generale sold to Kuwaiti Owned Al-Meezan Bank; Credit Agricole was bought by NIB; Mashriq Bank was purchased by Crescent Group; Bank of Ceylon's branch was taken over by Dawood Group and later sold to Atlas Investment Bank; and American Express Bank is being acquired by Jahangir Siddiqui Investment Bank.

Standard Chartered has a 140 years history in this part of the world. Originally, the Chartered Bank, became Standard Chartered after a merger of two British owned entities with large network in Asia and Africa in the 1980s. And later, ANZ Grindlays was also taken over by SCB making it the largest foreign banking entity in Pakistan.

Under its new country head, Badar Kazmi FY2005 has been a historic year, as SCB has expanded its network from 21 to 45 branches. Its balance sheet has increased from 1.5 billion dollars to nearly 2 billion dollars in just over a year.

The deposit base of the combined SCB/Union entity would be around Rs 175 billion and advances will total Rs 119.1 billion. After shedding expensive deposits in Union Bank amounting to Rs 9 billion and merging overlapping branches, the new entity should be able to drastically reduce Union's administrative expense, now amounting to Rs 3.2 billion, to Rs 1.5 to Rs 2.0 billion, making SCB in Pakistan an even more profitable entity.

Once the merger goes through after due diligence is completed, SCB will have to corporatise its operations in Pakistan as Union Bank is a locally listed entity.

In FY2000 Pakistani authorities had invited leading OECD banks to come foreword and bid in its privatisation process but there was no response.

The acquisition by SCB is likely to act as a catalyst for further banking acquisitions and renewed interest in Pakistan by reputable international banks. Second largest foreign entity (as per balance sheet), Citigroup is also expected to increase its branch network as well.

Negotiations for over six weeks have been under way between the representatives of Dr Abdullah Basudaan and Standard Chartered group in London. Earlier, Singapore's Tamasek Group, having stakes in NIB, had also made a bid to acquire Union's branch network after being outbid in the sale of ABL to the local Ibrahim Fibres Group. The stakes of Standard Chartered in Pakistan after the Union Bank acquisition will be larger than SCB's present stake in India, and is expected to make the Pakistani franchise an important contributor to SCB's bottom line.

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