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Overview of Islamic Banking Industry of Pakistan & Potential for Initial Public Offering
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The 8th GSM, Nov 2009, Manama, Pakistan
1
Prepared By: Umair Munaf Moon
Overview of Islamic Banking Industry of Pakistan
& Potential for Initial Public Offering
October 2013
Umair Munaf Moon
Manager Operational Risk
Albaraka Bank Pakistan Ltd
The 8th GSM, Nov 2009, Manama, Pakistan
2
2,706
3,269 2,946
4,242
5,259 651644
638
573
564
520
540
560
580
600
620
640
660
-
1,000
2,000
3,000
4,000
5,000
6,000
Dec-09 Dec-10 Dec-11 Dec-12 Sep-13
No
. o
f L
iste
d C
om
pa
nie
s
Am
ou
nt
in R
s.
(Bil
lio
n)
Total Market Capitalization Total Number of Listed Companies
Five Years Progress Chart
SOURCE: KARACHI STOCK EXCHANGE
Reasons for Delisting:
i) Violation of listing regulations
ii) Voluntary delisting
Karachi Stock Exchange
Prepared By: Umair Munaf Moon
The 8th GSM, Nov 2009, Manama, Pakistan
3
Establishment of a more stringent regulatory framework through a number of
initiatives, most recently in the shape of a corporate governance code, played an
important role in scaring away at least a few companies that wished to go public.
Poor economic conditions in recent years, as fewer companies considered it viable
to raise capital through a public offering.
After the 2008 Global Crisis, world industrial growth suffered and there was no
appetite for investment, which resulted in fewer IPOs.
Declining trend in IPOs is not Pakistan-specific. Rather, it is a global phenomenon.
Number of IPOs in 2012 slumped to lowest level since financial crisis, as signs of
economic slowdown curbed demand & prompted companies to push back sales.
The annual global IPO tally declined for a second straight year… In Asia, the
biggest region for IPOs, proceeds fell 43% to $46.7 billion. (BLOOMBERG)
Tax rates in Pakistan are also skewed towards non-listed entities, which discourage
companies from going public. The current corporate tax rate for both listed and non-
listed companies in Pakistan is 35%.
Reasons for Decline in Listed Companies at KSE
SOURCE: Nadeem Naqvi, Managing Director, KSE.
Prepared By: Umair Munaf Moon
The 8th GSM, Nov 2009, Manama, Pakistan
4Karachi Stock Exchange
Newly listed Companies at KSE – Last Five Years
8,444
24,495
14,066
1,184
(4,547)
46
4
4
22
97
68
11
-30
-10
10
30
50
70
(5,000)
-
5,000
10,000
15,000
20,000
25,000
Dec-09 Dec-10 Dec-11 Dec-12 Sep-13
Num
ber
of
New
D
elist
ed /
Lis
ted C
om
panie
s
Net
Capit
al fl
ow
fro
m lis
ting a
nd d
elist
ing
of
Com
panie
s in
Rs
(Million)
Capital Inflow / Outflow of Companies New Listed Companies Number of Delisted Companies
SOURCE: KARACHI STOCK EXCHANGE
Prepared By: Umair Munaf Moon
The 8th GSM, Nov 2009, Manama, Pakistan
5Karachi Stock Exchange
IPO Price to Book Ratio
Year Company NameShare offered @
Premium of Rs.
Net Issue Price
in Rs.
Share Price as
at 09-Oct-13
(Rs.)
Price To
Book Ratio
2013 Lalpir Power Ltd Rs. 12.00 Rs. 22.00 Rs. 18.99 0.86
Next Capital Ltd - Rs. 10.00 Rs. 4.28 0.43
TPL Trakker Ltd - Rs. 10.00 Rs. 7.00 0.70
Aisha Steel Mills Ltd - Rs. 10.00 Rs. 8.05 0.81
International Steels Ltd Rs. 4.06 Rs. 14.06 Rs. 17.70 1.26
Pakgen Power Ltd Rs. 9.00 Rs. 19.00 Rs. 20.00 1.05
Engro Foods Ltd Rs. 15.00 Rs. 25.00 Rs. 100.43 4.02
TPL Direct Insurance Ltd - Rs. 10.00 Rs. 8.99 0.90
Ghani Gases Ltd Rs. 4.00 Rs. 14.00 Rs. 15.82 1.13
Fatima Fertilizer Company Ltd Rs. 3.50 Rs. 13.50 Rs. 24.80 1.84
Safe Mix Concrete Products Ltd Rs. 2.50 Rs. 12.50 Rs. 8.50 0.68
Agritech Ltd Rs. 20.00 Rs. 30.00 Rs. 12.25 0.41
Amtex Ltd Rs. 3.00 Rs. 13.00 Rs. 2.29 0.18
Wateen Telecom Ltd - Rs. 10.00 Rs. 4.50 0.45
Media Times Ltd - Rs. 10.00 Rs. 3.16 0.32
Nishat Power Ltd - Rs. 10.00 Rs. 31.01 3.10
Nishat Chunian Power Ltd - Rs. 10.00 Rs. 37.26 3.73
Arif Habib Bank Ltd * Rs. 11.00 Rs. 21.00 Rs. 29.50 1.40
Invest and Finance Securities Ltd - Rs. 10.00 Rs. 14.00 1.40
Thatta Cement Company Ltd Rs. 12.50 Rs. 22.50 Rs. 25.79 1.15
Dawood Equities Ltd Rs. 7.50 Rs. 17.50 Rs. 2.03 0.12
Engro Polymer & Chemicals Ltd Rs. 8.00 Rs. 18.00 Rs. 13.04 0.72
KASB Securities Ltd Rs. 57.50 Rs. 67.50 Rs. 6.16 0.09
First Credit and Investment Bank Ltd - Rs. 10.00 Rs. 3.00 0.30
Descon Oxychem Ltd - Rs. 10.00 Rs. 5.80 0.58
2012
2011
2010
2009
2008
*IPO P/B Ratio = Current Share Price / Net Issue Price SOURCE: KARACHI STOCK EXCHANGE
Prepared By: Umair Munaf Moon
The 8th GSM, Nov 2009, Manama, Pakistan
6
Other, 8
Power, 4
Financial Sector, 6
Fertilizer, 2
Steel, 2Chemical, 2
Bank, 1
Listing By Sectors
2
15
10
NA P/B Above 1 P/B Below 1
Price to Book Ratios (x)Issue Price
12 @ Par
15 @ Premium
Karachi Stock Exchange
Listing of Companies (2008-2013)
SOURCE: KARACHI STOCK EXCHANGE
Prepared By: Umair Munaf Moon
The 8th GSM, Nov 2009, Manama, Pakistan
7Karachi Stock Exchange
Newly listed Companies at KSE – Last Five Years
Not a single bank was listed during the last five years, last Bank to get listed was
ARIF HABIB BANK on 11-Feb-2008.
Total number of new listings at KSE was 20 as compared to 97 delisted companies
since year 2009.
Net capital Outflow in year 2013 shows lack of interest from investors in IPO
Market.
Total Listed Companies at KSE are 27 since year 2008. Out of 27 Listings, 15 issued
their shares on Premium.
Out of 27 Listings, shares of 9 companies were subscribed by underwriters due to
its unpopularity in Stock Market.
Price to Book (P/B) Ratios of most of the companies is below 1.
Only Power & FMCG Sectors witnessed a better P/B Ratios amongst all 27 Listings.
SOURCE: KARACHI STOCK EXCHANGE
Prepared By: Umair Munaf Moon
The 8th GSM, Nov 2009, Manama, Pakistan
8
Prepared By: Umair Munaf Moon
Outlook for Pakistan's banking system remains negative, reflecting banks' large and
increasing holdings of government bonds, which render their balance sheets vulnerable
to sovereign credit risk and the challenging domestic operating environment which will
continue to pressure asset quality.
These negative pressures are only partly mitigated by banks' low cost and stable
deposit-funded profiles.
Banks' high and increasing exposure to Pakistani government debt will remain a
major source of credit risk, as the government will continue to run large deficits over
the outlook period, which will be financed in a large part by domestic banking sector.
Operating conditions will also remain challenging due to low growth rate, significant
fiscal imbalances, low foreign exchange reserves, fragile political environment and
structural problems, particularly in the energy sector where power outages have
depressed manufacturing activities and led to a fall in private investment.
This will suppress demand for credit and lead to increases in NPLs which stood at
14.7 percent as of March, 2013. Also, reported NPL figures understate the full extent of
asset-quality deterioration in the banking system due to high level of problematic
government guaranteed loans that are not classified as NPLs.
Banking Sector
Future Outlook
SOURCE: Moody's Investors Service, 22nd July, 2013
The 8th GSM, Nov 2009, Manama, Pakistan
9Islamic Banking
Islamic Banking in Pakistan has tremendous growth potential
Islamic banking in Pakistan has witnessed significant growth during the last decade and
now constitutes over 10 percent of the country’s banking system with an asset base of
above Rs 900 billion and a network of more than 1,100 branches
Given the interest of all stakeholders and relatively high level of financial exclusion in
the country, this expansionary trend is likely to continue and the industry is well set to
double its market share by 2020
Promoting Islamic finance as a viable and competitive component of the financial
system through enabling legal, regulatory and supervisory environment has remained an
important component of SBP‟s strategic goals. SBP have accordingly developed the five
year Strategic Plan for Islamic Banking industry again through a rigorous and meaningful
consultation with all the key stakeholder
17 48 70150
289
515
651
751
886
1,097 1,115
0
200
400
600
800
1000
1200
0
2
4
6
8
10
12
14
16
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Full Fledge Islamic Banks
Conventional Banks with IB Branches
Total No. of Branches*
SOURCE: SBP, Islamic Banking Bulletin Apr-June 2013
Prepared By: Umair Munaf Moon
The 8th GSM, Nov 2009, Manama, Pakistan
10
Prepared By: Umair Munaf Moon
The fiscal deficit has widened from 5% of GDP in FY 2008 - 2009 to about 8.8% of
GDP in FY 2012 – 2013.
Depleting Foreign Exchange reserves further weakens the domestic currency by 9%
against USD since Jan 2013.
According to IMF, on-going currency depreciation and reduced energy subsidies will
likely result in higher inflation in Pakistan.
A circular debt of Rs 100 billion has resurfaced in the power sector despite
clearance of the previous circular debt of Rs 503 billion.
World Bank has identified macro economic instability, massive cuts in electricity
access, leading to high country risk and a sudden stop in external, domestic
financing and government failures as some of the major constraints of growth in
Pakistan.
Persistent deterioration in the law & order situation of the country further act as
a barrier to economic growth.
Constraints to Pakistan’s Economic Growth
The 8th GSM, Nov 2009, Manama, Pakistan
11
P/B (x)
Silk Bank 0.81
JS Bank 0.46
Faysal Bank 0.50
Soneri Bank 0.67
Summit Bank 0.80
Bank of Punjab 0.46
Habib Metro 0.86
Bank Islami 0.53
Meezan Bank 2.23
Bank of Khyber 0.57
Samba Bank 0.31
Average 0.75
Note: P/B = Current Market Price (10/10/2013) / Last Qtr Book value per share
Comparable Analysis
Domestic Price to Book (x) Multiple of Mid Tier Banks
Prepared By: Umair Munaf Moon
The 8th GSM, Nov 2009, Manama, Pakistan
12Valuation
Pakistan Price to Book (x) Multiple Valuation
Approach: P/B (X) Multiple for
Pakistan Mid Tier banks
P/B (X)
Multiple
Book Value per
share
PKR Value per
share
Conservative Case 0.31 8.78 2.72
Base Case 0.75 8.88 6.66
Aggressive Case 2.23 9.00 20.07
Average P/B (x) for 11 Mid Tier banks is 0.75x
Tier III banks data set includes 9 listed conventional and 2 listed Islamic Banks
Islamic Banks data set includes Meezan Bank and Bank Islami
Lowest, Average and highest P/B(x) considered as conservative, base and
aggressive case scenario respectively
Prepared By: Umair Munaf Moon
The 8th GSM, Nov 2009, Manama, Pakistan
13
Prepared By: Umair Munaf Moon
Factors to be Considered For IPO
Factors Assessment
Duration of IPO Process LENGHTY
IPO Market Performance WEAK
Country’s Economic Outlook WEAK
The 8th GSM, Nov 2009, Manama, Pakistan
14
Prepared By: Umair Munaf Moon
Thank You