Pakistan Joint Venture Financial Institutions – An Overview April 2013 Background Profile Performance Assets Quality Capital Structure Outlook on the Sector
Pakistan Joint Venture Financial Institutions – An Overview
April 2013
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
BackgroundPost world war concept.“Development banks are government-sponsoredDevelopment banks are government sponsored financial institutions concerned primarily with the provision of long-term capital to industry’’ 1
Unique objective of the economic developmentPakistan Industrial Development Corporation of p pPakistan (PIDC) - first Development Financial Institution (DFI) - established in 1950.
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
Leading DFIs in INDIALeading DFIs in INDIAIndustrial Credit and Investment Corporation of India(ICICI) formed in 1955 transformed its business from2(ICICI), formed in 1955, transformed its business froma development financial institution to a diversifiedfinancial services group in 1990s.g pMerger of ICICI and two of its wholly-owned retailfinance subsidiaries, with ICICI Bank in 2002.ICICI Bank – second-largest bank of India – with totalassets of INR 4,736bln at March 31, 2012 earned aprofit of INR 64bln for the same period.
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
L di DFI i INDIALeading DFIs in INDIAIndustrial Development Bank of India Limited (IDBI),established in 1964 was transformed into a commercial
3
established in 1964, was transformed into a commercialbank in 2004.Merger of IDBI Bank Limited with IDBI Limited – theMerger of IDBI Bank Limited with IDBI Limited – theparent company in 2005.Currently working as IDBI Bank Limited the bank’sCurrently working as IDBI Bank Limited, the bank s total assets size reached to INR 2,908bln as on March 31, 2012, while it registered a profit of INR 20bln for that period.
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
DFIs in PAKISTANSr. # Segment DFI Current Status
1 Industrial Development Bank of Pakistan Active1.
Fi i l
Industrial Development Bank of Pakistan Active2. Pakistan Industrial Development Corporation of Pakistan Active
3. Pakistan Industrial Credit and Investment Corporation Acquired by a private Commercial bank
4. National Development Finance Corporation Merged in a National Bank Financial
Institutions5. Investment Corporation of Pakistan Acquired by private sector 6. Small Business Finance Corporation Amalgamated into SME Bank
Limited7. Regional Development Finance Corporation8. House Building Finance Corporation Active
9. Zarai Tarqiati Bank (formerly Agricultural Development Bank of Pakistan) Active
10Capital Market
National Investment TrustAcquired by private sector
Equity Participation Fund11.Banker's Equity Limited Under winding up12. a e s qu ty ted U de w d g up12.
13.
Joint
Pak Libya Holding Company (Private) Limited ActivePakistan Kuwait Investment Company (Private) Limited Active
14. Saudi Pak Industrial and Agricultural Investment Company Limited Active
15. Pak Oman Investment Company Limited ActiveVenture
Pak Oman Investment Company Limited Active16. Pak Brunei Investment Company Limited Active17.
PAΪR Investment Company Limited Active18.
Pak China Investment Company Limited Active19.
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
Lack of proper supervision poor management andDFIs in PAKISTAN
Lack of proper supervision, poor management anddeterioration in the loan portfolio created severechallenges even to the extent of the survival.gNo separate regulatory framework was establishedwhich brought challenges resulting in the mergersIndustrial Development Bank of Pakistan, ZaraiTarqiati Bank and SME Bank Limited, with theobjective of economic development, also havebanking license.A f H B ildi Fi C iApart from House Building Finance Corporationall other DFIs are working as Joint VentureFinancial Institutions (JVFIs) in PakistanFinancial Institutions (JVFIs) in Pakistan.
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
JVFIs 3 Years Rating HistoryJVFI PACRA Rating (5) JCR Rating (4)
4
Pakistan Kuwait Investment Company (Private) Limited AAA AAA
Pak Oman Investment Company Limited - AA+
Pak Brunei Investment Company Limited AA AA+
Saudi Pak Industrial and Agricultural Investment Company Limited
- AA
PAΪR Investment Company Limited AA- -
Pak China Investment Company Limited AA- -
Pak Libya Holding Company Limited AA- -
JVFI's Ratings
1
2
3
4
g
02012 2011 2010 2012 2011 2010 2012 2011 2010 2012 2011 2010
AAA AA+ AA AA-
PACRA JCR Negative OutlookPositive Outlook
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
Regulatory Framework
Regulatory supervision is done by two government bodiesI. State Bank of Pakistan - SBP (as these are financial
institutions) II Ministr of Finance MoF (ha ing in estment inII. Ministry of Finance – MoF (having investment in
these JVFIs directly and through SBP)
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
Regulatory Framework - SBPSBP – Regulator of the Banks/JVFIs govern theinstitutions through Banking Companies Ordinance, 1962and Prudential Regulations:and Prudential Regulations:Prudential Regulations:I. Corporate / Commercial Banking . Co po a e / Co e c a a gII. Small and Medium Enterprises Financing III. Agricultural FinancingIV. Consumer Financing
No separate/specific regulatory framework has been p p g yestablished for these JVFIs
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
Regulatory Framework - MoF
Joint secretary Internal Finance
Finance Secretary
Additional Finance
Secretary (I t l Fi
Internal Finance /Banking Deputy
Secretary (Investment I) CCP d SECPSecretary (Internal Finance
and Investment)
Joint Secretary Investments
CCP and SECP
DDeputySecretary
(Investment II)JVFIs and IDBP
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
JVFIs – Sponsor’s Profile
Sr. # Name of the JVFIDate of
Incorporation
GoP’s Representative
Body*Partner Representative Body
Partner’s GDP (USD bln)
Partner’s Sovereign
Ratings 5 6y g
1.Pak Libya Holding Company (Private) Limited
October 1978State Bank of Pakistan
Libyan Foreign Investment Company, Government of Libya
62.3 (2009)BB, -Ve Outlook by S&P
(March 2011)
2Pakistan Kuwait Investment Company March 1979
State Bank of Kuwait Investment Authority, 176 6 (2011)
AA by S&P 2. Investment Company
(Private) Limited March 1979
Pakistan Government of Kuwait 176.6 (2011)
(November 2011)
3.
Saudi Pak Industrial and Agricultural Investment Company Limited
December 1981State Bank of Pakistan
Public Investment Fund , Kingdom of Saudi Arabia
576.8 (2011) AA- by S&P
(July 2007)Limited ( y )
4.Pak Oman Investment Company Limited
July 2001Ministry of Finance
Ministry of Finance,Sultanate of Oman
71.7 (2011)A by S&P
(January 2007)
5.Pak Brunei Investment Company Limited
November 2006Ministry of Finance
Brunei Investment Agency, Brunei Darussalam
16.4 (2011) Not Ratedp y
6.PAΪR Investment Company Limited**
January 2007Ministry of Finance
Iran Foreign Investment Company,Government of Iran
331 (2009) Not Rated**
7Pak China Investment
J l 2007Ministry of China Development Bank,
7 318 4 (2011)AA- by S&P
*GoP’s GDP: USD 210.2 bln (2011) and GoP’s Sovereign rating: B- (S&P) and Caa1 with –ve Outlook (Moody’s) ** I ’ l t t i ti i d b Fit h t B+ d it h ld i t t till ithd i 2008
7.Company Limited
July 2007y
Finance p ,
Government of China7,318.4 (2011)
(December 2010)
** Iran’s latest sovereign rating was assigned by Fitch at B+ and it was held intact till withdrawn in 2008.
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
Governancel d i h h S kRegulatory governance structure entrusted with the State Bank
of PakistanEqual representation as per Joint Venture Agreement q p p gBoD independent from management
Sr. # JVFI Number of Members
1 Pak Libya Holding Company (Private) Limited Six members including one Managing Director and one Deputy1. Pak Libya Holding Company (Private) Limited g g g p yManaging Director
2. Pakistan Kuwait Investment Company (Private) Limited Six members including one Managing Director
3. Saudi Pak Industrial and Agricultural Investment Company Limited Six members including one Deputy Chairman*p y
4. Pak Oman Investment Company Limited Six members including one Managing Director
5. Pak Brunei Investment Company Limited Four members including one Managing Director
6 PAΪR Investment Company Limited Six members including one Managing Director
*The General Manager/Chief Executive Officer of Saudi Pak is not a director
6. PAΪR Investment Company Limited Six members including one Managing Director
7. Pak China Investment Company Limited Six members including one Deputy Chairman, one ManagingDirector and one Deputy Managing Director
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
GovernanceExpose to political intervention as no transparentframework available for the nomination of directorLimited guidance due to frequent changes indirectors holding Ex officio positionsStrategic void due to lesser number of meetings
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
ManagementgManaging Director (MD)/Chief Executive Officer(CEO) f JVFI i ibl t th ff i f(CEO) of JVFI is responsible to manage the affairs ofthe company under the supervision of the BoDPressure at the leadership positionsPressure at the leadership positionsEstablishment of stable teams remains critical
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
JVFIs JVFIs - Asset Structure
7
25%
30%
35%
40%
100 000
120,000
140,000
160,000
JVFIs Asset Structure
10%
15%
20%
25%
40,000
60,000
80,000
100,000
PKR i
n mln
CY09 CY10 CY11 9MCY12*Advances 26,688 32,842 34,299 33,674 TFCs / PTCs / CPs - Net 14,886 17,815 16,464 16,279 Investments 49,026 40,296 56,332 65,962 Deposit ith banks 7 349 2 807 2 451 2 659
0%
5%
-
20,000
Deposit with banks 7,349 2,807 2,451 2,659 Lending to FIs 12,276 9,079 2,905 1,553 Others 3,531 11,114 12,001 12,987 Total Assets 113,756 113,953 124,452 133,114 Growth in Assets 34% 0.1% 9% 7%
* Unaudited
Limited asset growth Significant growth in investments mainly in government securities (more than 75%) signifying low risksecurities (more than 75%) signifying low risk Background Profile Performance Assets
QualityCapital
StructureOutlook on the Sector
JVFIsJVFIs - Profitability Analysis
16%
20%
24%
28%
32%
4 000
5,000
6,000
7,000
8,000
ln
0%
4%
8%
12%
16%
-
1,000
2,000
3,000
4,000
PKR m
l
CY10 CY11 9MCY12*Total Revenue 6,446 6,954 5,733 Operating Cost 1,725 1,889 1,592 Provisioning (NPLs) (34) 506 252 Impairment on Investments 1,162 2,054 1,243 N I
-4%(1,000)
Nominal spreads
Net Income 2,163 789 1,572 Cost-to-Revenue 26.8% 27.2% 27.8%ROA 2.1% 0.7% 1.4%
* Unaudited
Nominal spreadsSignificant provisioning/ impairmentSubdued profitabilityp y
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
JVFIsJVFI Asset Quality Complete View
80%
100%
12,000
15,000 JVFI - Asset Quality Complete View
40%
60%
6,000
9,000
PKR
in m
ln
20%3,000
CY09 CY10 CY11 9MCY12*NPLs 7,368 7,633 8,353 10,252 Provision 5,754 5,951 6,498 6,429 Net NPLs 1,614 1,682 1,855 3,823 NPLs / Gross Advances 22% 19% 20% 23%
0%-
Increased credit risk
Net NPLs/Equity 3% 3% 3% 7%Provision/NPLs 78% 78% 78% 63%
* Unaudited
Increased credit riskBackground Profile Performance Assets
QualityCapital
StructureOutlook on the Sector
35%JVFIs - Top 5 Advances Sector Wise
JVFIs
15%
20%
25%
30%
CY10 CY11Energy, oil and gas 30% 30%Textile 18% 18%
0%
5%
10%
Chemical and fertilizer 12% 13%Transport/services and misc. 8% 8%Sugar and allied products 5% 6%
35%
40%
JVFIs - Top 5 NPLs Sector Wise
5%
10%
15%
20%
25%
30%
35%
CY10 CY11Textile 34% 32%Construction 8% 13%Cement 12% 12%Energy, oil and gas 11% 9%Automobiles and allied 10% 9%
0%
5%
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
JVFIsJVFI - Equity Structure
80%
100%
60,000
75,000 q y
40%
60%
30,000
45,000
PKR
in m
ln
20%
40%
15,000
30,000
CY09 CY10 CY11 9MCY12*Pure Equity 52,440 55,695 56,000 56,787 Revaluation Surplus/(Deficit) 1,891 1,677 909 1,716 Total Equity 54,331 57,372 56,909 58,503
0%-
Lower MCR as compared to banks
Total Equity to Assets 47.8% 50.3% 45.7% 43.9%CAR 68% 66% 64% 79%
* Unaudited
p
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
JVFIsJVFIs - Liability Structure
40%
50%
60%
60,000
75,000
90,000
JVFIs Liability Structure
10%
20%
30%
15,000
30,000
45,000
PKR
in m
ln
CY09 CY10 CY11 9MCY12*Deposits 18 074 16 492 12 074 14 571
-20%
-10%
0%
(30,000)
(15,000)
-
Deposits 18,074 16,492 12,074 14,571 Borrowings 38,791 38,029 52,912 57,046 Others 2,561 2,064 2,558 2,994 Total Liabilities 59,426 56,584 67,543 74,611 Growth in Liabilities 33% -5% 19% 10%
Low leveraged capital structureLimited funding avenues
* Unaudited
ted u d g ave ues
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
Opportunities ppLow leveraging providing significant room for expansion(Sector CAR: above 60%)Only few new projects/ventures have been started by fewJVFIs as against the mandate. These JVFIs may work aspartners for the development of industrial sectorpartners for the development of industrial sector
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
Ch llChallengesTransition to PSEs’ Corporate Governance structureE d li i l i i f i kExposed to political intervention for appointment at key positions Absence of a separate regulatory framework as these JVFIsAbsence of a separate regulatory framework as these JVFIs are supervised as a commercial institutionUnderdeveloped skill setup for evaluation of project fi ifinancingFew viable funding sources resulting in higher cost Limited outreachLimited outreach
Background Profile Performance AssetsQuality
Capital Structure
Outlook on the Sector
Bibliography
1. Armendáriz de Aghion (1999, p. 83)2. http://www.icicibank.com/aboutus/about-us.html 3 http://www idbi com/idbi bank history asp3. http://www.idbi.com/idbi-bank-history.asp4. http://www.pacra.com/
http://www.jcrvis.com.pk/5. The World Bank: http://data.worldbank.org/countryp g y6. http://www.standardandpoors.com/ratings/sovereigns/ratings-
list/en/us/?sectorName=Governments&subSectorCode=39&subSectorName=Sovereigns7. Financial statements:
i P k Lib H ldi C (P i t ) Li it di. Pak Libya Holding Company (Private) Limited, ii. Pakistan Kuwait Investment Company (Private) Limited, iii. Saudi Pak Industrial and Agricultural Investment Company Limited, iv. Pak Oman Investment Company Limited,iv. Pak Oman Investment Company Limited, v. Pak Brunei Investment Company Limited, vi. PAΪR Investment Company Limited, vii. Pak China Investment Company Limited
Analysts Rana M. Nadeemnadeem@pacra com
Aisha Khalidaisha@pacra com
Saira Rizwansaira rizwan@pacra com
M. Shahnawaz A. Khanzadashahnawaz aziz@pacra [email protected] [email protected] [email protected] [email protected]
Contact Number: +92 42 3586 9504
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