overview of islamic banking industry & potential for initial public offering

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


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



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.



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





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



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)





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.




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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


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



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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


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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



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



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Factors to be Considered For IPO

Factors Assessment

Duration of IPO Process LENGHTY

IPO Market Performance WEAK

Country’s Economic Outlook WEAK


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Thank You

overview of islamic banking industry & potential for initial public offering

Economy & Finance

umair munaf moon

karachi stock exchange

arif habib bank

islamic banking industry

newly listed companies

islamic banking

listed companies

8th gsm