Acquiring RBS by Faysal Bank

Acquiring RBS by Faysal Bank

Executive Summary

The report provides an overview and the short-term effect of the decision of acquiring RBS by Faysal Bank here in Pakistan. Starting with the introduction of the both the banks, their backgrounds, the scope of the operations and profitability, the report moves on to the advantages and reasons for acquiring, and then the quantitative ratio analysis of the before and after financials statements of the acquisition. The findings and the information is completely done by group by research.

After highlighting the ratios, an in depth analysis of the case is done. The analysis firstly presents the overall effect of the acquisition on the profitability of the bank and then also analyses the situation due to the financial and social conditions in the country. The analysis reveals that the bank is currently going through a low profitability time due to the heavy investment but the advantages that Faysal bank got with the acquisition will bring great benefits and profits in the long run.

RBS Bank:

The Royal Bank of Scotland is one of the retail banking subsidiaries of the Royal Bank of Scotland Group, and together with some other local banks, provides branch banking facilities throughout the British Isles in addition to having a global reach in many other countries. When RBS entered Pakistan it developed local knowledge and combined it with global expertise and financial strength and strived to deliver value to Pakistani customer. RBS had offices in all major cities including Karachi, Lahore, Islamabad and Rawalpindi and a significant presence in the Pakistani market. It claimed to focus on providing personal and business banking services as well as building extensive relationships with corporate and financial institutions.

RBS Pakistan combined local expertise, an extensive network of global contacts and a worldwide distribution platform to deliver a full spectrum of products and services which included

·         Financial markets

·         Transaction banking

·         Financial advisory

·         Mergers and acquisitions

·         Shariah- compliant products

FAYSAL BANK:

Faysal bank limited started its operations in Pakistan on October 3, 1994 as a public limited company under the company’s ordinance 1984. Currently Faysal bank has its shares listed on Karachi, Lahore and Islamabad stock exchange and is actively handling its operations in these cities. It is engaged in customer, commercial, corporate and Islamic banking activities. The bank has a bright future and has a long term credit rating of ‘AA’ and a short term rating as ‘A1+’ as determined by Pakistan credit rating agency limited (PACRA) and JCR-VIS credit rating company. Faysal bank strives to achieve excellence in whatever they do and are working towards achieving leadership in providing financial services in chosen markets through innovation.

Presently Faysal bank is providing services such as:

·         Deposit products

·         Consumer lending

·         Retail services

·         Corporate and banking services

·         Islamic banking

·         Bancassurrance

·         Priority banking

Acquisition of RBS by Faysal bank:

RBS had a merger with the Dutch bank ABN Amro a few years back, but that too did not help much in supporting and firming the shaky financial condition of the bank, and thus the subsequent downfall of the bank led to the decision of the management at RBS to end their operations in Asia by withdrawing their business in the retail and commercial sectors. Earlier the decision was to sell of RBS to the Muslim Commercial Bank of Pakistan for $87 million but it never got the regulatory approval.

Later, Faysal bank limited took over the controlling interests in the Pakistan operations of Royal Bank of Scotland Limited (RBS Pakistan), from the RBS Group for Euro 41 million which culminates in a share price of 2.5. In local currency this amount stands at 4.298 billion. This acquisition has extended and rooted Faysal Bank’s hold to over 200 branches, with combined business assets of over 260 billion, strengthening its balance sheet and improving its position amongst its competitor in the market. The merger of RBS Pakistan into Faysal Bank Limited was completed by January, 2011 thereby achieving a significant milestone in its growth strategy. RBS had 1,717,981,931 ordinary shares listed on the Karachi stock exchange, Lahore stock exchange and Islamabad stock exchange which are now owned by Faysal bank. According to the statement by the Faysal Bank, the merger completed and RBC became the formal and complete part of F.B from 31^st Dec’10.

Analysis of Strategic Factors (SWOT):

Strengths:

Based on financial strength and superior performance, Faysal Bank Limited has been assigned the highest short term rating of A1+ (A One Plus) and AA (Double A) for the long term by JCR-VIS (credit rating Company). Also:

·         Better technology like Symbols, implementation of Financial Oracle, HRMS.

·         Very attractive salary packages to employees.

·         Heavy internal financing i.e. from heavily growing deposits.

·         Attracted big corporations like SNGPL, Attock Group of Companies, Zaver Petroleum, etc.

Weaknesses:

    Weak branch network across the country.

·         Attracting only upper and middle class customers.

·         Low number of ATMs.

·         Market share is declining from new competition.

·         Employees’ frustration due to excessive work burden.

Opportunities:

·         It can capture agriculture market by offering innovative agri finance products.

·         Impressive print and electronic media campaign highlighting FBL’s role in the development of rural economy of Pakistan can give it competitive edge over its competitors.

·         Through re-branching, FBL can capture lot of new customers.

·         Merger with Barclays or Bank of China or RBS to become part of larger international banking

·         Network and to increase the profit.

Threats:

·         Declining trend in banking sector, which can affect it to large extent because of its big

·         Corporate customers which are few in number.

·         Arrival of Barclays and Bank of China in Pakistan, which can increase the competition in

·         Banking sector.

·         Decreasing trend in Earning per share and stock prices.

·         Moving of key employees, e.g. Corporate Relationship Managers, which means moving of

·         Corporate clients to other bank.

Motivation behind acquisition & the obvious advantages:

According to the analysts there were two main reasons behind this merger for the management at Faysal Bank, first was to increase its market share, and the second to develop themselves as the providers of premium banking products.  Also the motivation of becoming the 10^th biggest bank of the country and the obvious probability of Faysal Bank getting larger than Bank Al Habib and Askari Bank. Another reason was also that the brand equity of the bank is quite large and the brand itself, RBS is a plus point, as it is globally well recognized. The acquisition also helped Faysal bank in acquiring the some of the best human capital in Pakistan in terms of banking talent.

Acquisition and the after effects:

It’s quite early to see and analyze the effect of the merger on the overall performance of the F.B, as its only been 5 months that the RBS has officially and completely been added to the umbrella of the F.B. but as the consolidated financial statement of the bank is out for the period January to April, the figures and the statistics can be used to have a picture at this early stage of how the merger of both the companies has effected and aided the financial health of the F.B.

In one of the recent statements to the media, Naved A Khan, President & CEO Faysal Bank Limited said: “The acquisition is a significant milestone in Faysal Bank’s strategy to expand its presence and commitment to Pakistan, whilst offering a wider range of products across all business segments, with continued focus on improving customer experience. This expansion has resulted in positioning the bank as one of the key players in the financial sector, which is undergoing consolidation. The bank remains committed to all its stakeholders, customer and employees, while continuing to fulfill its corporate responsibilities.”
At another place Syed Naseem Ahmed, Chairman Faysal Bank Limited said: “This acquisition significantly complemented our ambitious growth plans. We will ensure that we optimize on the opportunities arising from this acquisition through providing the necessary support, investment and resources to the management of the bank with time further.”

As the obvious facts and the advantages and benefits of having RBS under its banner for F.B are qualitatively mentioned above and like the statement of the CEO of Faisal Bank says, it seems that the merger was a good decision by the management. But to have a more objective and a quantitative analysis, let us compare and contrast the financial statements of the last quarters i.e. the Jan-April 2011 and the Jan-April 2009 of the bank.

Ratios and the Quantitative Analysis:

In spite of certain limitations, accounting ratios are still considered as a convenient and reliable analytical tool. Ratio analysis, being a time-tested technique, is most frequently employed in all financial decision-making processes.

Gross profit ratio:

Gross Profit Ratio = (Gross profit / Net sales) × 100

The Gross profit ratio of an organization tells about the overall profitability of a company, as the operating income increases or decreases, the gross profit is affected and thus the ratio is changed. The decrease or increase in the ratio can be due to a number of reasons, which can be effected by sales or the markups.

As the financial statements shows the values of the operating profit of Faysal Bank for period ended Mar-2010 and Mar-2011, vary from Rs.2170million to Rs.783 million respectively, which is approximately a decrease of 64% from the previous year, thus the overall profitability can be said to be reduced over the year if the value alone is seen. But as we know that the bank very recently acquired whole 99.37% shares of the RBS, thus the huge outlay for the purchase and acquisition is the main reason for such a huge decline.

Earnings per share:

 EPS = Net Income – Dividends on Preferred Stocks / Outstanding Shares

The EPS of a company when calculated, alone is not much of a help to understand the financial health of a company, but when it is compared to the EPS of a previous year or quarter the EPS tends to tell the rate of growth of the company’s earnings. Now as indicated in the financial statement. The EPS of the bank over the last three quarters has decreased considerably, from Rs. 2.3 to Rs. 0.34 over the past year in Mar-2010 and Mar-2011 respectively. This means a decrease of 85% in the overall EPS for the shareholders. As the new acquisition by the bank was done so the resources and capital was consumed and return was decreased.

Dividend payout ratio:

Dividend Payout Ratio = Dividend per Equity Share / Earnings per Share

The dividend payout ratio indicates the amount and the portion of the earnings that are given out as dividends and the amount that is ploughed back and invested in the business. The higher the payout ratio the lower the earnings are ploughed back into the business. Lower payout ratios and the higher retained earnings means that the financial health of the company is strong.

According to the statements the dividend per share for the Mar-2011 is Rs. 0.171 which is better than the rate of Rs. 0.165 of the previous year. Also the dividend payout ratio of this year is better than the previous year, values being 50% for this year and 7.2% for the previous year. This can be reasoned as because the bank did the investment in the acquisition and thus wanted to keep the shareholders satisfied so increased the dividend this year.

Cash at Hand:

The cash at hand according to the balance sheet of the bank shows that there has been a decrease from the previous year, from Rs. 17,428,92 to Rs. 15,182,429 respectively. This also shows the effect of the acquisition of the company currently, as there has been a huge cash outlay from the company. This has an effect on the, liquidity of the bank, which has reduced due to the reduction in liquid assets such as cash on hand and equivalents.

Analysis:

 There is a clear decrease in the profits and the net income of the bank; this is due to the decision of the bank to acquire the RBS. According to the Bahrain parent company Ithmaar, the finances for the acquisition were to be arranged by local operations and capital reserves of Faysal bank here in Pakistan. The effect of the acquisition in the short-term as we saw above with the help of the ratios, is that it seems as if the financial health of the bank has weakened, though the high rate of taxes along with the high rate of inflation and the market condition itself which is going through a slump nowadays, also has played a very important part in the current operative conditions of the bank. Also the reason for the decline in the ratios and resultantly the financial health of F.B is due to the increase in operating expenses attributed to operations of RBS. After excluding administrative expenses of Rs.  1,251 million relating to RBS operations, administrative expenses increased by Rs. 300 million primarily on account of general inflation, salary increments and IT related expenses.

But even with the low operative profits and free cash at hand, the advantages that the bank gets to have in the long run from the diverse and the large customer base of RBS who are now part of F.B will prove to be advantageous for the bank. Also the premium customers that RBS had due to its brand name, who are now automatically part of the F.B will prove to be a great addition to the F.B operations here in Pakistan.

The brand equity or the net worth of the brand itself which F.B bought for Euro 41 million has the promise of giving great benefits to the F.B in future. Also the increase in investments and the resulting net mark up clearly indicates that the Faysal Bank is on its way to recovery and financial and operational strength. If it continues this rising trend in investments then soon the bank will be back on track in terms of financial health.

Also the lending to the financial inst has been made amounting to Rs. 100 million which is turning in interest contributing to the overall profit of the bank which is again a good sign for the future health if the bank. Profit of this quarter is much higher than the same quarter last year (pre-acquisition), but due to the deferral of taxes the net profit appears to be negative for the qauarter. 

Conclusion:

 As the ratios and the financial analysis of the bank for this quarter compared to the last quarter same year shows that there has been a decrease in the overall net profit in the short term, but the addition of the assets and the huge customer base of the RBS will benefit the company in the long run, and thus the company is sure to recover and come back to a healthy recovery in the future.