Nib Bank Merger Case

Will it be a win-win Proposition?

This case is written by Roma Israni1& Bakhtawar Shaikh2 , solely to provide for class discussion. The author may have disguised certain names and other identifying information to protect confidentiality. This Publication may not be transmitted, photocopied, and digitalized, or otherwise reproduced in any form by means without the permission of copyright holder. This Case Study covers practical implications of Business theories, models, and structures. This is written for Financial Reporting and Analysis.

Its June, the last month of Pakistan’s fiscal year, After analyzing financial statements of NIB Bank, Mr.Shanawaz is looking disturbed because of bank’s performance, so many questions raised in the mind of Mr. Shanawaz that either the bank will perform well enough in future to support its operations or not? Will the bank continue its strategy for longer period? Will the economic indicators support the NIB bank for the future actions? He became further confused when MCB Bank has given them offer of merger. Would this attempt of merging will be beneficial for the NIB Bank? Either this merging option will reduce its risks of bankruptcy or not? If NIB Bank will not follow the MCB Bank offer of merging then what type of activities will make the bank more profitable than the option of merging? For pondering over these situations, he along with the bank’s higher authorities’ recommendations have decided to hire external consultant for individually analyzing these financial statements and who will provide independent bank’s performance and also give suggestions for the future actions.

About NIB Bank Pakistan: NIB bank is the subsidiary of Bugis investments (Mauritius) Pte. Ltd that is a wholly owned subsidiary of Fullerton Financial Holdings Pte. Ltd. NIB is amongst the largest foreign banks of Pakistan having the extensive 1 Roma Israni is student of MBA program studying at IBA Sukkur. She is currently working on the case in order to find some financial dilemmas regarding NIB Bank Pakistan. This case is solely written for Financial Reporting and Analysis.2 Bakhtawar Shaikh is student of MBA program studying at IBA Sukkur. She is currently working on the case in order to find some financial dilemmas regarding NIB Bank Pakistan. This case is solely written for Financial Reporting and Analysis.

branching network in 52 cities of Pakistan. Also one of the largest corporate entities with a paid up capital of PKR 103 billion. The NIB bank started its operations in October 2003 with the merger of National Development Leasing Corporation (NDLC) and the Pakistan operations of IFIC bank. From the start bank grew well and acquired The Pakistan operations of Credit Agricole Indosuez in 2004 and then On December 31st 2007, NIB successfully merged with Pakistan Industrial Credit & Investment Corporation ltd. (PICIC) and PICIC Commercial Bank ltd. (PCBL). With total assets swelling up to PRs. 176.7 billion, advances to PRs 82.2 billion and deposits to an amount of PRs 116.7 billion the merger resulted in formation the seventh largest commercial bank in the country in terms of distribution network The bank serves its customers through all financial and banking needs by having 170+ branches with online connections and 160 ATM. The bank satisfies its customers by providing world class financial products and services by different business units includes Retail Banking, Commercial Banking, Corporate and investment banking, and Treasury Services. The main stockholder of NIB is Temaesk through its wholly owned subsidiary Fullerton Financial Holdings ltd. Basically Temaesk is a Singapore based Investment Company incepted in 1974. NIB has a team of eight Board of directors. The NIB aims to be a high performing bank admired for inspired employees, satisfying customer services and for innovation. NIB bank CEO and director is Mr. Atif R. Bukhari.

Business Portfolio: NIB has the vast portfolio of financial products that includes Deposits, Consumer loans, Wealth management, Trade Finance, Working Capital Finance, Seasonal Finance, and Medium Term Finance, Transaction banking, etc. And also the financial services through three different business units like: Retail banking: Consumer banking includes the services by a bank to individual consumers, instead of companies, corporations or other banks. Services offered include savings and transactional accounts, mortgages, loans, debit, and credit cards. Commercial Banking: Commercial bank is a division of a NIB bank, which more specifically deals with deposit and loan services provided to corporations or large/middle-sized business. Investment Banking: It is division of NIB that assists individuals, corporations, and governments in raising financial capital by underwriting or acting as the client's agent in the issuance of securities.

Glimpse of the Financial Performance of NIB: Since its inception in 2003 initially NIB performed well and grow itself by acquisition and merger. However the financial statements of NIB shows the instability of the profits and revenues the reason behind this is the economic indicators as well as the management decisions. Loss making NIB bank posted three years consecutive loss without declaring single penny of dividend to its shareholders. 37-members group of minority shareholders sent a letter to the Central Bank and request for hiring external auditor for saving the Pakistani holders. The stakeholders having the claim of about RS 2 billion in the bank’s capital. Due to the hidden and highlighting weaknesses bank had incurred loss of about RS 56.156 billion from 2010 to 2012. Stakeholders blamed the bank management for the losses and considering the administrative expenses as the contributing factor. Not only this, bank has increased its expenditures by booking seven floors at the PNSC building and is spending millions to reinvigorate the same building. And also bank has increased its salaries expense without any productive results. The Bank has not declared any dividend to its shareholders since it is handed over by Temasek for six years back. Before acquisition of Temasek, bank was used to give dividend and bonuses every year. The share price of the bank was about RS 80 when it was PICIC Commercial Bank. In spite of claiming to be largest paid up capital, bank has not raised its share price more than Rs.3. share price is moving around RS 1.5 to RS 2.8. After contacting the spokesman of NIB Bank, he admitted that losses has occurred since the last five years but bank has improved its performance from the first quarter of 2013, posted the profit before tax of about RS. 549 million compared to a loss before tax of RS 98 million in the year of 2012. He further pointed out its current new management that it is improving its policies and showing results. It is true that in previous years shareholders has not received any share in the bank’s earnings but now they will not be neglected because bank is now in position to increase its revenues. He further said that about the extravagant expenditures that bank has increased its revenues by 25% compared to its 10% expenditure. This is an economic move for the bank because the new location is cheaper place than the old place that was Pakistan’s most expensive place.

A tough decision to be made by NIB: MCB Bank has showed interest in the acquiring assets of NIB Bank in order to obtain an advantage in the competitive industry of Pakistan. The merger will lead to the persistent work of operations share prices of both Banks. And this

will be done only with the permission of State Bank of Pakistan and also with the permission of SECP and CCP. NIB Bank has officially announced that by the merger of two banks stakeholders of the NIB Bank will remain the investor of the MCB Bank. These are the only talks between the banks nothing more than this declared by NIB management. According to some analyst If the both banks come to mutual decision of having a merger of MCB and NIB bank then this may be the win-win situation for both of the banks as MCB will get the benefit from the vastly expanded branch networking of NIB bank as MCB has adequate liquidity and capital buffer to grow itself through risky assets and take a initiate to expand and face the competition more strongly on the other hand NIB having lower capital adequacy of 12.5%, high cost to income of 95% in CY15. With 21% of total loan book currently classified, heavy cost structure, low interest rate environment and adverse changes in the minimum deposit rate last year, the bank’s earnings and business turnaround looks stretched.

Questions: 1. Analyze the performance of NIB bank through ratios by using financial statements provided in the Exhibits. 2. Comment over the flaws in the NIB bank’s financial performance after working through the ratio analysis. 3. What do you think would be the best decision for NIB? Whether to go for merger or not? 4. What should be the future steps that management of NIB should take in order to get stable profits in the coming years if it does not go for merger? EXHIBIT 1

Income Statement NIB Bank

+ Total Interest Income - Total Interest Expense + Net Interest Income + Trading Account Profit

2012 14,095. 1 11,125.8 2,969.3 1,059.8

2013 13,228. 1 9,878.1 3,350.0 998.1

2014 15,144. 9 11,248.9 3,896.1 1,102.7

2015 14,928.6 10,086.7 4,841.9 4,164.0

+ Commissions & Fees Earned + Other Operating Income Net Revenue - Provisions for Loan Losses Net Revenue After Provisions

1,166.2 157.7 5,353.0 116.5 5,236.5

1,620.4 226.8 6,195.3 -751.0 6,946.3

1,616.9 10.2 6,625.8 1,536.5 5,089.3

1,420.9 3.0 10,429.8 199.2 10,230.5

- Non-Interest Expense Operating Income or Losses - Net Non-Operating Losses (Gains) Pretax Income - Income Tax Expense (Benefit) Income Before XO Items - Extraordinary Loss Net of Tax - Minority/Non-Controlling Interests (Credits) Net Income/Net Profit (Losses)

5,413.1 -176.6 -617.1 440.5 178.4 262.1 0.0

5,636.5 1,309.8 -802.5 2,112.3 532.3 1,580.1 0.0

6,305.0 -1,215.7 -575.1 -640.6 423.3 -1,064.0 -443.3

6,388.8 3,841.8 10.0 3,831.8 1,390.8 2,441.0 -109.5

4.8 257.3

43.4 1,536.6

99.2 -719.9

15.9 2,534.6

EXHIBIT 2

Balance Sheet NIB Bank Assets + Cash & Near Cash Items + Inter banking Assets + Short-Term Investments + Net Loans + Total Loans - Reserve for Losses on Loans + Long-Term Investments + Net Fixed Assets + Other Assets Total Assets Liabilities & Shareholders’ Equity + Demand Deposits

2011

2012

2013

2014

2015

7,411.5 16,711.0 39,386.4

7,282.0 4,788.6 75,139.9

7,681.5 3,142.2 53,768.3

7,767.0 8,582.7 47,558.3

60,861.5

71,585.9

84,489.2

94,879.8

82,026.0 104,583. 9

93,673.5 117,653. 6

9,602.9 3,693.8 86,364.6 110,669. 0 135,028. 0

23,627.7 4,832.9 2,722.9 22,898.8 154,825. 0

23,293.9 4,692.7 2,754.1 24,612.1 190,855. 2

22,557.9 1,728.4 2,879.3 27,567.8 178,793. 5

23,980.1 6,703.4 3,033.1 27,677.3 194,995. 3

24,359.0 6,678.9 3,086.4 24,947.1 245,042. 7

—

—

28,537.1

33,605.4

35,081.7

+ Interest Bearing Deposits + Saving Deposits + Time Deposits + Other Deposits

58,882.3 26,112.8 32,769.5 25,169.5

58,434.7 33,574.9 24,859.8 27,784.1

69,697.3 40,747.7 28,949.6 —

65,146.4 38,948.7 26,197.7 —

84,051.8 3,158.9 2,574.2 51,376.4 — 141,161. Total Liabilities 3 + Total Preferred Equity 0.0 + Minority Interest 0.0 103,028. + Share Capital & APIC 5 + Retained Earnings & Other Equity 89,364.9 Total Equity 13,663.7 154,825. Total Liabilities & Equity 0 Source: Annual reports of the bank

86,218.8 4,875.6 5,193.3 80,171.9 0.0 176,459. 6 0.0 0.0 103,028. 5 88,632.9 14,395.6 190,855. 2

98,234.4 9,516.0 3,836.9 51,506.7 0.0 163,094. 0 0.0 0.0 103,028. 5 87,329.1 15,699.5 178,793. 5

98,751.8 9,091.6 3,271.7 66,948.1 0.0 178,063. 1 0.0 0.0 103,028. 5 86,096.3 16,932.2 194,995. 3

+ Customer Deposits + ST Borrowings & Repos + Other Short-Term Liabilities + Long-Term Borrowings + Other Long-Term Liabilities

74,835.8 41,684.5 33,151.4 — 109,917. 6 23,058.3 4,105.4 89,872.3 0.0 226,953. 5 0.0 0.0 103,028. 5 84,939.4 18,089.2 245,042. 7

EXHIBIT 3

Statement of Cash Flows NIB Bank Cash From Operating Activities + Net Income + D&A and Provision for Loan Losses + Other Non-Cash Adjustments + Changes in Non-Cash Capital Cash From Operations Cash From Investing Activities + Disposal of Fixed Assets

2012

2013

2014

2015

257.3

1,536.6

-719.9

2,534.6

703.7 1,178.4 1,622.5 1,839. 9

-121.9

2,187.2

-971.3 1,071.7 -628.2

-851.5 1,635.3 1,019. 4

835.7 2,497.7

90.7

72.8

32.9

1,554.7 2,427. 3

11.5

+ Increase in Investments

-130.1 34,580. 8

+ Decrease in Investments

0.0

+ Change in Loans + Other Investing Activities Cash From Investing Activities

369.5 212.1 34,096 .4

Cash from Financing Activities + Dividends Paid

-0.4

+ Capital Expenditures

-447.8

-599.5

0.0 23,623. 8

0.0

-450.6 36,633. 7

4,152.5 18,758. 6 774.9 14,357 .8

0.0 11,100. 8 321.3 47,852 .3

0.0

0.0

11,122. 1 4,197.2

22,761. 6 0.0

0.0 0.0 0.0

-1.7 0.0 0.0 25,296. 8 415.9

8,380.1 151.8 15,038 .3

Cash from Financing Activities

35,110 .4

-1.4 24,239. 8 0.0 3,992.8 0.0 0.0 13,793. 3 97.1 14,343 .6

15,331 .2

Net Changes in Cash

-825.9

66.5

-46.1

+ Change in Short-Term Borrowings + Increase in Long-Term Borrowings + Decrease In Long-Term Borrowings + Increase in Capital Stocks + Decrease in Capital Stocks + Change in Deposits + Other Financing Activities

29,488. 6 0.0 -1.6 0.0 0.0 5,622.2 1.6

215.1 -203.2

48,472 .6 3,047. 5

Source: Annual reports of the bank

Exhibit 4. Projected consolidated statements after if the merger takes place.

PROJECTED CONSOLIDATED INCOME STATEMENT NIB BANK

Mark-up / return / interest earned Mark-up / return / interest expensed Net mark-up / interest Income Provision against non-performing loans and advances Provision / (reversal) for diminution in the value of investments Bad debts written off directly

Net mark-up / interest income after provisions NON MARK-UP / INTEREST INCOME Fee, commission and brokerage income Dividend income Income from dealing in foreign currencies Gain on sale of securities - net Unrealized gain / (loss) on revaluation of investments classified as heldfor-trading Other income Total non-mark-up / interest income Total markup plus non-mark-up income NON MARK-UP! INTEREST EXPENSES Administrative expenses Other provisions / write offs Other charges Total non-mark-up / interest expenses Share of (loss)/ profit of associates Profit / (loss) before taxation from continuing operations Taxation – Current - Prior years - Deferred

2016 147373 21 100866 90 46506 31 199229 184639 2248 38611 6 42645 15 142093 1 191231 357056 400778 7 -14731 41582 60038 56 10268 371 618481 9 141402 96877 64230 98 -13473 38318 00 207359

2017 150714 57 112488 71 38225 86 153650 1 -11561 2421 15273 61 22952 25 161686 9 73483 587181 509014

89578 28761 25 51713 50 609609 8 140376 66075 63025 49 490574 64062 5 215001 10851

1,183,4 31 197477 1,390,7 90 423,329

Profit gloss) after taxation from continuing operations DISCONTINUED OPERATIONS Profit from discontinued operations - net of tax PROFIT/(LOSS) AFTER TAXATION

2,441, 010

109524 443.257 2,550, 1,063, 534 511

PROJECTED CONSOLIDATED STATEMENT OF FINANCIAL POSITION NIB BANK 2016 ASSETS Cash and balances with treasury banks Balances with other banks lending to financial institutions Investments Advances Operating fixed assets Intangible assets Deferred tax assets – net Other assets Assets held for sale LIABILITIES Bills payable Borrowings Deposits and other accounts Sub-ordinated loans Liabilities against assets subject to finance lease Deferred tax liabilities Other liabilities Liabilities held for sale Owners’ equity Share capital Reserves Discount on issue of shares

1,063, 954

2017

10052543 1645086 1599044 96023597 110668994 3086446 890491 9359609 7157979 4558914 245042703

8063675 586418 7699646 59670691 93673494 3033057 2926075 9992164 9350081 194995301

2576216 85676741 130399643 4195516

2740528 62750894 105102800 4197195

3463013 642415 226953544

3271665 178063082

103028512 997582 -45769623

103028512 474123 -45769623

Accumulated loss Shareholders' equity Surplus on revaluation of assets - net

-40416118 17840353 248806 18089159 245042703

-42432340 15300672 1631547 16932219 194995301

PROJECTED CONSOLIDATED STATEMENT OF CASH FLOWS MCB BANK CASH FLOWS FROM OPERATING ACTIVITIES Profit / (loss) Less: Dividend income

Adjustments for non-cash Items Depreciation Amortization Impairment charge on tangible fixed assets Gain on sale of securities – net Gain on sale of operating fixed assets – net Gain from insurance against loss of fixed assets – net Fixed assets written oft Provision against non-performing loans and advances Bad debts written off directly Provision / (reversal) for diminution in the value of investments Unrealized loss / (gain) on revaluation of investments classified as held-to-trading Other provisions / write offs Share of profit of associates

(Increase)/decrease In operating assets Lending to financial institutions

2016 2017 IN RS (000) 402913 6 -107897 -191231 -92743 383790 5 200640 311847 324637 27941 400778 7 -8780 -64 8619 199229 2248 184639

309133 341516

-729629 -37907 -162 153650 1 2421 -11561

14731 141402 -1948 280328 6 103461 9

-21558 140376 -548290

610060 2

557213

980840 780200

Net investments in held-for-trading securities Advances Other assets (excluding advance taxation) Increase /(decrease) In operating liabilities Bills payable

-853935 172013 76 200160 6

Deposits and other accounts Other liabilities

-164286 229258 47 252968 43 406995

Income tax paid

395469 15 -353261

Borrowings

Net cash generated from / (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES Net investments in available-for-sale securities Net investments in held-to-maturity securities Net investments in associates Dividend received Payments for capital work in progress Acquisition of property and equipment Acquisition of intangible assets Sale proceeds of property and equipment disposed off Recovery from Insurance company against loss of assets Net cash (used in) / generated from investing activities CASH FLOWS FROM FINANCING ACTIVITIES (Redemption) / receipt of sub-ordinated loans Dividend paid Receipt from non-controlling unit holders PICIC Mutual Funds Net cash generated from financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year (Redemption) / receipt of sub-ordinated loans

391936 54 366582 38 24504 321120 191231 -272189 -169470 -8935 11468 181 365603 28

-1,679

0 367686 131864 49 154551 2 -122135 11,244, 221 215069 -457435 827648 5 -257708 853419 3

912752 0 497503 1 773898 93336 -327379 -270795 -1284 72780 1030 449407 5

4,197,1

Dividend paid Receipt from non-controlling unit holders PICIC Mutual Funds Net cash generated from financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year

-45 415,934 414,21 0 3,047,5 36 8,650,0 93 11,697, 629

95 -22 203,168 3,994,0 05 -46,113 8,696,2 06 8,650,0 93