Banks major attraction for foreign portfolio investors

Posted on 10.19.06 by StockPK Team @ 1:03 pm    

The growing foreign interest in Pakistan’s developing economy, particularly in areas like banking and capital market, is well reflected in the Karachi Stock Exchange, which has been rising for the last couple of weeks.

This is primarily evident from the increased inflow of foreign portfolio investment into Special Convertible Rupee Account (SCRA) managed by the State Bank of Pakistan.

SBP figures pointed out that during the week ended on October 12, 2006, a massive inflow of US$13.5 million was recorded in the country’s stock markets.

According to the data, a total of $214.51 million was brought into the market during the current fiscal year (from July 01, 2006 to October 12, 2006).

On October 12 alone, a huge sum of $6.45 million in portfolio investment was recorded. Investors from Hong Kong invested $2.273 million in the country’s stock market while $21,435 was invested by investors from Switzerland, $775,491 by the UK and $3.386 million by the US in a single session.

Faisal Shaji of Capital One Securities said a massive inflow of portfolio investment was witnessed due to growing banking, oil & gas and cement sectors in the country.

He said major share of portfolio investment went to the banking sector and more investment was expected. Cement and exploration and production sectors also had much potential as they could attract more investment from overseas investors in future, he added.

Equity analysts observed that foreign interest in the local banking sector, which was well represented in the KSE 100-share index, emerged following the central bank’s new regulation requiring the banks to increase their paid-up capital to Rs6 billion by 2009.

Some of the small and medium-sized banks are unlikely to meet this minimum capital requirement within the given timeframe and to remain operational, they need to be acquired or merged with capable banks.

After closely reading their balance sheets, it was found that top six listed banks in Pakistan recorded around 64 per cent growth in their profits during the first half of 2006.

Muhammad Imran of JS Research, in his detailed report, revealed that there were 46 scheduled banks in 1997-98, which due to mergers and acquisitions reduced to 39 as on Dec 31, 2005. However, the acquisition of Union Bank was the first of its kind in Pakistan.

The participation of foreign banks is still on the lower side in Pakistan as there were 11 foreign banks, representing nine per cent of total banking sector assets as on Dec 31, 2005.

After the acquisition of Union bank by Standard Chartered, this share has increased to 12 per cent. Seeing the rising interest of foreign banks in Pakistan, this ratio will improve in future, he believes.

MCB Bank has raised US$150 million by floating Global Depository Receipts (GDR) in the international market, indicating the growing foreign interest in Pakistani companies. It was the first Pakistani company that issued the GDR in the international market after a gap of 10 years.

Now the Privatisation Commission has been tasked to issue the OGDC’s GDR by the end of current calendar year, encouraging local investors to purchase more shares of the company and those of fellow companies in a bid to fetch handsome profits.

Therefore, it is common understanding the GDR would definitely improve the profits of companies, leading to disbursement of increased dividends to the shareholders, as the companies have massive plans of investing the money that they receive on account of GDR.

Moreover, the PC has also announced plans to float National Bank, United Bank and Habib Bank GDRs, following OGDC’s, in the world market, but has not given any timeframe. In addition to these, the privatisation of profit-making oil marketing giant PSO by December 2006 is also on the agenda.

If the government succeeds in meeting the set deadlines for the GDRs and privatisation of state entities, it is expected the KSE will continue to move in the upward direction in future too.

However, “rapid changes being made by the regulators ie the SECP and the KSE in trading regulations, should not be ignored by investors,” cautioned a leading analyst.

Meanwhile, JP Morgan has announced it is considering reopening its equity business in Pakistan, the first foreign brokerage to return since they abandoned the South Asian nation in the early 2000s.

Analysts said that local investors took this news as a go-ahead to buy more shares so that they could take their share of profit in the growing market.

The return of JP Morgan to Pakistan would definitely improve the image and rating of the country and endorse foreign interest in the growing economy, they added.

Source: The News