Cheap Banks: Cheap Getting Cheaper- Why?


Cheap Banks: Cheap Getting Cheaper- Why?

Written by: Invest Kaar

It looks like foreign fund managers have discarded Pakistan for equity investments. They have been sellers in stocks since 2017 now- 5yrs of consecutive selling! Commercial banks are amongst the most sold- let’s explore some reasons today. Considering foreign selling in banks of USD27mn in 1H2021, the foreigners are either worried about the growth of the sector in Pakistan or find them expensive. While fintech raised USD32mn with literally no revenues. So, it can’t be valuation.

What’s happening then?

Background: Post-privatization, the lowest hanging fruit was corporate banking. There were no banks providing complete banking solutions like deposits trade debt or working capital salary disbursements etc.

So the solution was a full-fledged commercial bank. Today, after almost 30 years, all of this untapped market is now catered to. All the large corporations have banking relationships for debt or deposits, all the salaries of their employees come in their bank accounts, and they have dedicated trade facilitation.

While doing this for so long, commercial banks got so much comfortable dealing with one corporation for billions that they forgot about the general public or SMEs. Millions that are not a part of these big corporations, or SMEs.

Now back to why are they selling? If they would want corporate bankers, why not stay with the developed countries. They are accustomed to practices and don’t have to worry about default risk in those countries. They came to Pakistan to capitalize on the under-banked and profits that arise from bringing them in. And since big banks have not moved in that direction, they are not appealing anymore. 

One might say that they are selling due to currency issues or geopolitics, but shouldn’t these problems apply to Meezan Bank also? It is the only bank seeing foreign inflows and unsurprisingly this is the only bank focusing on the general public. Have you ever been to their branch? Have you seen the number of customers present at a time? Visit any other banks’ branch and see the difference yourself.

Q: But isn’t all this due to growth in Islamic banking?
A: Bank Islami, Dubai Islamic are also full fledge Islamic banks, but don’t have these many branches and depositors.

So, why are foreigners wary of conventional banking space? What does the sector lack and what are they looking for?

An asset that is unique, caters to Pakistan’s growth dynamics (large population, urbanization etc) rather than just being cheap on book value

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