HBL Privatization Notes & Questions

Post date: Feb 14, 2010 6:22:28 PM

Habib Bank Limited is Pakistan’s second largest commercial bank with an extensive national and international branch network. The network spans 1,425 branches spread over Europe, the Middle East, Far East, South Asia, Africa and the United States. The bank was privatized in December 2003 and sold to the Aga Khan Fund for Economic Development (AKFED).

The privatization of Habib Bank represented an attractive investment opportunity for investors interested in leveraging HBL's extensive presence and market share. Nineteen Expressions of Interest (EoIs) were received by the Privatisation Commission and three bidders qualified for the final bidding. AKFED gave the highest bid and 51% stake in HBL was sold for Rs. 22.409 billion (US $ 389 million) along with management control. AKFED financed this purchase through an eight-year million Tier 2 subordinated loan of up to $50 million from IFC (International Finance Corporation) and an equity investment of up to 5% of the Bank’s capital. The privatization process of HBL was completed in February 2004 and the management control of HBL was transferred to AKFED on 26 February 2004.

In March 2004, the privatization of Habib Bank was challenged in the Supreme Court as lacking transparency, hastily arranged and against the national interest. Apart from the allegation that HBL’s valuation was not accurate, the sale to AKFED was criticized on the basis that the organization was primarily involved in rural and community development and had no experience of running a bank or commercial enterprise.

The post-privatization performance of HBL however includes approval of several successful investments and acquisition of financial assets by the bank in international institutions like Urumqi City Commercial Bank. HBL is currently rated AA (Long term) and A-1+ (Short term) and has a balance sheet size of over USD 11 billion. Public listing of HBL took place in July 2007 and a 7% stake was transferred to over 170,000 shareholders.

As you can see, the privatization of HBL is a multi-dimensional issue. You would need to answer several questions here. Among them:

1. Was the decision to privatize HBL a correct one? Look into its pre-privatization performance over 10 years or so. Compare it with other banks (state-owned banks in similar countries as well as other private banks in Pakistan).

2. The deal itself - what was the value of HBL according to your analysis? (you'll need to know a little about valuing companies). How much was paid? Who were the bidders etc etc. How was the payment made? If it was deferred, what was the loss (time-value of money) to the exchequer?

3. Post-privatization performance. How has that been?

4. From the consumer/business perspective has it been a good deal?