11/12/2009

PROJECT REPORT

MCB ACQUIRES RBS

Submitted By: | Group 5

TABLE OF CONTENTS

Acknowledgement .. Executive summary.. 1 The Background.. 4 Previous deals. 5 About MCB.. 6 About RBS....10 ABN Amro renamed to RBS in Pakistan...12 Deal details..15 Post acquisition effects...16 Conclusion .20 References .21

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ACKNOWLEDGEMENT

First of all, thanks to ALLAH S.W.T, for his mercy and guidance to giving us the full strength to complete this Report subjected MCB ACQUIRES R.B.S. Even facing with some difficulties in completing this task, we still managed to complete it. We thanks to our respectable teacher, Mr. Ghulam Rasool, who provided us this challenging opportunity of learning, which turned out to be very knowledgeable and in-depth learning experience for us regarding the real business situation which got us down to the brass tacks. In addition we are also gratefully acknowledging the help to all of our friends who had shared their time and knowledge in completing this report. Thank you.
Group 5 (Haris, Zohaid, Haifz Faisal Adnan, Ayaz & Bilal)

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Executive Summary
RBS is the formerly NO 1 bank in the world before selling their operations in Asia. In Pakistan, banking giant MCB purchases RBS last month & ANZ takeover RBS in rest of Asia. Given the identical positioning of both the banks in the market, the combined entity of MCB and RBS will deliver economies of scale, a more complete product set, a stronger operating platform and a wider distribution network. This acquisition will make MCB stronger and have the opportunity to make their image better. Though, RBS will officially operated as MCB in next six months but the management takeover still remains, which will completely change the internal business processes and policies. But, The State bank of Pakistan has not yet granted approval to MCBs merger with Royal Bank of Scotland, leading to a delay in completion of the acquisition process. According to sources, the central bank has raised objections that approval will be granted only when MCB fulfills the requirement regarding completion of sponsors shares. The central bank has raised the objection over MCBs violation of clause-4 of banking law. Under the legal requirement, the sponsors shar es are to be deposited at CDC. However, the experts view this requirement as inapplicable in the transaction in question while the requirement of Central Depository Company is also not applicable here. According to experts, State Bank should have scrutinized Royal Bank of Scotlands assets under the respective articles before approving the said deal. Also behind the curtains news that it is a political stint too, Mr. Zardari against the Mian Mansha, as he is also the close aide of Mr. Nawaz Sharif. Initially HBL was also interested but failed to bid more than MCB, remember HBLs owner is Prince Karim Aga Khan.

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The Background
MCB Bank is to acquire this from ABN Amro Bank N.V., which is a subsidiary of The Royal Bank of Scotland Group plc.
The Royal Bank of Scotland Group plc has reached agreement in principle for the sale of its 99.37 per cent holding in The Royal Bank of Scotland Limited (RBS Pakistan) to MCB Bank Limited (MCB) for a total consideration of $87 million, RBS is 70 per cent owned by the state after a massive bailout from the British government last year amid the global financial crisis. Besides MCB Bank, Habib Bank Ltd., Egypt's Orascom Telecom Holdings and local investment bank Jehangir Siddiqui Group had evinced interest in buying the assets earlier. The deal would be valued at around $90 million. The Pakistan sale is part of moves by part-nationalized RBS to sell assets globally as it tries to exit up to 36 countries and focus on its mainly U.K. Core businesses. Bank of America Merrill Lynch and KASB Securities have advised MCB while Morgan Stanley has advised The Royal Bank of Scotland Group plc on the transaction. The RBS sale in Pakistan attracted large banks, like Habib Bank and MCB Bank, while a relatively small Bank JSCL was in the race to win the RBS. The HBL later withdrew itself. Industry sources said that after the withdrawal of the HBL, the MCB Bank was the only one which could offer higher and attractive bids to acquire the RBS. In its Asia Operations, RBS Pakistan has the largest branch network while on the basis of customers; it ranks number 5 in Pakistan.

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Previous deals
Foreign banks which bought Pakistani banks paid best price for Union Bank. The Union Bank was purchased at Rs93 per share by the Standard Chartered Bank. The second best price winner was of PICIC DFI which was bought at Rs78 per share by NIB bank. The ABN Amro purchased the Prime Bank at Rs54 per share. The lowest prices among the deals were given to Saudi Commercial Bank which was purchased by a consortium at Rs29.3 per share. The only Pakistani bank which got the highest price was the MCB Bank as it sold its 20 per cent shares at a price of Rs470 per share to the Malaysian May Bank. Analysts said if the deal is matured, it would send a positive signal to the market, and it would also improve banking industrys image in the global market. They said the financial crisis still dominates the global market while the deal of a Pakistani Bank would be a sign of strength for local banking industry. The news of the acquisition pushed both MCB and RBS share higher on Karachi Stock Exchange: RBS Pakistan shares rose 5.3 per cent to Rs20.05; while MCB gained 5 per cent, closing trade at Rs179.79. In April this year, foreign donors promised to give about US$5.4bn in economic assistance over the next two years. Later this month, a session between Pakistani leaders and representatives of donors is expected to take place in Turkey to discuss further assistance. There have been eight acquisitions of Pakistani banks since 2002, with the biggest being Standard Chartered purchase of Union Bank for $487 million (Dh1.78bn) in September.

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1
About MCB:

MCB
Muslim Commercial Bank

MCB Ltd formerly known as Muslim Commercial Bank Limited was incorporated by the Adamjee Group on July 9, 1947, under the Indian Companies Act, VII of 1913 as a limited company. The bank was established with a view to provide banking facilities to the business community of the South Asia. The bank was nationalized in 1974 during the government of Zulfikar Ali Bhutto. This was the first bank to privatized in 1991 and the bank was purchased by a consortium of distinguished Pakistani corporate groups led by Nishat Group. As of June 2008, the Nishat Group owns a majority stake in the bank. The president of the bank is Mr. Atif Bajwa (previously with Citibank). Founded in 1948, Nishat Group is one of the leading and most diversified business groups in Pakistan. The group has strong presence in the most important business sectors of the country such as banking, textile, cement and insurance. Mian Mohammad Mansha is the Chairman of the group (and also MCB) and has played instrumental role in its success. In recognition of Mr. Manshas contribution, the Government of Pakistan has conferred him with "Sitarae-Imtiaz", one of the most prestigious civil awards of the country.
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MCB is Pakistans fourth largest bank by assets having an asset base of US$6.7 billion, and the largest by market capitalization having a market capitalization of US$4.1 billion. The Bank has a customer base of approximately 4 million and a nationwide distribution network of 1,026 branches, including 8 Islamic banking branches, and over 300 ATMs, in a market with a population of 160 million. MCB is one of the leading banks of Pakistan with a deposit base of about Rs. 280 billion and total assets of around Rs.300 billion. Incorporated in 1947, MCB soon earned the reputation of a solid and conservative financial institution managed by expatriate executives. In 1974, MCB was nationalized along with all other private sector banks. The Bank has a customer base of approximately 4 million, a nationwide distribution network of over 1,000 branches and over 400 ATMs in the market.. During the last fifteen years, the Bank has concentrated on growth through improving service quality, investment in technology and people, utilizing its extensive branch network, developing a large and stable deposit base.

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RBS
The Royal Bank of Scotland

About RBS
The Royal Bank of Scotland Group (LSE: RBS) is a British banking and insurance holding company in which HM Treasury holds a 80.4% controlling share, through UK Financial Investments Limited. The group is based in Edinburgh, Scotland, and is the world's largest company by assets. The group controls the Royal Bank of Scotland Plc, founded in 1727 by a Royal Charter of King George I, the National Westminster Bank, which can trace its lineage back to 1650, and Ulster Bank in Ireland. RBS Group is the largest banking group in Scotland, and at its earlier peak was the second largest in the UK and Europe (fifth in stock market value), and the fifth largest in the world by market capitalization. According to Forbes Global 2000, it was the tenth largest company in the world. Its shares have a primary listing on the London Stock Exchange. The registered head office of the group and the UK clearing bank are located at St Andrew Square, Edinburgh. In 2005, Queen Elizabeth II opened the bank's new head office building in Gogarburn, Edinburgh. The RBS Group operates a wide variety of banking brands offering personal and business banking, private banking, insurance and corporate finance throughout its operations located in Europe, North America and Asia. In the UK and Republic of Ireland, the main subsidiary companies are: The Royal Bank of Scotland; National Westminster Bank; Ulster Bank; Drummonds and Coutts & Co. In the United States, it owns Citizens Financial Group, the 8th largest bank in the country. From 2004 to 2009 it was the second largest shareholder in the Bank of China, itself the world's fifth largest bank by market capitalization in February 2008. Insurance companies include Churchill Insurance, Direct Line, Privilege, and NIG. The group issues banknotes in Scotland and Northern Ireland and, as of 2008, Royal Bank of Scotland is the only bank in the UK.

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History of Royal Bank of Scotland

The Royal Bank of Scotland Group has grown from small beginnings nearly 300 years ago to become one of the largest financial services groups in the world. Our brands operate around the globe to provide banking services for individuals, businesses and institutions. Proud of our history, we remain committed to innovation and service. The successful consortium bid for ABN AMRO in 2007 has further strengthened the Group's presence in Asia. ABN AMRO has had a long history in Hong Kong, stemming from the opening of offices in 1906 by two of its largest and oldest predecessors Nederlandsche Handel-Maatschappij (NHM) and Nederlandsch-Indische Handelsbank (NIHB). The RBS group now has a presence in the region through 180 branches in 16 countries, including Australia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Pakistan, Philippines, Singapore, Taiwan, Thailand, UAE and Vietnam. The Group serves a broad array of medium to large enterprises, including MNCs and financial institutions, offering integrated consumer and business banking services such as transaction banking, risk management, investment banking, private banking and asset management. Our clients across the world each have different aspirations, goals and needs, so we work closely with them to ensure that our service is integrated and appropriate in providing solutions for their particular personal and business circumstances.

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ABN Amro renamed to RBS in Pakistan

The Royal Bank of Scotland (RBS) Group formally re-branded ABN AMRO branches in Pakistan on Friday, August 1, 2008.

world. With an AA credit rating, RBS group has more than 40 million customers worldwide and total assets, as of 31 December 2007, of 2.4billion. Our brands operate around the globe and down your street to provide banking services for individuals, businesses and institutions. Proud of our history, we remain committed to innovation and service in business and through our many sponsorship activities. Banking sources said the MCB Bank was making efforts to buy the RBS Pakistan operations to further strengthen its position in the industry.

Acquisition Reasons RBS

On 22 April 2003 RBS announced the largest rights issue in British corporate history, which aimed to raise 12billion in new capital to offset a write down of 5.9billion resulting from the bad investments and to shore up its reserves following the purchase of ABN AMRO. On 13 October 2008, British Prime Minister Gordon Brown announced a UK Government bailout of the financial system. The Treasury would infuse 37 billion ($64 billion, 47 billion) of new capital into Royal Bank of Scotland Group Plc, Lloyds TSB and HBOS Plc, to avert financial sector collapse. This resulted in a total government ownership in RBS of 58%. As a consequence of this rescue the chief executive of the group Sir Fred Goodwin offered his resignation, which was duly accepted.

Pakistan is among the first Asian markets where ABN AMRO has been re-branded as RBS effective from August 1 as approved by local regulators. ABN AMRO Bank (Pakistan) Ltd will now be officially renamed as The Royal Bank of Scotland Ltd. This follows the successful global acquisition of ABN AMRO in October 2007 by an RBS-led consortium. A press statement of the bank said presently RBS was the second largest financial services group by profit, with an AA- credit rating with total assets of 1,900.5 billion pound sterling as of December 31, 2007. The Royal Bank of Scotland Group has grown from small beginnings nearly 300 years ago to become the second largest financial services group by profit in the

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In January 2009 it was announced that RBS had made a loss of 28bn of which 20bn was due to ABN AMRO.[10] At the same time the government converted their preference shares to ordinary shares resulting in a 70% ownership of RBS. The potential 28 billion loss is nearly twice the size of Vodafone's 15 billion deficit in 2006, currently the biggest-ever corporate loss in UK history. News of RBS's record-breaking deficit came as the government announced a second support package for banks designed to counter recession by kickstarting lending to businesses and consumers. The scheme failed to reassure investors, however, and RBS shares closed down 67 percent at 11.6 pence, having earlier slumped to 10 pence.

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MCB Interest in RBS

MCB interested in RBS's assets to gain clients from multinational companies, its consumer banking network and a few prized branches in main cities. The attractive element for MCB is RBS's consumer banking network as it is a strong player in that. Moreover, RBS is also technologically sound with quality human resource that can add value in each of the interested banks. However, RBS asset quality is worst amongst the three banks which means the RBS would have to discount the price at the time of agreement. Banking sources said the MCB Bank was making efforts to buy the RBS Pakistan operations to further strengthen its position in the industry. Analysts said the RBS has a sound customer base of 226,000 (by Dec 2007) with quality infrastructure. This could earn much higher price than the deals signed before for the sale of different banks.

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Acquisition details
MCB will initially acquire 1,707,107,891 ordinary shares from RBS Pakistan at Rs4.22 per share - representing a 99.37 per cent stake. The total consideration to be paid will be Rs7.2 billion (approximately $87 million). In addition, MCB will make a tender offer for the remaining 0.63 per cent ordinary shares, which were not owned by the majority shareholder under the Listed Companies (Substantial Acquisitions of Voting Shares and Takeovers) Regulations, 2008. This tender offer will also be subject to the necessary regulatory and other approvals. MCB said it would fund the transaction entirely through internally generated cash reserves and would not be contingent on any external fund raising. ($1 = 82.86 rupees) The price would be 0.76 times RBS Pakistan's book value of 9.888 billion rupees, as of March 31. They will pay around 7.5 billion rupees ($90.4 million) for RBS Pakistan The MCB deal to buy out RBS is a continuation of a positive trend in Pakistan. For MCB, the deal for US$87m is extremely attractive. The market was expecting a higher value said Shuja Rizvi, a Karachi based equity and business analyst. Remaining shares: In addition, MCB will make a tender offer for the remaining 0.63 percent of ordinary shares not owned by the majority shareholder under the Listed Companies (Substantial Acquisitions of Voting Shares and Takeovers) Regulations, 2008. The tender offer will also be subject to the necessary regulatory and other approvals. The Pakistan sale is part of moves by part-nationalised RBS to sell assets globally as it tries to exit up to 36 countries and focus on its mainly U.K. core businesses. The assets would help the buyer tap growth in a nation that forecasts an economic revival for the fiscal year that started July 1 after the government predicted a 3.3 per cent expansion. Pakistan's economy may expand more than 6 per cent annually on average over the next five years, Shaukat Tarin, adviser to Prime Minister Syed Yousaf Raza Gilani, said in March.

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Post acquisition effects

After acquiring RBS operations, MCB branch expansion nd customer base is expected to increase and it will facilitate customers more aggressively. As a result of the transaction, the total number of branches of combined MCB and the acquired bank will increase to 1,139. The total consolidated deposits will increase to Rs 413 billion and consolidated gross advances to Rs 324 billion. MCB will add more than 75 RBS Pakistan branches in 24 cities, taking its total network to 1,139 branches.

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Acquisition is pending
On the other hand, State Bank of Pakistan has not yet granted approval to MCB's merger with Royal Bank of Scotland (RBS), leading to a delay in completion of the acquisition process. According to sources, the central bank has raised objections that approval will be granted only when MCB fulfils the requirements regarding completion of sponsor's shares. The central bank has raised the objection over MCB's violation of clause-4 of banking law. Under the legal requirement, the sponsor's shares are to be deposited at CDC. However, the experts view this requirement as inapplicable in the transaction in question while the requirement of Central Depository Company is also not applicable here. People also say that the muss between a giant business group and a senior leader of the political government has now intensified as the non-CBA staff union led by the general secretary Karachi wing of the ruling party expanded their agitation here Monday. At a time when country's economy is almost at a halt, efforts are on to discourage whatever economic activities are left with the backing of ruling party. Some of the political and financial analysts are linking this action of staff union with the tussle between the head of the giant business group and a senior-level party leader. They are of the view that the pending issue of RBS merger with MCB could also be part of this bout, while the criticism on Kerry-Lugar Bill by Mian Muhammad Mansha could be the retaliation. Earlier in his statement to a private TV news channel, Mian Mohammad Mansha, Chairman Nishat Group of Companies, had said that he has brought $1 billion to Pakistan from abroad through the private sector and could bring $1.5 billion a year, equal to US aid in Kerry-Lugar Bill.

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Acquisition is pending (Continued from previous section)

To create hurdles in smooth functioning of the Bank, which is the significant part of Mansha Group's business, members of the union again blocked many of the branches Monday, despite of Sindh High Court orders in a petition filed by the Bank. The MCB Bank management issued a press circular Monday saying a group of outsiders is illegally interfering in the normal business activities of the bank.

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THE CONCLUSION
The past few years of economical disruption had bankrupted or borderline many large international financial institutions, the big names included Merrill Lynch, Lehman Brothers and R.B.S. The financial market of Pakistan was also affected with the situation, but not to the extent of international financial markets. While, with the disruption came along board some opportunities as well which were seized by the private sector entrepreneurs. One of them is the case of acquisition of R.B.S by a local private bank MCB. The acquisition is largely in market interest, not only due to the good circulation of capital, but to boost investors confidence as well. However, the acquisition is currently seem vague for the reasons maybe latent in the way in which deals are handled in our country where national interest get overlaps with personal gain & political approval. The acquisition of RBS by the MCB management is still remains, because the State bank of Pakistan has not yet granted approval to MCBs merger with Royal Bank of Scotland, leading to a delay in completion of the acquisition process. According to sources, the central bank has raised objections that approval will be granted only when MCB fulfills the requirement regarding completion of sponsors shares. Rumors says that, behind the curtains there is an political stint, which is that Mr. Zardari against the Mian Mansha, as he is also the close aide of Mr. Nawaz Sharif, and thats been the reason the central bank has raised the objection over MCBs for the violation of clause-4 of banking law, however, the experts view this requirement as inapplicable in the transaction in question while the requirement of Central Depository Company is also not applicable here. We are in sincere opinion that Government should aid such private investment opportunities which help in the revival of our economy.

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RFEFERENCES

mcb.com.pk rbs.com.pk wikipedia.com/rbs, financial times.com www.aaj.tv/ www.geo.tv/ www.bbc.com

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