In an exciting development, United Bank Limited (UBL), one of Pakistan’s leading financial institutions, has obtained board approval for two significant strategic moves. Firstly, the bank is set to establish a fully-owned exchange company with an initial paid-up capital of Rs1 billion, pending clearance from the State Bank of Pakistan (SBP) and compliance with regulatory requirements. Secondly, UBL plans to sell its 55 percent stake in its UK subsidiary to the Bestway Group.
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Creating an Exchange Company for Transparency and Competitiveness
The board of directors at UBL believes that the establishment of a wholly-owned exchange company will not only bring transparency but also enhance competitiveness within the foreign exchange sector. This move aims to meet the genuine demands of the public for foreign currency, which is a crucial aspect of modern banking. Analysts have praised this decision, emphasizing its potential to improve market efficiency and depth.
Fahad Rauf, Head of Research at Ismail Iqbal Securities, commented, “Exchange companies operated by banks will improve market efficiency and depth. It is a step in the right direction in my opinion.”
Several other banks, including Habib Bank Limited and the National Bank of Pakistan, have already taken similar steps, reflecting a broader trend encouraged by the SBP. The central bank’s recent measures encourage banks to establish wholly-owned exchange enterprises to better serve the public’s legitimate foreign currency needs.
Addressing Concerns in the Exchange Industry
Experts have occasionally expressed concerns about the operational structure and compliance levels of category “B” exchange companies. In response, the SBP has advised both category ‘B’ firms and franchisees to either merge with established full-fledged entities or sell their businesses to stronger counterparts. Failure to comply with this directive within the stipulated three-month window will lead to the automatic cancellation of licenses for standalone category ‘B’ firms.The SBP has also set a higher bar for exchange companies, instructing them to increase their paid-up capital to a minimum of Rs500 million (excluding losses) by December 31, 2023, up from the current requirement of Rs200 million. These measures are aimed at improving the overall integrity and stability of the industry.
Government’s Efforts to Stabilize the Rupee
The government has been taking robust measures to stabilize the Pakistani rupee, which faced a significant drop in value earlier this month. The crackdown on illicit dollar trading has included actions such as the arrest of individuals involved in hoarding, smuggling, and black marketing of dollars. Furthermore, law enforcement authorities have detained those engaged in hawala/hundi and illegal forex activities, resulting in a slowdown in grey market activity.As a result of these measures, the local currency has gained 28 rupees against the dollar in the last five trading sessions on the kerb market. Additionally, there is less pressure on the key interbank market, where the rupee has appreciated by 2.3 percent against the dollar since Wednesday.To further enhance the industry’s integrity, the SBP has terminated the licenses of some B-category exchange firms due to their involvement in unlawful forex trading.
UBL’s Sale of UNBL UK to Bestway Group
In another strategic move, UBL has announced the sale of its 55 percent stakes in United National Bank Limited (UNBL UK) to the Bestway Group. This sale represents a reallocation of business within the group, as Bestway Group already owns UBL.UNBL UK contributed significantly to UBL’s earnings per share (EPS), with Rs0.57 for the first half of 2023 and Rs0.48 for the full year 2022. UNBL UK, incorporated in the United Kingdom, was formed in 2001 from the merger of the UK branches of United Bank Limited and the National Bank of Pakistan.UNBL UK’s primary activities include providing retail banking, wholesale banking, and treasury services to financial institutions, as well as offering trade finance facilities to businesses of all sizes. It operates one branch in the United Kingdom under the trade name United Bank UK.
Strengthening UBL’s Capital Adequacy Ratio (CAR)
UBL’s consolidated Capital Adequacy Ratio (CAR) for the first half of 2023 stood at 14.81 percent, while the unconsolidated CAR was slightly higher at 16.92 percent. The difference was attributed to rupee devaluation and its impact on UBL’s subsidiaries outside Pakistan.Upon successful completion of the sale to Bestway Group, it is expected to have a positive impact on UBL’s consolidated CAR, boosting it by 200 basis points (bps) and bringing it closer to the levels of the unconsolidated CAR.
These strategic moves by UBL reflect its commitment to adapt to changing market dynamics, enhance transparency, and strengthen its position in the banking industry. The bank’s initiatives align with the SBP’s efforts to improve the foreign exchange sector and ensure the stability of the Pakistani rupee.