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National Bank of Pakistan Aims to Tap ‘War Chest’ of Bad Debts    
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By : Naween A. Mangi and Farhan Sharif, Bloomberg Businessweek

March 16 (Bloomberg) -- National Bank of Pakistan, the lender with the highest loan delinquency ratio in the nation, plans to boost profit by recovering more funds from borrowers as an economic slowdown and terror attacks damp growth prospects.

“Our non-performing loans are a war chest for our investors,” Chief Executive Officer Syed Ali Raza, 59, said in an interview at his Karachi head office yesterday. “We always had a very passive approach to recoveries, of depending only on the courts; now we have a menu of solutions. Recoveries are our No. 1 priority.”

Raza aims to meet or exceed the bank’s 2009 profit by pursuing court cases to bolster loan repayments, deploying more branch staff for recoveries and restructuring loans at lower interest rates as power outages, a terrorist insurgency and an economic slowdown curb demand for new loans. Pakistani lenders’ bad debt has more than doubled in the last five years.

“The banks have to find a remedy to reduce non-performing loans, since the slowdown in the economy -- especially tough times for the textile sector -- may keep the pressure on profitability,” said Khalid Iqbal Siddiqui, head of research at Invest & Finance Securities Ltd. in Karachi, who has a “sell” recommendation on the stock.

Non-performing loans in the banking system rose to 446.1 billion rupees ($5.32 billion) as of Dec. 31, compared with 210 billion rupees in 2004, according to the central bank.

Stock Performance

Shares of National Bank, Pakistan’s biggest lender by assets, rose 1.2 percent to 102.05 rupees on the Karachi Stock Exchange as of 10:49 a.m. today. The stock has advanced 37 percent this year, surpassing the 7.4 percent advance in the benchmark Karachi 100 Index.

In the next five years, National Bank aims to recover 80 percent of the 55 billion rupees worth of non-performing loans that have been provided for, Raza said. The government- controlled company, which has 68 billion rupees in total bad debt, will also consider swapping some corporate borrowers’ debt with equity, he said.

“To get the kind of direct benefit to our bottom line that we can get through recoveries, we’d have to lend more in one year than we have in decades,” Raza said.

National Bank has Pakistan’s highest loan infection ratio of 13.4 percent, compared with the industry’s average of 12.4 percent, according to securities firm Invest Capital & Securities Ltd. in Karachi. Reversals on bad debts accounted for an average 7 percent of non-performing loans in the last seven years, it said in a report.

Economic Growth

The lender has been setting aside more funds to cover defaults by borrowers after the nation’s central bank said risks for economic growth have “increased considerably” due to the country’s deteriorating security situation. The South Asian nation, whose economy grew at the slowest pace in eight years in the last financial year, is seeking aid from a group of donors. The bank plans to more than double revenue from global operations to $50 million in the next three to five years by capturing trade and investment flows from the Central Asian nations, South Asia and the Middle East, Raza said.

“The financial center of gravity has moved from the west to the east,” Raza said. “Pakistan is now at the center of this new world. The neighborhood is bad but wars come to an end and the peace dividend will be huge.”

National Bank has 25 overseas branches, of which 14 are in Central Asia, the Middle East and South Asia, contributing 90 percent of the revenue from international operations. Most of these outlets have been opened in the last 5 years.

The bank’s Saudi Arabia branch is scheduled to open by the end of April, Raza said. He may also consider an acquisition in Malaysia and is looking for a venture partner in China to meet the asset size requirement to convert his representative office in Beijing into a branch.

The bank’s loan portfolio will grow as much as 10 percent this year, Raza said. Net income rose to 18.1 billion rupees in the year ended Dec. 31, from 15.7 billion rupees a year ago.

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