Burj Bank – The small Islamic bank attracting attention

The year 2013 proved to be a challenging year for Burj Bank Limited. The discount rate environment, with a 250 bps drop during CY2012, had reduced spreads for the entire banking sector, while the economic situation impacted businesses negatively resulting in industry wide financing portfolio deterioration. The Bank’s bottom line suffered having fully absorbed the effects of default, from the legacy clientele including one of the most prominent business groups of the country (Gulistan Group) having a cumulative financial impact of PKR 819 mn for the year. Even with this huge default the Bank managed to maintain a healthy portfolio with improved portfolio quality. On the other hand, due to regulatory enforcement of the CAR floor/ CAR cap, the Bank was restricted in growing the financing portfolio in the higher spread segment which was a pre-requisite for countering the discount rate dip. As a result the Bank’s bottom line suffered significantly due to its inability to meet the Capital Requirements laid down by the SBP. The first full year impact of the 25 new branches launched at the end of 2012 (50% growth in branch network) & several other strategic investments such as a New Core Banking System resulted in additional pressure on the expense line which also impacted the profitability of the Bank.

While these strategic investments such as the network expansion have increased admin expenses in the short run, these are expected to enhance the long term shareholder value.

The bank has successfully focused on building CASA & bringing the CoF down while instituting strong control and compliance frameworks to avoid any issues. The Bank reduced cost of deposits by 172 basis points over a period of 12 months despite the competitive pressures. The financing book also grew by 30% year on year with additions of quality credits. In order to improve spreads, the Bank replaced high cost deposits and yet managed to close the deposit book at a reasonable size of around PKR 43 bn while growing CASA deposits by over 25%. With minimal foreign direct investment coming into the economy during 2013, the Bank successfully attracted capital injection of PKR 568 mn from the existing foreign shareholders of the Bank. Over the past two years the Bank has successfully built a widely recognised brand, built technology platforms and achieved scale through solid expansion.

As a result of the brand creation, the Bank has also positively moved ahead towards permanent resolution of the capital shortfall as per the minimum capital requirement from the SBP. A memorandum of understanding has been signed between MCB Bank and the major sponsors of Burj Bank under which the shares of one of the major sponsors will be bought out by MCB subject to the regulatory approvals in this regard. Additionally, MCB will inject significant fresh capital along with additional investment by the existing strategic sponsor (ICD) in a manner to raise the capital of the Bank to meet the MCR stipulation of the SBP.

It is worthwhile to note that a savvy investor like MCB has opted to invest in Burj Bank at a price premium at a time when publically traded Islamic entities were also available for investment at a discount. As a result of the expected transition and foreseeable capital adequacy, the Bank will be set free from the CAR restrictions and with no major provisioning hits expected in 2014, the current year may prove to be a positive year for the bottom line of the Bank. The potential investment by MCB shows that while Burj may not be amongst the most profitable Islamic Banks at the moment, it is certainly the Bank which has caught the eyes that matter & it may prove to be the Islamic Bank to watch out for.