Tuesday, May 6, 2008

Maybank takes stake in Pakistani lender, Part I

Before investors can feel better and recovering from negative reactions of Maybank acquiring BII, they will possibly need to brace for one more round of bungee jump. Though the acquisition price seems to be high, 5-6 times book value, this bank, Muslim Commercial Bank (MCB), is better managed than BII(wait for my Part II).

(Financial Times) Maybank of Malaysia is set to pay as much as $1bn for a minority stake in Muslim Commercial Bank of Pakistan, a purchase welcomed by Pakistan’s new finance minister as evidence of renewed investor confidence in his politically-troubled country.

Let's take a look at Pakistani economy since performance of banks is generally tied in with the overall economy. See below two tables.

It is seems that Pakistan may continue to benefit from the recent soft commodities boom. You can see agriculture contributes quite a bit.

'Pakistan is the world's largest producer of oranges varieties, and is also the fifth largest producer of milk having some 50 million dairy animals, the world's third largest herd. It ranks in the top five producers of the world in mangoes and dates. Additionally, the potential in crops like cotton, rice and sugar has earned directly or indirectly more than 70% of total national exports, inclusive of bi-products and the processed foods value chain. This means tremendous potential in contributing towards the global food chain.(LINK)'

Mining and manufacturing is another significant contributor to Pakistani economy. They export quite a lot cotton related stuffs, which is an excellent substitute material given the current high oil price.

Political risks aside, currency risk is also something needs to worry. Pakistan Rupees (PKR) has been depreciating against Ringgit given its ever growing current account deficits. One of the reasons is high crude oil and coal prices since they are a net importer.

If you buy the story of food inflation over the next few years, big picture looks Okay, still there are many things to worry. Assuming there is a big sales on Maybank, at what level of price are you willing to take the risk assumed?

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