Should NIB Bank sell PICIC Asset Management?

When at least two parties start competing to buy an asset you own, it can be tempting to sell it to the highest bidder.

But NIB Bank would be better off if it resisted that temptation with PICIC Asset Management. While PICIC has been operated as a non-core subsidiary of the bank, it generates steady and useful cash flows and would enhance the value of the entire bank when it is eventually put up for sale.

On Wednesday afternoon last week, NIB Bank sent a notice to its shareholders that the bank has received offers from “a few” parties interested in acquiring PICIC Asset Management. It has not yet been disclosed which companies are interested in PICIC, so let us assume that there are at least two and that they have the cash to make an offer.

There are two main considerations for NIB Bank’s new CEO Atif Bokhari as he ponders over whether or not to go ahead with the sale. Firstly, does owning PICIC make strategic sense for NIB Bank? And secondly, if owning it does make strategic sense, is the price NIB Bank can get for PICIC worth the tradeoff of selling it off? The answer to the first question, in my view, is yes. The answer to the second is no.

First, a look at trying to understand how much money PICIC actually makes. NIB does not separately break out the finances of PICIC, so it is not possible to get direct numbers for how much money PICIC makes. But using some public information, it is possible to get reasonably good estimates.

As of December 2014, PICIC had Rs27.3 billion in assets under management. The weighted average management fee on those funds is around 1.6%, which implies revenues from managing the assets themselves to around Rs440 million. Add in the supplemental fees that most firms charge and one gets an estimated revenue number of Rs500 million, which is slightly lower than what MCB-Arif Habib Savings & Investments (MCBAH), a publicly listed asset management company, makes.

Assuming a 50% net margin, which is close to the median in the asset management business in Pakistan (yes, it really is that lucrative), one gets a net income figure of Rs250 million.

So how much could PICIC Asset Management sell for? Unfortunately, the only recent precedent transaction is that of MCBAH, which was more of a distressed sale and not even a full divestiture, so does not make for a good comparison.

And the only two comparable publicly listed companies are JS Investments and MCBAH. JSIL is trading at a steep discount to the market, so let us take the earnings multiple of MCBAH, which is trading at 10 times previous 12 months earnings. That would imply that PICIC is worth Rs2.5 billion.

Would a potential acquirer pay a control premium? Yes, but it is unlikely to be high, since PICIC’s revenue stream and assets under management have not grown as fast as the rest of the industry. So let us assume the company can sell for Rs3-3.5 billion.

So NIB Bank is unlikely to get a particularly stellar price for PICIC. But should they even own PICIC, given that they are a commercial bank? The answer to that question should be an unequivocal yes. There are two reasons why.

Firstly, NIB Bank’s majority shareholder – Singapore sovereign wealth fund Temasek – is desperate for a sale and would want to get a good price for the bank when it does go on the block. Based on its consolidated 2013 net income of Rs1.5 billion and our estimates above, it is clear that PICIC forms a significant part of the earnings power of NIB Bank as a whole.

Selling it would make NIB Bank less attractive to future buyers and reduce the price they would be willing to pay.

Sophisticated customers

Secondly, and perhaps even more importantly, banks in Pakistan are about to enter a phase where depositors will get more sophisticated and demand more products from their financial institutions. High-end depositors will especially demand more services than they can get from alternative sources.

When that moment hits, having an asset management firm as part of NIB’s portfolio of offerings will be helpful in staying relevant for their clients.

In short, selling PICIC may sound like a nice idea, but it adds more value to NIB Bank than any reasonable buyer would be willing to pay for it. Bokhari would be better off keeping it.

Published in The Express Tribune, February 9th,  2015

Farooq Tirmizi

CEO, Elphinstone

Farooq Tirmizi is the founder and CEO of Elphinstone, the financial services firm that operates SmartRupee.

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