Karachi: Habib Bank Ltd., the lender involved in about $6 billion of Pakistan projects under the Belt and Road Initiative, plans to expand in China to tap more business under President Xi Jinping’s flagship infrastructure program.
The bank’s application for full-fledged commercial operations has been accepted by China’s banking regulator, and Pakistan’s biggest lender expects to get a branch license within three months, Chief Executive Officer Muhammad Aurangzeb said.
The experience in working with Chinese companies building the China-Pakistan Economic Corridor, coal mines and power plants in the South Asian nation encouraged the lender to expand in the world’s second-largest economy. Habib Bank, controlled by the Aga Khan Fund for Economic Development SA, is among the few Pakistani lenders to fund the Belt and Road projects that are otherwise dominated by Chinese banks.
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China’s state-run companies “increasingly want to work with us in all those locations which are part of the Belt and Road but Chinese banks are not present,” Aurangzeb, 55, said in an interview in his Karachi office. “In the next 3-5 years, if we get this one right, this puts us is in a supra-regional play.”
The bank is looking to leverage its relationship with Chinese companies in Pakistan. It has expanded business with one such company in the United Arab Emirates and is discussing a project in Oman as well, said Aurangzeb. The lender has been able to penetrate Belt and Road projects in Pakistan by developing China business over the last decade and a half, said the former JPMorgan Chase & Co. executive.
“They want to explore new markets, which is fine, but they need to do it in a cautious manner, cognizant of the risks,” said Raza Jafri, director of research at Intermarket Securities Ltd. “Lending in foreign markets will be least preferred given risks to the global economy, but it will be fine if Habib Bank sticks to services like trade facilitation.”
The bank’s shares have gained almost 20% this year, while the benchmark KSE-100 Index has dropped about 1%.
Habib Bank advanced credit and also acquired stake in the nation’s first-ever coal mining venture, one of the main Belt and Road projects, with Chinese companies in Pakistan’s Thar desert. It has also participated in a few coal-fired power plants and an electricity transmission line project in different roles, Aurangzeb said.
In its attempt to follow Chinese investment it became the first Pakistani lender to open a branch in Gwadar, a small fishing town — 630 kilometers (391 miles) west of Karachi — where China is developing a port. It also became the first foreign bank to have a branch in Urumqi in western China last year, and acquired a license last week that allows them to open yuan-based accounts for customers.
The lender, founded in 1941, has since worked with Chinese state-owned companies including China Machinery Engineering Corp. and State Grid Corporation of China. Habib Bank also got a credit line from China Development Bank for $500 million about three years ago that has been 80% consumed, according to Habib Bank.
Expansion in China will help it further improve its relationships with the companies. That explains Aurangzeb’s visiting card, which mentions his name and other details in Chinese along with English — unusual for Pakistani firms.
Pakistan has been one of the flagships for China’s Belt and Road initiative, with infrastructure projects valued at $60 billion. It ended Pakistan’s decades-old power shortage problem, though it did increase Pakistan’s reliance on China. It has to pay Chinese commercial banks more than the International Monetary Fund in the next three years.
Habib Bank’s increased focus on China comes after it shut its U.S. branch, following a fine of $225 million by a New York regulator two years ago for weak anti-money laundering controls and sanctions compliance.
Habib Bank has about over a dozen Chinese employees working in Pakistani branches that handle 10,000 accounts of Chinese citizens and companies. The bank as part of its new global strategy to focus on China is also exiting countries including Lebanon, Afghanistan, Mauritius and Seychelles, said Aurangzeb.
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More from the interview:
New York fine fallout:
- The bank took a foreign currency loan to pay the fine that has impacted earnings this year but that loan is being reduced quite aggressively and is expected to be repaid by next year, said Aurangzeb.
- CEO not worried about another penalty at this point.
- Cost to income ratio to start dropping in normalized level around 60% next year and 50% range in following 3-4 years, says Aurangzeb.
Pakistan bad loans:
- There is stress in bad loans but “I don’t see alarm bells ringing,” said Aurangzeb.
- CEO targets getting into double digits ROE next year and 17%-18% ROE range in 4-5 years.
- Deposit growth of 9%-10% and loan growth of 7%-9% estimated for next year.