MBSL selling savings bank for a song!

• Planned divestiture of subsidiary – the sole private savings bank in the country – not advertised
• Deal with in-out-and-in Navara Capital under fire as Rs. 562 m strike price falls below Board recommendation
• Analysts label deal price as “cheap” when CB is unlikely to be generous in issuing new Specialised Bank licences in the future
• Taprobane Securities had made a higher offer but backed out later on
• Analysts opine ‘prized’ entity can be retained with MBSL or its parent BOC infusing Rs. 500 m capital given turnaround and better prospects since takeover from Ceylinco crisis

Hot on the heels of NSB facing flack over the TFC deal, pioneering merchant bank MBSL is now under fire over its move to sell its savings bank subsidiary and at a low price.

Merchant Bank of Sri Lanka (MBSL) had reached an understanding with a consortium of investors-led by Navara Capital Ltd., to divest 68% stake in MBSL Savings Bank (formerly Ceylinco Savings Bank) for Rs. 562 million.
This was despite at least one higher offer quoted as well as MBSL Board having told Chairman M.R. Shah to fetch the best price with Rs. 735 million indicated. As per analysts if the sale is properly marketed a much higher value could be obtained.
Reasons for the latter include MBSL Savings Bank being the country’s only private savings bank whilst the Specialised Bank licence it enjoys is also a privilege worth billions since Central Bank is unlikely to be generous with issuance of fresh licence. These reasons apart from a smarter strategy if adopted analysts opine MBSL could avoid selling the prized savings bank.
MBSL’s stake of 68% in savings venture amounts to 87.18 million shares (Rs. 87.18 million) whilst it also has 100 million non-voting shares (Rs. 150 million) and its investment in MBSL Savings is stated at Rs. 237 million.
Be that as it may, for starters the sale of MBSL Savings Bank wasn’t advertised but the Board has pursued the matter to resolve several entity-specific issues such as need for much needed capital.
Since MBSL abandoned a transparent approach such as advertising and calling for Expression of Interests (EOIs) or outsourcing the exercise to a reputed consultancy firm, the proposed sale has only got either unsolicited proposals or Board-driven requests.
Daily FT learns that originally there had been a proposal from Navara Capital of financial industry specialist Harsha De Silva fame’s newest entity. Navara is believed to be having several investors in a consortium including Lankem Ceylon, Hettigoda Industries Asoka Hettigoda and PC House owner M. Rishan.
In a letter addressed to MBSL Chairman Shah, Navara has originally expressed interest to buy MBSL Savings Bank and follow up negotiations saw a strike price of Rs. 4.50 per voting share reached.
Thereafter Taprobane Securities Ltd., which is owned by Ajith Devasurendra who started his career at MBSL Group, and under spotlight for its involvement in ill-fated NSB-TFC deal had made an offer of Rs. 4 per voting share and Rs. 2.25 for non-voting. This deal was subject to MBSL providing loan facility up to 40% of shares to be paid in six months.
With Navara’s proposal in the background, MBSL Board authorised Chairman Shah to negotiate a fresh deal with Taprobane Securities on the following basis: 53% of the voting ordinary shares at Rs. 4.50 per share; 72.38% of the non-voting ordinary shares at Rs.2.70/= per share; Retain a balance of 15% of the voting shares as an investment; MBSL Savings Bank name to be changed; execution of a Share Purchase agreement and Settlement terms to be 60% to be paid by cash and Balance 40% settlement on a loan. Additionally a Board seat for MBSL for its 15% investment.
As an alternate proposal, the Board was also in favour to dispose the entire holding in the MBSL Savings Bank at Rs. 5.00 per voting share and Rs. 3.00 per non-voting share.
However Taprobane had apparently dropped off from the negotiating table thereafter which saw Navara Capital returning a few months later offering Rs. 3.50 per share for the entire voting shares block and Rs. 2.25 per share for Non-voting shares. The revised price was one rupee less than the original offer. Insiders said the fresh deal arose after a meeting chaired by Chairman Shah and involving MBSL Director Dr. Ranjith Bandara (who is tipped to be Chairman under new owners after being re-named as Udana Savings Bank) and Navara Capital Managing Director De Silva. Further negotiations saw final strike price fixed at Rs. 3.75 per voting share and Rs. 2.35 for non-voting bring the deal value to Rs. 562 million.
Though Navara had valued Savings Bank at that level, analysts said value of a Specialised Bank is worth a billion or more whilst there are only two “savings” banks in the country. Furthermore, the strike price falls short Rs. 1.75 per voting share and 65 cents per non-voting share when Board recommendation is considered.
They argued that to tide over capital issues MBSL could look at more innovative approaches than merely dumping it at questionable value and worse without a transparent process.
“If claims of turnaround at MBSL Savings are true and prospects for future are promising then MBSL or its parent Bank of Ceylon can infuse Rs. 500 million and strengthen the balance sheet than selling such a prized entity,” they added.
After the Golden Key fiasco, Ceylinco Savings Bank (a Licensed Specialised Bank, established under the provisions of the Banking Act No. 30 of 1988 and the (Amendment) Acts No. 33 of 1995, No.02 of 2005, No.15 of 2006 and No.46 of 2006) ran into problems and as per MBSL sources, in 2009, the savings venture lost over Rs. 500 million of deposits and faced a liquidity crisis. With approval from the Central Bank, MBSL originally acquired 78% stake (10% was sold in 2010) for Rs. 300 million with balance shareholding is held by major depositors who converted their savings in to the capital during the Ceylinco crisis time.
After MBSL takeover with the guidance of the newly appointed Board, and the revitalised commitment of the staff, the Savings Bank managed to recover from its precarious position and rebuild the trust and confidence of Customers to recover from the crisis within a very short time.
In deed in 2009, MBSL Savings Bank made a profit of Rs. 40 million profit as against loss of Rs. 372 million loss in 2008. In 2010 a loss was posted whilst in 2011 either a break-even or loss was like.
In 2010, MBSL Savings Bank achieved a gross deposit collection of Rs. 1.03 billion, an increase of 15% over 2009. It managed to increase the Minors Savings base by 26% and the Savings Base by 61% during the year. The Savings Bank was also able to disburse Rs. 943 million worth of facilities in 2010 in comparison to Rs. 474 million in 2009.
The weighted average cost with overhead cost has reduced from 23.77% in December 2009 to 17.17% in December 2010. Cost of funds has come down from 15.43% p.a. to 12.05% per annum due to what MBSL described as the prudent treasury management. Furthermore the net Non Performing Advance (NPA) Ratio which was 10.65% in December 2009 was reduced to 7.90% in December 2010.
During the year 2010, the Bank successfully completed a rights issue of 121,685,328 ordinary non-voting shares to the value of Rs. 182.5 million and the required level of capital adequacy as per CBSL guideline was met as of 31 December 2010.
In 2010 though, MBSL Savings Bank failed to contribute positively to the bottom line of the group, it managed to perform to its budgetary expectations. This indicated that MBSL Savings Bank is energetically progressing and was expected to break even in the year 2011.
 “At present, the MBSL Savings Bank is in a solid footing to meet the challenges ahead and looking forward to a profitable year 2011,” was the assurance Chairman Shah told shareholders in his review in the 2010 Annual Report. However as it is confirmed now, a few months after the AGM in June, Shah was busy trying to sell this prized venture for a song.
MBSL’s 2011 Annual Report is yet to be out and latest status of the Savings Bank’s performance is not publicly available.
However Savings Bank had issues of its going concern status in 2011.
As per 2010 Annual Report, the Bank has budgeted to offer a fresh issue of Rs. 600 million ordinary shares and list the Savings Bank on the Colombo Stock Exchange by 31 December 2011 in order to comply with the CBSL guidelines. The fresh infusion has been approved by the Board of Directors and the capital infusion will allow the Bank to overcome the serious loss of capital in May 2011. The Central Bank also requires Licensed Specialised Bank to maintain a minimum capital of Rs. 2 billion, and MBSL got regulatory approval for time until 31 December 2011 to comply with this rule.
The MBSL also sought approval from Central Bank to convert the 12 extension offices of Savings Bank to fully-fledged branches. That will allow the Bank to explore many opportunities and enhance business volumes, which will eventually increase the profitability of the Bank. Considering these factors, the directors were of the view that it is appropriate to adopt the going concern assumption in preparation of the financial statements for the year ended 31 December 2010 for MBSL Savings Bank.
MBSL which recently celebrated 30 years of operations and created banking history by opening 16 new branches and service centres in a day to mark the milestone, saw in 2011, its Group after-tax profit down by 27.6% to Rs. 391.7 million whilst net profit attributable to equity holders was down by 29.6% to Rs. 346.5 million. Group profit from operations was down by 30% to Rs. 221.2 million. This was despite income growing by 6% to Rs. 3.1 billion in 2011 and operating income improving by 2.5% to Rs. 1.9 billion. At bank level, its income rose by 2.3% to Rs. 1.55 billion whilst operating income dipped by 8% to Rs. 1.01 billion. Profit from operations was down by 32% to Rs. 383.6 million and after-tax profit dipped by 27.5% to Rs. 325.7 million.
Board of Directors of MBSL comprises M.R. Shah (Chairman), L. Kaluarachchi (Acting CEO), W.A. Nalani, M.S.S. Paramananda, Lakshman Perera, P.G. Rupasinghe, V. Kanagasabapathy, L. De Silva and Ranjith Bandara