United Bank Limited (UBL), one of Pakistan’s largest lenders, said on Tuesday it had received board approval to set up a wholly-owned exchange company and sell its 55 percent stake in its UK subsidiary to the Bestway Group.

“The board of directors has approved the establishment of an exchange company with Rs1 billion as initial paid-up capital, as a fully owned subsidiary of UBL subject to the State Bank of Pakistan (SBP) clearance and other regulatory compliances,” the country’s third largest bank said in a filing to the Pakistan Stock Exchange.

The bank’s move will help bring transparency and competitiveness in the foreign exchange sector, as well as meet the legitimate demands of the public for foreign currency, analysts said. Several banks are currently in the process of establishing exchange firms. Habib Bank Limited and the National Bank of Pakistan have already done so, and UBL is preparing to follow suit.

“Exchange companies operated by banks will improve the market efficiency and depth. It is a step in the right direction in my opinion,” said Fahad Rauf, the head of research at Ismail Iqbal Securities.

UBL’s decision to establish the exchange company follows the SBP’s recent announcement of measures, including encouraging banks to create wholly-owned exchange enterprises to meet the legitimate demands of the general public for foreign currency.

Experts have occasionally expressed concerns about the operational structure and low levels of compliance observed in category “B” exchange companies.

“The SBP has now advised both category ‘B’ firms and franchisees to either merge with established full-fledged entities or sell their businesses to stronger counterparts,” said Topline Securities in a note.

“Failing to comply with this directive within the stipulated three-month window will result in the automatic cancellation of licenses for standalone category ‘B’ firms.”

The SBP has also instructed exchange companies to increase their paid-up capital to a minimum of Rs500 million (excluding losses) by December 31, 2023, up from the current minimum requirement of Rs200 million.

Following a significant drop in the value of the rupee earlier this month, the government intensified its crackdown on illicit dollar trading. In the last five trading sessions on the kerb market, the local currency gained 28 rupees against the dollar due to strong measures, such as the arrest of individuals involved in hoarding, smuggling, and black marketing of dollars.

Additionally, the detention of those engaged in hawala/hundi and illegal forex activities by law enforcement authorities led to a slowdown in grey market activity. Consequently, there is less pressure on the key interbank market, where the rupee has appreciated by 2.3 percent against the dollar since Wednesday.

The SBP alos terminated the licenses of some B-category exchange firms due to their involvement in unlawful forex trading.

UNBL UK to Bestway Group

The bank informed the stock market that its board had approved selling the Bestway Group the 55 percent stakes of United National Bank Limited (UNBL UK).

“The sale of the subsidiary is just a reallocation of business within the group. Bestway Group owns UBL,” Ruaf said.

The notice mentioned that UNBL UK contributed Rs0.57 to the consolidated earnings per share (EPS) of UBL for the first half of 2023 and EPS of Rs0.48 for the full year 2022.

UNBL UK is a banking institution incorporated in the United Kingdom. UNBL UK was formed in 2001 from the merger of the UK branches of United Bank Limited and the National Bank of Pakistan, according to Topline Securities.

The principal activities of UNBL UK are to provide retail banking, wholesale banking, and treasury services to financial institutions and trade finance facilities to businesses of all sizes. UNBL UK operates one branch inside the United Kingdom under the trade name of United Bank UK.

“To recall, as of 1H2023, UBL’s consolidated Capital Adequacy Ratio (CAR) stood at 14.81 percent, whereas the unconsolidated CAR stood at 16.92 percent. In 1H2023 CBS, management mentioned that the difference is due to rupee devaluation and its impact on its subsidiaries outside Pakistan,” the brokerage said.

“After the successful completion of this deal, it will have a positive impact of 200 bps [basis points] on its consolidated CAR, bringing it closer to the levels of the unconsolidated CAR, as per our channel checks.”

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