DRIVING CHANGE THE RESTRUCTURING OF UNITED BANK LIMITED Zubyr Soomro Citigroup Country Officer - Pakistan

DRIVING CHANGE

THE RESTRUCTURING OF

UNITED BANK LIMITED

Zubyr Soomro

Citigroup Country Officer - Pakistan

THE RESTRUCTURING OF UNITED BANK LIMITED

WORLD BANK CONFERENCE – TRANSFORMING PUBLIC SECTOR BANKS

In Apr 97 asked by recently elected Prime Minister Nawaz Sharif to take over UBL, help restructure & ultimately privatize the bank

Part of financial sector restructuring program – two professionals already brought in to head the other two big banks (together 60% of banking system)

Several key laws already amended to facilitate process Autonomy given to Boards of Government Banks Expediting recovery of bad debts Tightening labor laws

I returned to Pakistan after 14 years with Citibank overseas to take on the UBL task in Jul 97

Background



UBL – Perspective

Set up in 1959 – within 10 years was challenging Habib Bank, the largest in the country

Nationalized in 1973 along with 4 other locally owned banks

Privatization program started in 1991 51% of the smaller Muslim Commercial Bank successfully sold Thereafter, via an employee buyout, the smallest – Allied Bank –

sold Privatization of the larger but more problematic UBL

unsuccessfully attempted 3 times between 1991 & 1996

Meanwhile its condition continued to deteriorate (market share fell from 27% to 7%)



In April 96 the Central Bank took over – retired central banker appointed Chairman; he took on the militant unions but over the next 15 months had 4 different bank Presidents

As of year-end 1996 the bank hadNegative equity Heavy & continuing operating losses due to

Overstaffing – 21,500 employees Overbranching – 1,701 branches NPLs – 60 % of total loans

An international network (9 countries) incurring substantial losses and under pressure from all regulators

A lack of systems and controls across the board

Demoralized staff, declining deposits & market share

UBL – Perspective



The Objectives of Reform

Overall purpose was to reposition it for privatization. This was to be achieved in three phases

Phase 1: (Jul – Dec 97)Stem the bleeding

Phase 2: (Jan – Jun 98)Create Key Building Blocks

Phase 3: (Jul 98 onwards)Consolidate and position for growth



Reform – Phase 1

Strong Board of Directors from the private sector (CEO’s from major local & foreign companies)

People focus New senior hires for expertise / change (33 key positions) Identify key internal seniors to retain, involve and drive change Downsize staff – cut costs and signal intent to change culture

Rationalize branches and zones

Arrest rising NPLs (80,000 accounts in default)

Start re-building overseas network

Develop/communicate basic strategy – identify external consultants to assist in development of strategic plan



Data integrity / Timeliness (P&L, Balance Sheet)

Credit policies / controls / review / monitoring (previously all approvals with executive committee of Board)

Strengthen / revamp audit process (25% of new hires into audit)

Treasury – track and manage liquidity / positions

Human Resources – make performance driven

Reform – Phase 2



Facilitate recovery of bad debts – set up specialized remedial management units

Work on government to resolve public sector default cases to cut drag and signal support / commitment

Establish corporate bank structure for domestic network to limit flow of new NPLs, enhance image

Finalize / implement technology plan – PC based, hub driven (zones / regions)

Based on above progress (Phases 1 & 2) push for capital injection by government

Reform – Phase 2



Essentially upgrade processes / consolidate for growth

Implement next downsizing stage – voluntary/non-officials

Build overseas franchises – develop strategies, staff up, clean out NPL’s, improve service / ability to lend

Deepen corporate banking effort & implement SME strategy, protect top consumer relationships

Extend automation to cover all key branches (150)

Drive down pay for performance message

Reform – Phase 3



Prior management identified excess of 8,000 out of existing 21,500

Approach coordinated with other banks under SBP umbrella Similar packages, agreed timeframe Others chose voluntary / UBL mandatory to protect quality Others covered all staff / UBL officers only (less grief, more

saves) – total of 5,400 officers in one go

Formula used instead of subjective approach to minimize contention give signals to unions / bureaucracy / politicians signal to staff on culture change intent ease legal process

Staff Downsizing



Implementation Form team of old / new Involve counsel / media rep throughout Pre-clearance at all government levels Special cell to respond to errors / queries / complaints Communicate with staff to maintain morale – ie no further

mandatory actions Net Effect

Severe political pressure – however ‘no reversals’ decision sent strong positive signals on culture change

842 legal suits against UBL, but position upheld Lessons

Do early, coordinate with other banks World Bank involvement key – identifies as critical to reform

and de-personalizes as seen to be government driven Helped with capital request as regulator saw seriousness

Staff Downsizing



1,701 branches, 56 Zones 436 of these losing money, 11 excess zones Target closure of 300 domestic / 11 overseas branches / 11

zones

Strategy of relocating, not retrenching staff

Minimize customer disruption through careful transitioning of clients from closed branches

Cost impact relatively small due to No staff reductions Low cost of closed premises Real saves in opportunity costs of not having to upgrade

branches / technology / branding

Network Rationalization



Overall, the most difficult area to manage

Declared at 60% of loans – actually higher. 25% of these at overseas branches

Used dedicated units with direct CEO reporting

Domestic Profile 150 accounts made up 60% of amount Agricultural / Yellow Cab loans 13% of amount but 80% of accounts 50% of accounts already under litigation

Overseas Profile Concentrated in UK / USA / UAE UK / USA collateralized but not pursued UAE mostly unsecured, and to Royals

Non Performing Loans



Domestic Dedicated officers against large accounts Outsourced agricultural / Yellow Cab loans Reduced panel of counsel / upgraded quality Used system-wide formulas for settlement eg Principal + 10% Joint approach to judiciary (with Central Bank) to expedite Focus on cash collections – 25% collected in cash, 30%

restructured Post-2001, used Corporate Industrial Restructuring

Corporation (CIRC) formed by Government to take over NPLs from public sector banks

Overseas Royal loans taken over by CIRC with Government

involvement

NPLs – Actions Taken



Discrete Corporate Banking Group set up to handle accounts over $500,000

Marginal relationships sifted out to remedial unit

Account Management Moved to 3 regional centres and 15 Corporate branches Staffed primarily by new Relationship Managers With skilled staff and new credit process, able to

delegate decision making

Centralization of trade processing (100 branches to 18) and Credit extension (800 branches to 150) enabled better control

NPLs – Reducing the flow



Advisors (SocGen) complete due diligence

Expressions of Interest invited

Sealed bids submitted by 3 groups Combination of overseas Pakistanis / UAE Royals Owner of Muslim Commercial Bank Union Bank

Eventually open auction, 51% sold, formal handover 9/02

Key Government actions to facilitate Execution Law Tax refunds Resolution of PASMIC default CIRC sales – especially UAE Royals

Reform, underpinned by changes in law, key to success

The Privatization



Where is UBL today ?

1997 1999 2002

Staffing 21,500 14,000 8,525

Branches 1,701 1,494 1,112

NPLs (% of loans) 60 - 75% 23% 7%

Revenue/Expense 1:4 1.3:1 1.6:1

Market Share 7% 9% 10%

Operating Profit (Rs Bn)

(3.7) 1.4 2.7



Change in laws was key Autonomy Labor Law Recovery laws

Leverage benefits from systemic approach under Central Bank umbrella

IFI involvement important – not only to fund restructuring but also for monitoring and feedback

Choice & Role of Board – Top Corporate individuals lent credibility in setting policy while leaving management free to focus on operations

Constant feedback to Government at multiple levels to avoid dilution of support

Lessons Learnt



Consultants Use to train / integrate existing seniors Help develop direction including feedback from old seniors Add credibility with Board / Government Provide independent sounding board Useful for strong, aggressive follow-up

Downsizing Do early on for initial strong message Structure to signal culture change Retain key old players (history/pitfalls) Use media to communicate for maximum reach / transparency Absolutely no exceptions

Lessons Learnt



Existing staff Surprising number of good people (previously sidelined) Once convinced of sincerity, are great assets Critical to success as documentation poor Communicate constantly & widely Give strong compensation signals (High/same bonuses) Identify best – then trust / delegate

New hires Involve old seniors in choice Balance maturity vs innovation / enthusiasm Initially focus on expertise to establish credibility Quick action on non performance Diversity of experience (geography / banks) helps

Lessons Learnt



NPLsPrioritize by court / success probability

Government NPLs as catalyst

Reward and publicize successes

High visibility cases – use to effect

Coordinate approach to judiciary with other players and Central Bank

Separate foreign – focus where laws most supportive

Lessons Learnt



On Reform Take systemic approach (loners will fail) Use like minded CEOs Coordinate tough actions Demonstrate own commitment through support

On Privatizations Avoid unrealistic timelines Do transparently Lay clear road maps Targeted road shows Need track record to widen investor interest – ie reform first,

then privatize

Lessons for Government



Can be transformed from dying dinosaurs to vibrant, lean, competitive entities that can be privatized

Temptation to retain once fixed but privatization is critical

Set realistic targets – start with more doable ones!

Conclusion

Documents

DRIVING CHANGE THE RESTRUCTURING OF UNITED BANK LIMITED Zubyr Soomro Citigroup Country Officer - Pakistan