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

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

2. Background • 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

3. 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%)

4. UBL – Perspective • 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 had • Negative 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

5. 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

6. 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

7. Reform – Phase 2 • 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

8. 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

9. Reform – Phase 3 • 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

10. Staff Downsizing • 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

11. 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

12. Network Rationalization • 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

13. Non Performing Loans • 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

14. NPLs – Actions Taken • 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

15. NPLs – Reducing the flow • 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

16. The Privatization • 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

17. Where is UBL today ?

18. Lessons Learnt • 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

19. 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

20. 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

21. Lessons Learnt • NPLs • Prioritize 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

22. Lessons for Government • 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

23. Conclusion • 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!