Bank Islami Pakistan Ltd (BIPL) has signed a Memorandum of Understanding (MoU) with Emirates Global Islamic Bank Ltd (EGIBL) with a view to merge EGIBL with BIPL. In this regard, BIPL is expected to commence the due diligence process shortly. If the proposed merger goes through, the number of Islamic banks in Pakistan will reduce to five from six at present. Besides lower competition within the local Islamic banking space, in our view advantages for BIPL are 1) enhanced branch network and 2) loan book diversification. That said, relatively poor asset quality of EGIBL could be a concern. Although eventual consideration may be through stock issue (swap), BIPL appears to have necessary funds available on its existing balance sheet should it opt for cash purchase. In CY09, BIPL has underperformed the KSE-100 Index by 72% and the scrip currently trades at a trailing Tier-I P/B multiple of 0.67x.