Financial industry: Mergers and takeovers await banks in 2012

Eight banks fail to meet minimum capital requirement of Rs8 billion in 2011.

KARACHI:

Lower tier banks will find it hard to survive alone in the tough central bank regime and will need to merge or get acquired to carry on, a CEO of a top bank told The Express Tribune.

Eight banks failed to meet the minimum capital requirement in 2011 and need to look for places to raise funds.

The State Bank of Pakistan in April 2009 slashed the minimum capital requirement (MCR) by massive 57% to bring it down to Rs10 billion by Dec 31, 2013 from as high as Rs23 billion mandated earlier.

The slashed target suggested that banks were to maintain MCR of Rs8 billion by the end of Dec 31, 2011.

This suggests another extensive round of mergers and acquisitions in the upcoming year. During 2010, we witnessed only takeover Faysal Bank acquiring Royal Bank of Scotland (RBS) Group’s Pakistan unit for 41 million euros and only the takeover of three commercial banks Arif Habib Bank, Atlas Bank and MyBank by UAE-based Suroor Investment in 2011.

It can be safely deduced that 2012 is eventually going to be the year of consolidation for the banking sector once again, according to an InvestCap research note.

There are a total of four banks who are on the brink of meeting MCR for 2011. On the other hand, three out of eight banks who are yet to meet MCR for CY11, stand with sufficient enough reserves to issue bonus shares, adds the note.  This category includes Faysal Bank, Askari Bank and Samba Bank that are expected continue their business without any hassle.

“The rest of the banks including Burj Bank, Silkbank, KASB Bank and Bank Islami are those not blessed with enough reserves to issue even bonus to ensure their survival as far as MCR is concerned,” says the note.

JS Bank is also not close to the MCR but it is likely to receive funds from the group.

Finally, this scenario of the banking industry puts certain banks into a basket of prime targets for acquisition by the stronger ones in the industry. Increasing the MCR for banks will lead to consolidation of the banking industry with relatively lower risk or better capitalised and more competitive banks in the sector ahead.

Published in The Express Tribune, January 1^st, 2012.