Debris of a crisis: After disclosures, Bank of Punjab back in good books

State-owned bank declares nominal profits, without provisioning for Rs30 billion in bad loans.

LAHORE:

Its balance sheet may still have a gaping hole in it, but the Bank of Punjab’s decision to finally come clean with the full scope of its crisis-era woes appears to be rewarded on the interbank market: the bank can once again raise money from other financial institutions without having to post government securities as collateral.

“Ever since we issued our financial statements [in March 2012], we have been able to access clean borrowing,” said Naeemuddin Khan, the president of the bank, in an interview with The Express Tribune.

Khan was referring to the fact that, after disclosing a Rs10 billion loss for 2008, the bank did not issue any financial statements until early 2012, when it disclosed the annual financial statements for 2009, 2010, and 2011. That period of non-disclosure led to speculation within the banking industry about the true financial health of the Bank of Punjab, and most other banks sought to limit their exposure by refusing to lend to BOP without requiring government securities as collateral.

Following the disclosure of its financial statements, however, the bank appears to have been welcomed back into the interbank market. Sources inside the banking sector confirm that the Bank of Punjab is able to access limited amounts of financing in the “clean” interbank lending. The bank, however, still appears to be viewed with at least some suspicion since it still has at least Rs30 billion worth of bad loans that it has not provisioned for.

The Bank of Punjab was one of the worst victims of the post-Musharraf crash in the financial sector that saw Pakistan’s fixed income markets freeze up in late 2008. Nearly all banks faced a sharp rise in bad loans after interest rates jumped more than 6% within a few months during that time, but Bank of Punjab’s woes were exacerbated by allegedly politically motivated lending by the then-provincial government in Lahore.

There have been allegations of politically connected companies such as Haris Steel borrowing billions of rupees above their normal credit limit by using fraudulent methods and in connivance with bank officials. The bank’s former president Hamesh Khan was even extradited from the United States – the first time that the US has ever extradited a fugitive to Pakistan – to face charges of mismanagement and corruption.

The hole in Bank of Punjab’s balance sheet, however, suggests that the problem was much wider than the Rs9 billion loan to Haris Steel. Adding together the Rs20 billion in bailouts that the Punjab government has pumped into the bank to the Rs30 billion in bad loans that still need the provisioning yields a number of closer to Rs50 billion in questionable lending, out of a total lending book that stood at Rs252 billion as of September 30, 2012.

It is unclear just how much of that lending was just the result of a bad economy and how much was the result of poor risk management. The State Bank, meanwhile, has allowed the Bank of Punjab to not provision for Rs30 billion in bad loans. That provisioning would cost the bank over Rs27 billion, which would more than wipe out the bank’s total equity of close to Rs12.1 billion. Were that to happen, BOP would have had a colossal net loss instead of showing a Rs348 million profit in 2011 and a Rs634 million profit for the first nine months of 2012.

The exemption from provisioning appears to be consistent with the State Bank of Pakistan’s policy of letting time heal all financial wounds. As a response to the 2008 crisis, the central bank allowed all banks to take asset write-downs over four quarters, instead of having to provision for them all at once. This extension largely worked: the banking system stabilised, and after a poor 2009, banking sector profitability bounced back in 2010 and has continued to rise since then.

But while the interbank market may be cautiously welcoming back the Bank of Punjab, the stock market has been less forgiving: the bank’s stock is down 21.8% since the day it released its financial statements, though it is still up 51.4% since the beginning of the year, outperforming the KSE-100 index, which is up by 42.4% for the year.

Published in The Express Tribune, November 7^th, 2012.