IMF’s report: Two commercial banks expecting capital injection

Another up for merger with domestic bank in coming months, says third review.


Kazim Alam July 11, 2014

KARACHI:


Two commercial banks are expecting a capital injection from foreign investors while another is up for a merger with a domestic bank in the coming months, according to the third review of the International Monetary Fund’s (IMF) Extended Fund Facility (EFF).


“Staff urged the State Bank of Pakistan (SBP) to continue monitoring the implementation of the time-bound action plan to address capital adequacy issues with a few problem banks,” the Washington-based lender said while listing
policy developments in the country’s financial sector in recent months.

Capital adequacy ratio (CAR) measures the soundness of a banking institution and reflects the level of protection its depositors enjoy. CAR is expressed as a percentage of a bank’s risk-weighted credit exposures.

In line with the Memorandum of Economic and Financial Policies (MEFP) signed with the IMF, the SBP has asked all private and public-sector banks to raise their capital before December 2014 in order to achieve the minimum CAR of 10% of their risk-weighted assets.

Although the IMF stopped short of naming names, it said currently one state-owned bank and three private-sector banks are operating below the statutory minimum CAR of 10%.

These banks comprise 6.4% of banking assets and their total capital shortfall amounts to Rs13.2 billion, which is 0.05% of the country’s gross domestic product.

Most banks publish their CARs only in annual financial results at the end of every financial year. A review of the latest financial accounts of commercial reveals that Bank of Punjab, KASB Bank, Summit Bank and Silk Bank do not meet the minimum CAR requirement.

The IMF claims the state-owned bank improved its CAR to 9.3% by March. “Given the current profitability trend, the bank will possibly meet the CAR requirement by end-December 2014,” it said without actually naming Bank of Punjab.

While noting that its CAR “remained below the prescribed level of 10%” the latest quarterly report of Bank of Punjab says its majority shareholder – the government of Punjab – has extended its commitment to ‘support and assist’ the bank in ensuring that it remains compliant with the regulatory requirements.

According to the IMF, one private bank has received Rs2.5 billion from major shareholders as advance against a subscription of rights issue besides offers from potential foreign investors as well as commitment from existing sponsors for injection of the remaining capital shortfall.

The financial statements of Summit Bank for the January-March quarter show that the bank intends to raise Rs5 billion from domestic and international markets to meet the regulatory capital requirements.

Also, its quarterly report states the bank has received an advance against the proposed rights issue shares amounting to over Rs1 billion from their sponsors against their portion as of March 31 and subsequent to the quarter end, the bank has received another amount of Rs1.9 billion.

Another private bank, the IMF report stated, has received an Expression of Interest from a strategic foreign investor for both capital injection and acquisition of shares from existing major shareholders.

The SBP is ‘actively engaged’ with the third private bank, according to the IMF, for its merger with a domestic bank expected in coming months along with the possibility of capital injection.

According to the latest quarterly financial accounts of KASB Bank, its board of directors have already approved a restructuring plan that envisages, among other things, the reshaping of the bank through a demerger between its ‘core banking assets and operations’ and the ‘non-core business and assets’.

The recapitalisation of the damaged core banking operations will be through either a direct equity investment or by way of amalgamation with another bank, it said.

Although these banks have missed deadlines many times in the past, the IMF seems confident this time that they will meet the CAR requirement of 10% soon. “Plans to deal with undercapitalised banks are advancing relatively well,” it said.

Published in The Express Tribune, July 12th, 2014.

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COMMENTS (1)

H.A. Khan | 9 years ago | Reply

Just think about it: shares of how many banks in Pakistan are quoted below face value?

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