“Fauji Foundation has expressed interest in acquiring the majority stake in Silkbank Ltd,” Silkbank informed the Pakistan Stock Exchange (PSX) in a mandatory filing on Jan 28.

Silkbank had been requested by the potential acquirers that it should allow them to conduct due diligence. It was said that Fauji Foundation intended to apply to the State Bank of Pakistan (SBP) for requisite approval.

Silkbank stated that in the meeting of the board held on Jan 28, the bank had “subject to the approval of the SBP given its in-principle approval to allow Fauji Foundation to conduct the required due diligence and evaluate the information that would be provided by Silkbank in this regard”.

The news fired up a rally in the Silkbank stock. The price of the penny stock rose by 23 paisa to close at Rs1.54. But the exuberance of investors was seen more in the volume traded, which stood at 355 million shares — the highest turnover in a single share on any day in 15 years.

Smaller banks are unlikely to keep afloat in a sea of financial crisis deepened by the pandemic

A corporate raider’s stoop to pick up Silkbank comes as no surprise. Senior bankers say that out of the 29 banks in the country, seven to eight smaller and financially weak ones are unlikely to be able to keep afloat in a sea of financial crisis deepened by the pandemic. Those banks had the choice to either close down or be taken over by strong financial groups or banks.

Shaukat Tarin, former finance minister who owns 11.5 per cent shareholding, told this writer that Silkbank had some attractive features. It was strong in consumer banking. The asset quality of the bank was good. It carried Rs3.5bn-4bn on the balance sheet as deferred tax. He affirmed that the bank had made inroads into the small and medium enterprises (SMEs) and hoped to benefit from the real estate boom.

Mr Tarin observed that most of the 29 banks were too comfortable in making risk-free investments in government papers, which stifled their interest in offering loans to the private sector. He reckoned that the potential acquirer that already has the stronger Askari Bank Ltd under its fold may decide to merge the two banks going forward to ensure a bigger bank with stronger financial and structural muscle. He affirmed that the reason Silkbank had conceded to a potential takeover was that it was non-capital compliant for the last two years.

The financial accounts of Silkbank for January-September 2020 state: “On Sept 30, the equity of the bank was Rs10.7bn, excluding surplus on the revaluation of assets. This includes share capital (net of losses and discount on shares of Rs9.88bn against the Minimum Capital Requirement (MCR) of Rs10bn as prescribed by the SBP.”

The bank goes on to note that the Capital Adequacy Ratio (CAR) of the bank is 4.16pc (Dec 31 2019: 5.81pc) against the minimum CAR requirement of the SBP of 11.5pc (2019: 12.50pc). “Consequently, the bank is non-compliant with MCR and CAR on Sept 30, 2020, which can expose the bank to regulatory actions under the banking laws.”

Silkbank added the SBP had allowed it to treat general provision held against consumer financing as part of Common Equity Tier 1 instead of Tier II for the purpose of CAR calculation. “In case such relaxation was not provided by the SBP, the CAR would have been lower by 0.79pc.”

Another senior banker, who asked not to be named, observed that smaller banks will have to tie up with bigger and financially strong banks since the regulations and restrictions under the Financial Action Task Force (FATF) and anti-money laundering (AML) laws will have to be closely monitored. It will require heavy investment in technology, which smaller banks can ill-afford. He said private-sector borrowings as a percentage of GDP in Pakistan was 19pc, way below 45pc in Bangladesh and 55pc in India. He believed that private-sector lending will remain limited unless the government takes lead in setting things right.

The legal system of recoveries needs to be improved and the Federal Board of Revenue (FBR) must draw a long-term plan to grapple with infected loans. He said that experience shows lending to SMEs is profitable for both banks and borrowers.

Arif Habib Corp is a major shareholder in the bank with 28.23pc of total equity. The total shareholding of Mr Tarin was 11.55pc, IFC 7.74pc and Zulqarnain Nawaz Chattha (of the Gourmet Group) 7.47pc.

The bank has a network of 123 branches in 39 cities with 4,423 employees. It earned a profit after tax of Rs1.33bn in 2018, which was its highest in six years. But for 2019, the bank posted a net loss of Rs3.95bn. The bank said the loss was primarily because of a delay in payments from real estate customers of the bank. “The unexpected ban on construction of high-rise buildings in Karachi by the Supreme Court of Pakistan for a certain period of time adversely affected the real estate projects financed by the bank.”

Published in Dawn, The Business and Finance Weekly, February 1st, 2021