LAST week, Silk Bank Ltd presented a ‘tentative’ timeline about its much-awaited rights share issue in a notice sent to the stock exchange. The bank hopes to wrap up the entire process by September 24.

The bank is planning to issue over 6.41bn rights shares at Rs1.56 per share to raise Rs10bn. The book-closure period started from last Monday and will last till July 20.

The issue is at a big discount of Rs8.44 per share from the par value of Rs10, representing the general problems facing some smaller banks as they try to raise additional capital from the market to comply with central bank and Basel III regulations regarding minimum capital requirement (MCR) and the capital adequacy ratio (CAR). The bank has entered into an underwriting agreement with Arif Habib Ltd for the issue.

By end-2014, a majority stake (around 74pc) in the bank was vested with a consortium of four entities and one individual: the International Finance Corporation, former finance minister Shaukar Tarin, Nomura European Investment Ltd, and Bank Muscat.

Despite its capital issues, the bank managed to stage a turnaround last year and posted a profit in the first quarter as well

Silk Bank received approval for the plan from the State Bank of Pakistan (SBP) earlier this month, and its board had approved the rights share issue last August. The bank had also received Rs2bn as advance against the issue by four investors in December 2014, and then received permission from the central bank to include this as part of its capital for MCR and CAR calculations.

The bank is not new to such a capital-raising drive, having issued rights shares earlier in 2010 as well. However, Rs2.572bn worth of these shares had been under-subscribed. The bank had clarified last year that the current issue is a new process and that it is not putting up the unsubscribed portion of the previous issue on the block again.

While the bank is expected to update investors about progress on these fronts when it declares its half-yearly results over the next few weeks, it is unlikely that it would have met the MCR (net of losses) threshold of Rs10bn given that the rights share issue is yet to be completed.

While not naming them, the government, in its latest memorandum on economic and financial policies (MEFP) document sent to the IMF had mentioned that four banks had yet to meet the MCR.

In addition, it noted that “only one bank (out of 36 banks) remains CAR-non-compliant. The size of this bank is about 0.85pc of banking system assets (or 0.4pc of GDP). The bank’s CAR is at 9.36pc (against the 10pc requirement) and it is expected to complete a rights issue…which will enable it to become CAR-compliant, and we will continue to engage with the bank to ensure that it will stay CAR-compliant thereafter”. Some sector analysts believe this bank to be Silk.

Financial performance: But despite its capital issues, the bank managed to stage a turnaround last year and posted a profit in the quarter ending March 31 (1QCY15) as well.

While this can partly be attributed to the general improvement in the banking environment, part of it has also been due to the bank’s efforts to shore up cheap customer deposits.

“Branch banking remains one of the most critical businesses for the bank, accounting for approximately 75pc of our deposit base by end-March. During the [first] quarter, branch banking witnessed a deposit growth of 8pc. [We] continued to focus on reducing the cost of funds by replacing high-cost funds with low-cost Casa deposits and favourably modifying the deposit mix by 3pc during the quarter,” wrote the bank’s chairman, Munnawar Hamid, in his quarterly report to shareholders.

However, an analysis of the bank’s 1QCY15 financial statements shows that its high-cost fixed deposits had recorded the highest quarterly growth (17.5pc) and reached Rs33.7bn. Non-remunerative current accounts went up by a lower 6.2pc to around Rs19bn, while savings accounts grew 4.1pc to just over Rs19bn during the period.

As a result, the bank’s interest expenses rose 15pc on a yearly basis to Rs1.55bn. And continued monetary easing during the period led to the bank recording a meagre 4.5pc rise in its interest income, which reached Rs2.33bn. Consequently, its net interest income for the quarter dropped 11.4pc to Rs781.6bn.

However, this was somewhat compensated by a solid 44.6pc growth in its non-core income, which went up to Rs649.5m. This came on the back of big rises in other income (up 121pc to Rs70.85m), capital gains (up 79.4pc to Rs262.9m) and banking fees and commissions (up 21.7pc to Rs229.6m).

On the other hand, Silk’s non-interest expenses also recorded a rise of 12pc and reached Rs1.2bn by end-March.

The bank ended up posting after-tax earnings of Rs49.87m for 1QCY15, which were down 25.4pc from Rs66.84m in 1QCY14. This translated into earnings-per-share of Re0.01, down from last year’s Re0.03.

Published in Dawn, Economic & Business ,July 21st, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play