IMF assured lagging banks likely to meet MCR by end-Sept

KARACHI: The government has assured International Monetary Fund (IMF) that three local banks, short of central bank’s minimum capital requirement (MCR), are expected to meet these regulatory standards in the third quarter of 2021, The News has learnt.

“The government is closely monitoring the health of the financial sector to safeguard its resilience,” said the IMF staff report, citing the memorandum of economic and financial policies attached with the letter of intent of the government on the economic programme under the Extended Fund Facility (EFF).

“We remain engaged with two non-systemic private sector banks and one public sector bank to ensure compliance with the MCRs. However, due to technical difficulties during the crisis, the deadlines to ensure the compliance with the capital requirements have been reset to end September 2021,” the government told the IMF.

“The public sector bank is undergoing a privatisation process that is expected to be completed by end-September 2021. In case the privatisation is not successful, we will consider other resolution options, including liquidation.”

State Bank of Pakistan (SBP) binds banks to maintain the MCR of Rs10 billion and capital adequacy ratio (CAR) of 11.5 percent to build buffers and enhance resilience.

CAR is a risk sensitive measure of assessing capital adequacy of financial institutions and is computed as the ratio of total eligible capital to total risk weighted assets.

The government has not identified the names of the non-compliant banks but there are two small-sized private sector lenders, which are struggling to meet the CAR requirement.

Silkbank Limited and the Summit Bank Limited are below the minimum capital thresholds, it said.

A loss making state-owned enterprise (SOE), SME Bank Limited is also facing the capitalisation issue and is currently on the government’s active privatisation list.

Interesting to note is that the government has also put another public sector bank, First Women Bank Limited, in its active privatisation programme under its push to sell financially weak state-owned enterprises and shore up revenues.

“As per my understanding, SMBL is getting a new sponsor as a part of a group deal in the Middle East. The new sponsor will have to inject equity if they plan to continue to operate the bank in Pakistan. As far as the Silk bank is concerned, there have been rumors in the circles regarding the acquisition of the bank,” said Syed Masroor Hussain Zaidi, a banking analyst at Foundation Securities. “However, given the current market price and the bank's financial position, a deal at current levels seems less likely. Moreover, I think that First Women Bank is also in the government's privatisation risk,” he said.

“So it seems like any potential acquirer will probably be bridging the gap. To conclude, yes there are some points of concerns specific to these banks but the overall financial soundness of the system remains well managed primarily due to the timely measures taken by the State Bank of Pakistan,” Zaidi added.

As at September 30, 2020, the equity of the Silkbank stood at Rs10.70 billion, excluding surplus on the revaluation of assets. This includes share capital (net of losses and discount on shares) of Rs9.88 billion, showed the financial accounts of Silkbank for January-September 2020. The CAR of the bank is 4.26 percent, it added. Recently, Habib Bank Limited has intended to acquire the Silkbank’s consumer portfolio after Fauji Foundation backed off from the deal. The financial results of Summit Bank Limited (SMBL) haven’t been issued since 2018. “As at December 31, 2018, the bank is non-compliant with the minimum capital requirement of Rs10 billion prescribed by the SBP while the Capital Adequacy Ratio stands at -8.02 percent as against the minimum requirement of 11.90 percent,” the bank said in its annual report for 2018.

A notice posted on the SMBL’s website said that Nasser Abdullah Hussain Lootha, who had expressed his intention to acquire a controlling stake in the bank last year, has issued letter of intent to inject fresh equity in the bank as perspective foreign investor subject to necessary regulatory approvals in due course to ensure the bank meets its capital requirement as per applicable MCR and CAR. “Due to timely measures taken by the central bank, capital adequacy levels currently stand at the adequate level despite the economic stress exerted by the Covid induced economic slowdown,” Zaidi said.

“However, I believe the implementation of IFRS9 will be a challenge for the banking sector,” he said and added that having said that, most of the banks had significantly increased their general provisioning reserve to create cushion for the implementation of IFRS 9.

“As per our calculations, capital erosion due to its implementation is likely to stay under 2 percent as fresh infection ratios for most of the banks are quite low as legacy non-performing loans account for the major chunk of the infection. Therefore this should keep probability of default under check to some extent diluting the overall impact of the capital adequacy,” Zaidi added.

The CAR of the banking industry inched up to 18.7 percent in the first half of 2020 from 17.0 percent a year earlier due to improved earnings and decline in credit risk weighted assets.