SILK Bank may have met the State Bank of Pakistan and Basel-III regulations on the minimum capital requirement and capital adequacy ratio, through a massively discounted right share issue of Rs10bn last year, but it isn’t out of the woods yet.

Its performance during the ongoing year will indeed give us a glimpse into its long term future: whether or not it can hold its own and grow in a highly competitive market where depositors trust its reputed rivals more than any of its smaller peers.

The bank’s right share was offered for Rs1.56 per share — at a massive discount of Rs8.44 per share from the par value of Rs10 — to shareholders and new investors, reflecting the problem faced by any small bank trying to raise additional capital from the market to comply with minimum capital requirement (MCR) and capital adequacy ratio (CAR) regulations.

At the same time, the successful subscription of the right issue shows that some institutional and individual investors still consider the bank a risk worth taking.

The capital of the bank (net general reserves of Rs180m and accumulated losses of Rs12.15bn) at the end of the first quarter of the present year to March amounted to Rs11.28bn and CAR is calculated at 10.83pc. The bank’s capital also includes Rs2bn it had received as ‘advance against the right issue’ by four investors in December 2014.

The bank is yet to issue shares to these investors whose names are being withheld by its management because it hasn’t yet met ‘certain SBP conditions (that is, issue of shares and adjustment of finance facility of one of the investors), which were to be completed by March 31, 2015’.

However, the bank is still treating the advance against shares subscription towards MCR and CAR. “The SBP is aware of it and has allowed us to consider the advance as part of the bank’s capital,” Silk Bank’s company secretary Uzman Naveed Chaudhry told Dawn from Karachi by telephone.

Last year’s right share issue was more than successful in view of the subdued response to the bank’s capital-raising drive in 2010. The bank had offered a right share issue of Rs7bn at that time but could raise just less than two-thirds of the money, or Rs4.428bn. The remaining Rs2.572bn remained unsubscribed.

Having met the MCR and CAR conditions, the bank management appears quite upbeat about its future growth. For example, the bank’s chairman in his message in the bank’s financial report for last year said: “With the inflow of capital, the bank has a high growth potential.” In his review, the bank’s president pointed out that (the bank has) crossed the threshold of MCR and CAR.

The management has already formulated a growth strategy for the next three to five years, Chaudhry said.

The growth strategy, according to the bank’s financial reports for the last year and the first quarter of the present year, revolves around opening new branches (currently, the bank has 88 branches operating in 33 cities), lowering the cost of funds, reducing non-earning assets and selling bank-owned real estate and properties, rationalising expense, improving use of technology and focusing on customers.

The bank’s quarterly financial results show that the bank, which had posted a pre-tax loss of Rs1.84bn last year, had improved its pre-tax profit to Rs310m during Jan-March 2016 compared with Rs75m last year. Its interest income rose by 46pc to Rs1.14bn during the Jan-March 2016 from Rs780m last year. But its non-interest income went down by almost a third to Rs445m from Rs649m and provisioning against non-performing advances rose by 31pc to Rs204m from Rs155m.

Thus, quarterly profits owe more to the reversals of write-offs and provisions of Rs268m than an increase in its interest and non-interest income during this period. The reversals helped the bank pull down its expense by over one-tenth to Rs1.07bn from Rs1.2bn.

The bank’s advances net of provisions of Rs5.45bn made against non-performing loans declined to Rs58.84bn (the amount also includes Rs8.53bn placed under non-performing status) from Rs61bn and net investments rose to Rs40.14bn from Rs35bn last year. In line with the industry trend, a major chunk of the bank’s investments (Rs39bn) has made its way to federal securities.

Deposits and other accounts, nevertheless, increased to Rs85bn from Rs81bn. A major part of deposits attracted by the bank are parked in fixed accounts (Rs34bn) and savings accounts (Rs23.75bn). A chunk of the rest of deposits (Rs20.91bn) is placed in the non-remunerative current accounts.

A Karachi-based financial analyst told Dawn that the bank was more focused on the recovery of bad debts for now than on expanding its business. “Apart from that I don’t see any strategy its management might be pursuing to expand its business and grow,” he said on condition of anonymity. He was of the view that unless doubtful and bad loans were recovered, the bank may be requiring yet another capital injection in the not too distant future.

But the bank’s company secretary does not agree with the analyst’s reading of the bank. “We have covered the capital shortfall, met the MCR and CAR regulations, paid off our debts (especially the one against the convertible preference shares of Rs2.2bn issued in 2013 as capital-raising effort, which the SBP disallowed from showing towards MCR), and halved our provisions held as a ratio of total advances to 8.9pc in 2015 from 16.2pc in 2010; we now find ourselves in a position to expand our network and grow rapidly,” Chaudhry said.

A senior executive of the bank in Lahore said the management planned to increase the number of branches to more than 400 in the next three to five years. “As far as I know, the bank management will also be open to a good merger proposal if and when it is made.”

Published in Dawn, Business & Finance weekly, August 8th, 2016