The cash the Bank of Punjab will raise from its latest issue of right shares of slightly more than Rs13bn — its third since 2013.
The equity is expected to help the bank support its capital structure, make provisions to cover bad loans, and grow its network to lend more and earn more.
The Bank of Punjab (BoP) is required by the central bank to make additional provisioning of Rs4.12bn by the end of 2017 and Rs12.38bn by the end of 2018 to cover its non-performing debt of Rs17.53bn.
At the close of 2016, the requirement of making additional provisioning of Rs16.50bn was not subjected to the State Bank of Pakistan’s prudential regulations criteria and the bank was allowed to stagger it in view of the relaxation provided by the regulator, on the basis of the two Letters of Comfort (LoCs) issued by the Punjab government, to inject necessary funds in order to make good the capital shortfall to the satisfaction of the central bank.
The bank has come a long way since it was on the verge of bankruptcy on account of a massive non-performing loan portfolio
“The new issue of right shares is purely a business decision taken by the management to further strengthen the bank’s balance sheet. The stronger equity base of the bank will improve its credit ratings, provide additional comfort to stakeholders, and enable the management to expand its branch network and explore new business avenues for enhancing our earnings,” Mr Naeemuddin Khan, the bank’s president and chief executive officer, contended.
The right shares issue, equivalent to 70pc of the bank’s capital, is being sold at a premium of Rs12 per share. “The decision to issue 70pc right shares at Rs12 a share has been taken on the basis of the bank’s business requirements and on the basis of its future growth strategy,” said the president.
“The value of the bank’s net assets per share was Rs13.41 as of December 31, 2016, and as per market practice the price of the right share is not determined on the basis of the highest price on a certain day,” he argued to counter the objections raised by chairman of the Senate panel on finance, Salim Mandviwala.
Mr Khan also sought to dispel the impression that the latest right issue will change the shareholding pattern of the bank. “It will not dilute minority shareholding at all. The Punjab government’s holding in the bank will remain the same despite its investment of Rs7bn in the right issue.”
The bank has come a long way since the current management took over a bank that suffered a loss of Rs16.83bn in 2008 and was on the verge of bankruptcy on account of a massive non-performing loan portfolio of Rs92bn, or 56pc of its total deposits of Rs164bn.
It has significantly strengthened its capital base with injections of the provincial government. Although it made a pre-tax profit of Rs8.05bn last year and has recovered or rescheduled NPLs of over Rs50bn since 2009, the current stock of bad debt of Rs55bn equal to 12pc of its total deposits and 18pc of its advances still remains a drag on its balance sheet.
The crisis at the bank, which forced the Punjab government to inject liquidity of Rs10bn in 2009 and Rs7bn in 2011 to keep it afloat, was triggered when some of its large borrowers stopped loan repayments and depositors started taking their money out of it.
“The public confidence in the future of the bank was at its lowest when we took over. But we have managed to turn the company around,” Mr Khan said. And quite a turnaround it is.
The bank’s pre-tax profit reached Rs8.05bn last year from a loss of Rs16.83bn in 2008 with deposits growing to Rs453.22bn from Rs164.07bn, cost of deposits declining to 3.89pc from Rs10.89pc, investments rising to Rs211bn from Rs25.67bn, advances surging to Rs293.92bn from Rs150.90bn and assets spiking to Rs545.21bn from Rs185.90bn.
“When we took over the bank was facing capital inadequacy of -14pc (or minus Rs20bn) against the required Capital Adequacy Ratio (CAR) of 10pc to support risk assets. The bank had a very weak capital structure. Indeed, the provincial government greatly helped the bank in its bad days,” the president said.
“We are on the track of rapid growth. Today the BoP is one of the fastest growing banks and has progressed very well in the last few years,” Mr Khan insisted. “The bank has a very bright future ahead. We are hopeful that the new right issue will help us expand even at a faster pace than in the past.”
Published in Dawn, The Business and Finance Weekly, May 15th, 2017