KARACHI: United Bank Ltd (UBL) is considering a potential “merger” with Silkbank Ltd, one of the smallest commercial lenders battling undercapitalisation issues for years.

One of the three biggest banks in terms of the asset base, UBL is going to seek permission from the State Bank of Pakistan (SBP) to start Silkbank’s due diligence, which involves an in-depth examination of financial statements of the target company by the lawyers and accountants of the other party.

Silkbank has been making losses for many years. Its accumulated losses amounted to Rs20.2 billion at the end of 2020, the latest period for which the bank has published its financial accounts.

The bank is in desperate need of new capital to meet regulatory requirements. Its capital stood at Rs3.16bn against the prescribed minimum capital requirement of Rs10bn at the end of 2020.

Similarly, its capital adequacy ratio was -4.45pc against the prescribed level of 11.5pc on Dec 31, 2020.

Speaking to Dawn, Topline Securities Research Director Yousuf M. Farooq said it was premature to speculate about the nature or size of the transaction in case it goes through.

However, the use of the word “merger” in the regulatory disclosure implies that the existing shareholders of Silkbank will receive a proportionate number of UBL shares as part of the transaction. If the deal is structured as an acquisition then the buyer will likely pay Silkbank shareholders in cash for a majority stake.

At the going market rate, the total value of Silkbank is Rs10.1bn. The major shareholders of Silkbank are Arif Habib Corporation Ltd (28.23pc), former finance minister Shaukat Tarin (11.55pc), International Finance Corporation (7.74pc) and Zulqarnain Nawaz Chattha (7.75pc).

Silkbank has also been facing asset quality issues for some time. Its coverage ratio — which is the reserved allowance for loan losses divided by the total amount of non-performing loans — was already “very low” and may have further deteriorated given the considerable increase in interest rates since 2020.

It posted a net loss of Rs6.57bn in 2020 versus a net loss Rs3.95bn in the preceding year. The share price of Silkbank closed at Rs1.12 apiece on Friday after increasing 10.89pc from the preceding close.

Published in Dawn, April 29th, 2023