KARACHI, Nov 6: Following the decision by American Express Bank to close down operations due possibly to shortfall of nearly 50 per cent in minimum paid-up capital requirement , two more foreign banks might be wondering how they would be able to meet the target of Rs2 billion by December 2005: HSBC, with Rs1 billion in its head office capital account and Oman International Bank also undercapitalized to the extent of 50 per cent of the Dec 2005 minimum capital requirement.
The State Bank of Pakistan has raised minimum paid-up capital requirement for banks (net of accumulated losses) from Rs1 billion to Rs1.5 billion by Dec 2004 and to Rs2 billion by Dec 2005. At end-June this year, 14 commercial banks were short of the end Dec '04 target: Habib Bank AG-Zurich with paid-up capital at Rs1.4 billion; Bank Al Habib Rs1.4 billion; Soneri Bank Rs1.3 billion; Askari Bank Rs1.3 billion; Metropolitan Bank Rs1.2 billion; Meezan Bank Rs1.2 billion and Prime Bank held Rs1.1 billion in paid-up capital.
Wajahat Ali, Head of Research at Taurus Securities believes that those seven banks might have to issue bonus shares so as to transfer funds from reserves to paid-up capital to meet the Dec '04 target. Other seven banks, the analyst reckons would need to raise fresh capital possibly through right issues or else merge with other banks: Those include, NDLC-IFIC bank with capital of Rs1.2 billion; American Express Bank Rs1.1 billion; KASB Bank Rs1.3 billion; Oman International Bank Rs1.1 billion and HSBC; Bolan and Trust Commercial Bank with paid-up capital of Rs1 billion each.
There are a total of 37 scheduled banks in Pakistan, out of which 18 are currently listed on the stock exchanges. Other than meeting the minimum capital requirement, the banks have scarcely had anything to worry about. Good times have continued to roll for most of the banks during FY'03 and their earnings have been 'surprisingly' good for the current year. Market feared a fall in earnings as a result of expected reduction in capital gains income from government securities, but banks could tide over that by remarkable growth in net interest income (NII), lower provisioning and growth in non-interest income other than capital gains. Although most people were looking at a slump in bank revenues because of falling interest rates and narrowing spreads, the period has never been better for banks. Wajahat maintains that stable spreads combined with advance growth gave a boost to earnings and that higher dividend and fee income offset full impact of lower capital gains.
Based on Jan-Sept '04 results of 16 listed banks (not including NDLC-IFIC and Crescent Commercial Bank since those two were not operational during the nine months period), net combined profit posted growth of Rs1.1 billion (8.4 per cent) to Rs14.3 billion, from profit of Rs13.2 billion in the comparable three-quarters of 2003.
Pre-tax profit of banks edged higher by Rs1.0 billion (4.6pc). "Out of the 16 listed banks analyzed, only four banks recorded a decline in profits namely Bank Alfalah, Bank Al-Habib, Al-Faysal, and Meezan" observes Faisal Jiwani, analyst at InvestCap. He maintains that the reason for the fall in profit in case of all banks was the same: Not being able to book as much capital gains as last year.
The analyst calculates that if capital gains were to be completely deleted from the accounts of all 16 banks for the nine-months period in 2003 as well as the current year, their pre-tax earnings would post a huge rise of Rs5bn or 35pc - the growth driven mainly by NII and fee-based income (fees and commissions charged by banks). The increase in NII could be linked to higher credit off-take in the economy combined with rising spread on earning assets. NII of the 16 banks showed an increase of Rs2.6bn (9.8pc) whereas the increase recorded in Fee, Commission and Brokerage of banks was Rs2.9bn or 53.8pc.
The 2003 was a year of boom for the local stock and bond market. Most banks seized the opportunity and made enormous capital gains on their bond and stock portfolios. But banks have not been passing on the benefits of higher profitability to shareholders, understandably to build up capital base and fatten reserves.