The banks to meet the condition of the State Bank of Pakistan (SBP) will raise their paid-up capital by end of next year and would either issue rights or bonus shares while a few analysts were of the opinion that dividends from these entities might shrink.
The much-awaited SBP circular on enhancing the minimum paid-up capital of commercial banks and DFIs have finally been unfolded. The SBP vide its BSD Circular No 6 dated October 28, 2005 further enhanced the minimum paid-up capital requirement for commercial banks and DFIs up to Rs 6 billion by December 31, 2009 from the existing Rs 2 billion by December 31, 2005.
This increase in paid-up capital would be in phases, as the banks will raise capital to Rs 3 billion by 2006, Rs 4 billion by 2007, Rs 5 billion by 2008 and Rs 6 billion by 2009.
Moreover, the SBP in an effort to reinforce the financial health and ward off risks arising out of any downturn expected in the economy in the coming years which may directly infect the banking sector advances portfolio, has also initiated a model to change the uniform Capital Adequacy Ratio (CAR) of 8 percent. The replaced variable CAR shall be based on the separate ratings assigned by the SBP to individual banks/DFIs.
The afore-mentioned measures would induce most of the banks to plough back their profits into equity and issue more bonus shares in order to raise minimum paid-up capital requirement, said Faisal Shaji, research analyst at Capital One Equities.
"Our hunch is that the banking sector''s profitability would continue to remain there with incremental banking spreads of 5 percent-5.5 percent up to 1H-FY06. However, since we would be seeing more inflows coming into the banking system, which means that monetary authorities would allow to ease up the private sector credit offtake (expected to exceed Rs 380 billion during FY06)", he added. Yet at the same time, the spreads of the banking sector would be normalised if do not go down. However, with the increase in paid-ups, ROEs of the banks would come down delineating the fact that exaggeratingly high profits would also show a decline, he said.
"Large banks having sufficient paid-ups would not have a big deal in increasing paid-ups and we would continue to see them issuing regular cash dividends", said Faisal Shaji. However, some of the growing banks would have to issue bonuses/rights in the following years up to FY06 in an effort to maintain the minimum deterrence against credible risk against de-scheduling and an overall exposures taken against consumers as well as equity markets, adding: "We have provided the data of the listed banks in which we have mentioned their current status and the imminent shortfall."
"We have looked at 29 banks out of the total banking universe of 38 banks, including unlisted banks and identified 9 banks which have a low equity balance, and insufficient earnings (based on annualised 9MCY05 performance) to meet the SBP''s rising capital requirements", said Ali Sibtan, research analyst from Elixir Securities.
These include KASB Bank, Saudi Pak Commercial Bank, MyBank, Crescent Commercial Bank, and HSBC. Medium risk banks include NIB, Prime Bank, and Meezan Bank, which have sufficient paid-up capital to meet the requirement for 2006, but will need to increase annual earnings to over Rs 1 billion to meet the SBP capital requirements for 2007-09 or else issue rights shares.
Banks at low risk are the ones with expected annualised earnings in excess of Rs 1 billion, which can meet the rising capital requirement either through retaining earnings (issuing bonus shares to increase paid-up capital if needed).
"We believe the move to raise minimum paid-up capital by Rs 1 billion each year could force a slew of mergers in the banking sector amongst the smaller banks or at the very least, cause smaller banks to forego dividend payments in order to build up their capital base. In today''s daily, we consider the banks that are unlikely to raise their paid-up capital to the specified requirement and are most at risk of being closed down, or are take-over targets", he added.
All of these moves are good for the banking sector, and while significantly higher provisioning requirements will lower earnings versus our forecast, these are non-cash charges, and the underlying books of the banks will be healthier as a result, said Sibtan.
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