NIB Bank intends to increase its capital by an amount of approximately Rs 8.6 billion in the near future with the objective of continuing to keep the bank strong and well-capitalised. According to an information sent to Karachi Stock Exchange (KSE), the Board of NIB Bank currently contemplates the capital increase to be in the form of Redeemable Preference Shares.
The structure and terms of the proposed capital increase are under discussion with the State Bank of Pakistan and will be determined subject to corporate, shareholder and regulatory approvals. The proceeds of the capital increase will be used to enhance NIB Bank's Tier I capital and to support its earnings. The majority shareholder of NIB Bank, Bugis Investments, which is a wholly-owned subsidiary of Fullerton Financial Holdings of Singapore, has agreed in principle to support NIB Bank in its objective of strengthening its capital.
Following its acquisition of Picic in June 2007 and subsequent merger in December 2007, the major focus of NIB Bank has been on providing finances to the SME and consumer segments of the economy. To achieve this objective NIB Bank dedicated 96 branches to developing business with small SMEs under the brand name "Salaam Banking" and another 35 branches for mid-sized SMEs. Unfortunately, due to the economic downturn witnessed in Pakistan, along with power shortages and restrictions imposed through regulations and other decisions on the collection of delinquent loans, financing SMEs and consumer businesses has proved to be very challenging for the banking industry. As of March 2010, 25 percent of all loans extended by the banking industry to SMEs have become non-performing and, similarly, a high rate of infection has been witnessed in consumer finance as well. Given its strong emphasis on growing the SME and consumer segments, NIB Bank has also been affected by the poor performance of both these sectors. As a consequence, NIB Bank has recorded provisions of Rs 1.8 billion in the first half of 2010, which has impacted its financial results.
In view of these developments, and until the economic situation in Pakistan stabilises and shows sustained improvement, NIB Bank has decided to expand its product offering aimed at transactional and liability services to all business segments and to pursue a much more selective lending strategy to the SME and consumer segments. While NIB Bank is confident that it will continue to derive value from the businesses, customers and branch network acquired from Picic and Picic Commercial Bank, this will now be based on different products and services than those envisioned at the time of the Picic acquisition. Consequently, the goodwill that NIB Bank had recorded at the time of the Picic acquisition has been adjusted directly into equity and will now no longer be carried on the books of NIB Bank. This adjustment will not affect the Capital Adequacy Ratio of NIB Bank.
In light of the recent floods in Pakistan, NIB Bank believes that the damage to infrastructure and production facilities across the country could be quite severe and therefore expects the performance of loan portfolios to worsen. To that extent NIB Bank expects that further provisioning across all segments is likely and is taking active steps in anticipation of these developments.
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