Summit Bank Limited

Summit Bank Limited (PSX: SMBL) was incorporated in Pakistan as a public limited company in 2005. The bank was formed as a result of a series of acquisitions. In 2007, Arif Habib Securities acquired the local operations of Rupali Bank Limited which formed Arif Habib Bank. In 2010, a Mauritius based investment firm, Suroor Investments Limited, acquired 59.41 percent shares of Arif Habib Bank from Arif Habib Securities and rebranded it as Summit Bank Limited. Suroor Investments Limited later acquired major stake of MyBank Limited and Atlas Bank Limited which were merged into Summit Bank Limited. The bank has a network of 193 branches spread in over 20 cities of Pakistan. 48 branches of the bank offer wide range of Islamic banking services. Overall, the bank offers wide range of Corporate Banking, Consumer Banking, SME/Agriculture Banking as well as Trade Finance and home Remittance services.

Pattern of Shareholding

As of December 31, 2022, SMBL has a total of 2638.151 million shares outstanding which are held by 41,634 shareholders. Suroor Investments Limited, the parent company of SMBL, has the major stake of 66.77 percent in the bank followed by individuals holding 14.64 percent shares. Banks, DFIs, NBFIs, Insurance companies, Modrabras and Mutual funds collectively account for 5.89 percent shares of SMBL. Foreign shareholders hold 1.76 percent shares of the bank while Rupali Bank Limited, an associate company, accounts for 1.24 shares. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

The asset base of SMBL after registering a 62 percent year-on-year plunge in 2019 has been growing thereafter. The slump in the asset base in 2019 came on the back of a 13 percent year-on-year nosedive in advances while investment grew by 14 percent year-on-year in 2019. It is pertinent to note that SMBL has a massive AD ratio of 97.78 percent in 2018 which meant that the bank had an aggressive focus towards lending to private sector. However, the advances portfolio of the bank has been shrinking in all the years under consideration to rest at 44.99 percent in 2022. The AD ratio in excess of 40 percent kept SMBL immune from additional taxation on government securities. Over the years, the bank became more risk-averse in its asset deployment approach which is evident from the fact that its investment portfolio has been riding an upward trajectory in all the years under consideration with ID ratio growing from 22.5 percent in 2018 to 42.06 percent in 2022. What made SMBL change its asset mix was a rise of 13 percent in its non-performing loans (NPLs) in 2019. In the following years, NPLs have been ticking down, however, with the shrinking advances portfolio, infection ratio kept rising from 43.5 percent in 2018 to 65.78 percent in 2022. To counteract, SMBL has been aggressively booking provisions in all the years under consideration except for a reversal of Rs.309.68 million in 2021 which was also on account of reversals for diminution in the value of investments while provision against advances kept inching up. The persistent provisioning drove SMBL’s coverage ratio from 59.61 percent in 2018 to 92.14 percent in 2022. As of December 2022, around 17.4 percent of SMBL’s advances pertain to textile sector followed by sugar sector which accounts for 16.44 percent of the gross advances of SMBL. However, sugar sector has the highest contribution of 23 percent in the total NPLs of the bank followed by textile sector having 9.6 percent say in total NPLs of SMBL.

On the liabilities front, the deposit base has been touting steady growth in all the years under consideration. The CASA ratio of the bank which stood at 81.67 percent in 2018 slightly dwindled to 79.66 percent in 2019 on the back of a 10 percent year-on-year dip in current account deposits in 2019. In the subsequent years, the CASA took an upward flight to clock in at 87.45 percent in 2022. It is to be noted that the saving deposits of SMBL stay above its current deposits in all the years under consideration. CA ratio which stood at 35.9 percent in 2018 ascended to 37.1 percent in 2022 while SA ratio climbed from 45.8 percent in 2018 to 50.4 percent in 2022 which are the costly deposits after the imposition of MDR amidst monetary tightening scenario.

An alarming fact about SMBL is that due to constant accumulation of losses, the bank has been posting negative equity since 2019 which is a major red flag to the lenders and investors of the bank. It means that if all the liabilities come due at once, the bank would fail to service them even if it is liquidated. This will not improve without the injection of fresh equity to boost the bank’s minimum paid-up capital (net of losses) to up to Rs.10 billion which is the minimum capital requirement (MCR) set by SBP. As of December 31, 2022, the bank’s paid up capital (net of losses) stood at negative Rs.21.8 billion which fell from negativeRs.26.57 million.

The bank’s insolvency can also be reaffirmed by the fact that its capital adequacy ratio (CAR) stayed below the minimum requirement in all the years under consideration. In fact, SMBL’s CAR is negative since 2018 which worsened from -8.02 percent in 2018 to – 80.04 percent in 2022 as against the minimum requirement of 11.5 percent set by SBP. This casts serious doubts on bank’s ability to continue as a going concern.

The financial performance of SMBL reveals that the topline of the bank had been shrinking since 2019 and then posted a 78 percent year-on-year rise in 2022 – thanks to monetary tightening. However, except 2018, SMBL’s net interest margin has stayed in the negative zone. In 2019, the topline plunged by 30 percent year-on-year despite high discount rate. To recall, this was the time when the bank streamlined its asset portfolio and trimmed its advances by 13 percent year-on-year. On the flip side, the markup expensed kept rising in 2019 due to monetary tightening scenario and a downtick in current deposits which drove the CASA down from 81.67 percent in 2018 to 79.66 percent in 2019. This turned the gross spread ratio from 21.4 percent in 2018 to -21.95 percent in 2019. In the subsequent years, the gross spread ratio remains in the negative zone to mount to -27.8 percent in 2022. It is pertinent to note that in 2022, multiple rounds of monetary tightening resulted in a robust topline for SMBL which stood at Rs.8.14 billion in 2022 versus Rs.4.56 billion in 2021. Besides, CASA also boasts its highest value of 87.45 percent in 2022, yet the bank posted the highest negative NIM. Diving into the details show that 50.4 percent of the CASA comes from saving deposits which are no longer lucrative for the banks amidst monetary tightening and MDR. The bank needs to work aggressively on mobilizing non-remunerative deposits to post a positive NIM which will go a long way to produce a positive bottmline.

The non-funded income of SMBL posted zigzag trajectory whereby it grew in 2020 and 2022 and contracted in 2019 and 2021. During the course of five years, the non-funded income plummeted from Rs.2191.66 million in 2018 to Rs.1450.25 million in 2022. The major off-putting factor in this category is fee and commission income which slumped from Rs.1014 million in 2018 to Rs.516.28 million in 2022. Over the years, commission income on trade, guarantees, cash management, home remittances and bancassurance have significantly declined.

SMBL posted a positive total income (funded and non-funded) in 2018, 2020 and 2021, however, the bottomline remained in the negative zone in all the years under consideration. If we look back, the bank posted the last positive bottomline in 2014 and 2015. The net losses that stood at Rs.8790.99 million in 2018 have reduced to Rs.3187.99 million in 2022 after maxing out to Rs.9486.92 million in 2019.

Recent Performance (1QCY23)

The asset base of SMBL grew by 11 percent in 1QCY23 over December 2022 figure. While advances shrank by 11 percent compared to December 2022, investments magnificently surged by 47 percent in 1QCY23. The clause of higher taxation on government securities given the AD ratio is less than 40 percent is reversed in 2023 and SMBL took full advantage of this by trimming down its AD ratio to 39.78 percent in 1QCY23 compared to 44.99 percent as of December 2022. ID ratio mounted to 57.19 percent in 1QCY23. NPLs and provisions almost remain constant, however infection ratio grew to 68.7 percent owing to a plunge in advances portfolio. Coverage ratio also remained stable in 1QCY23. Deposits grew by 8 percent over year-end figure in 1QCY23. It is pleasing to observe that current deposits rose by 15 percent which took the CA ratio to 39.4 percent in 1QCY23. Saving deposits rose by 7 percent and SA ratio slightly tumbled to 49.9 percent in 1QCY23. Overall CASA mix improved to 89.3 percent as of March 2023.

SMBL’s topline grew by 207 percent year-on-year in 1QCY23; however, higher proportion of saving deposits in the overall deposit mix didn’t allow SMBL to achieve a positive NIM in 1QCY23. Non-funded income considerably shrank by 73 percent year-on-year despite massive growth in foreign exchange income and a considerable uptick in fee and commission income. Here the major culprit was loss on securities worth Rs.476.46 million incurred in 1QCY23 due to sale of shares. However, the same transaction allowed the bank to reverse the impairment on shares. Owing to maintaining a good coverage ratio, the bank booked reversals of Rs.533.86 million in 1QCY23 as against the provision of Rs.100.39 in 1QCY22.

The net loss reduced by 21 percent year-on-year in 1QCY23 to clock in at Rs.934.54 million with a loss per share of Rs.0.35 as against Rs.0.45 during the same period last year.

Future Outlook

The entire banking sector enjoys soaring income and profitability on the heels of unprecedented level of discount rates. Robust foreign exchange income on account of depreciating Pak Rupee serves a cherry on top resulting in a fat bottomline. Yet, SMBL is unable to make the most of this scenario as its deposits mainly comprise of saving account deposits which are costly. Moreover, lately, the bank has started focusing on deploying its deposits in government securities which are less yielding than private sector advances. The loss accumulation since 2016 has shoved down SMBL’s equity to negative zone whereby it is unable to meet MCR and CAR and is facing issues of going concern. SMBL along with Silk Bank are under the radar of IMF which suggests resolution of the two if their capital issues are not resolved until March 2023. Recently, SMBL received an offer from a UAE based investor for the subscription of3.98 billion shares of the bank at Rs.2.51 per share with a face value of Rs.10 per share. SMBL has attained all necessary regulatory approvals and has issued Rs.10 billion worth shares to the investor. It is yet to be seen how close the bank’s capital will stand versus the MCR after this equity injection. Whether or not the bank will evade the IMF’s radar is another question the coming quarter will answer.