Why is the Bank of Khyber faltering?

A power struggle between the board of directors and the managing director of Bank of Khyber (BoK) has allegedly impacting the bank's performance over the past two years.

According to sources, the board meeting held on August 25 reviewed the performance of the MD, digital banking policy, HR issues, board minutes, committee minutes, and six-month performance report.

Under the Code of Corporate Governance, the MD's performance should be reviewed annually, but for the past two years, it had not been reviewed due to a lack of interest by the board chairman. Private sector directors tried their best to review the MD's performance at their level, but were not allowed, which severely affected the bank's performance.

Bank sources said that most of the decisions of the board meeting were previously made with consensus. However, due to differences between the board and the MD, most decisions are being made by the government majority members.

Despite strong opposition from the board, MD has appointed various favorite people to senior positions, including the acting group head of Islamic banking, who was given the acting charge until June 30, 2023. The current acting head failed to fulfill his promises and business development and did not meet the objectives.

According to BoK sources, in the appointment of the new company secretary of the bank, MD violated merit as he did not follow the recruitment process. The newly appointed company secretary has no experience in commercial banking and has no knowledge of corporate governance laws. She was previously in charge of legal affairs at KE Solar.

The bank administration has not yet responded to the queries sent to them for this story.

BoK’s current financial performance 

The Bank of Khyber (BOK) has set an impressive financial milestone in the first half of 2023, recording a noteworthy profit after tax of nearly Rs 169 crores. This achievement marks a remarkable fourfold increase compared to the same period last year. However, despite this substantial growth, it's worth noting that BOK's net profit margin currently stands at a modest 6%, which is considerably lower than the industry average of approximately 200%.

Operating expenses stood at Rs 373.6 crore in June 2023 as compared to Rs 307.6 crore in June 2022.

According to sources, BoK’s half-year accounts recorded profit of Rs 169 crores was not due to the bank's performance but due to the booking of Rs 100 crores income as a penalty for early encashment of government deposits by the provincial government and Rs 60 crores from foreign exchange business. Otherwise, the bank had a loss of Rs 20 crores in the half-year.

Despite objections from board members and audits on opening accounts of most bank executives in other banks, bank executive accounts have not been transferred yet.

Trajectory of BoK’s financial performance 

Taking a closer look at BOK's financial journey from 2011 to 2022, we can discern a consistent upward trajectory in profitability. Yet, this ascent was not without twists. While the bank managed to maintain its profitability throughout this period, there were two notable instances when the year-on-year profit after tax experienced a decline.

The first of these anomalies occurred in 2017 when the year-on-year profit after tax (PAT) took an unexpected 11% dip. The following year, in 2018, BOK faced another downturn, with PAT plummeting by a substantial 74%. However, BOK managed to bounce back in subsequent years, with profitability showing signs of improvement in 2019 and 2020.

Nonetheless, the financial PAT once again witnessed a decline, this time by 49%, reducing to Rs 110.4 crore in 2021, and a further 59% decrease, resulting in Rs 45.5 crore in 2022. An additional point of interest is that 2022 marked the first time in the past seven years when BOK's net profit margin dipped into single digits, settling at just 5%.

Why did the profitability decline?

Simultaneously, operating expenses continued to rise. In the fiscal year 2022, the Bank's non-markup expenses reached a total of Rs. 671.1 crore, a significant uptick from the Rs. 530 crore reported in 2021. This increase can be attributed to a combination of factors, including the impact of inflation as well as the mounting operating costs associated with the bank's ongoing efforts in branch expansion and capacity-building initiatives.

The Bank's branch network experienced substantial growth during this period. In 2021, the number of branches surged by an impressive 21%, soaring from 179 to 216. Building upon this momentum, the year 2022 witnessed a further expansion of the branch network by 7%, culminating in a total of 231 branches. 

Additionally, the bank found itself grappling with substantial losses incurred in its investment portfolio. As per the financial statements, a sudden and significant increase in policy rates led to a cumulative mark-to-market (MTM) loss on government securities, amounting to a considerable Rs. 207.7 crore. This loss was anticipated to be absorbed gradually over a specified period.

It's worth noting that "mark to market" is a fundamental accounting practice that involves recalibrating the value of an asset to mirror its current market worth, as determined by prevailing market conditions. In essence, it reflects what the asset could fetch if it were to be sold at that precise moment.

Who has stakes in BOK?

The government of Khyber Pakhtunkhwa (GoKP) holds the majority shares at 70.2% while Ismail Industries Limited holds 24.4%. BoK is one of the three Provincial Public Sector Commercial Banks in the country