Last call for Summit Bank and Silkbank in new IMF commitments

The government has committed to the IMF that Summit Bank and Silkbank will be sent into “resolution” by May 2023 if they don’t complete the first stage of their recapitalization plan by March of the same year. If this happens, these banks could be the next to be forcibly restructured or even sold off altogether like KASB Bank was in 2015.

“We remain closely engaged with two undercapitalized private banks and are committed to ensuring compliance with the minimum capital requirements” the government says in the Memorandum of Economic and Financial Policies released late on Thursday night. The two banks are not named but it is clear it is Silkbank and Summit Bank being referred to.

“Due to unanticipated delays in the process, the first-stage recapitalization of the two private sector banks will not be completed on time” it continues. The “first stage recapitalization” plan requires an injection sufficient to cover 50 percent of the capital shortfall for both banks as of September 30, 2021, according to the MEFP. It is not clear from the language which capital shortfall is being referred to. Banks are required to maintain a Minimum Capital Requirement of Rs10 billion, and various Capital Adequacy Ratios have to comply with standards that measure capital against Risk Weighted Assets. A State Bank source told Profit that the minimum capital being referred to in the IMF document was neither one of these two, but would not specify further except to say it is connected with the Net Assets on the banks’ balance sheets.

“On March 18, 2022, a public offer was made for an equity injection into one of the private banks” the MEFP continues, referring to Summit Bank’s announcement to its shareholders that UAE national Abdulla Hussein Lootah had agreed to acquire 51 percent shares in the bank. Based on the numbers of shares being acquired and the price offered, Lootah’s capital injection into Summit Bank would have been exactly Rs15bn.

 “However, the process could not be completed by end-May because of a legal dispute. The legal dispute is expected to be resolved shortly paving the way for equity injection, which would likely result in the bank achieving positive capital by end-September 2022, meeting the first stage recapitalization requirement” the MEFP says.

But things are more uncertain for Silkbank, owned largely by former finance minister Shaukat Tarin. “For the second private bank, the capital process was hampered but the bank has now identified an investor and a public announcement of intention has been made for an equity injection on May 31, 2022”. 

In May of this year Silkbank announced to its shareholders that M/S Park View, owned by estranged PTI politician Aleem Khan, had offered a capital injection of Rs12bn against 51 percent shares in the bank. 

Both deals are subject to State Bank approval, particularly the rigorous “fit-and-proper” test, where the regulator uses strict standards to determine whether the applicant is trustworthy enough to be allowed to hold the general public’s deposits against a banking license. Aleem Khan is facing a NAB case in Lahore which could complicate his application.

Once these deals are completed “the first-stage recapitalization of both banks will be complete by end-March 2023” the MEFP says. This was originally a structural benchmark in the MEFP signed by Shaukat Tarin himself back in January, and was supposed to be completed by May. 

This time the MEFP has gone a step further. Should the recapitalization plans not materialize, it has committed to the fund that both banks will be moved into “resolution”, a process that could potentially see a forced restructuring, amalgamation or outright sale.

“[W]e will initiate orderly resolution of either or both of these two banks by end-May 2023 should they
remain undercapitalized at that point” the MEFP says. This is the first time the government has set a deadline for these banks to bring their capital ratios into compliance or face punitive action, possibly of the sort that was taken against KASB in 2015, when the whole bank was sold to Bank Islami for Rs 1000.

Both banks have seen their Tier 1 capital fall massively against their Risk Weighted Assets in the past few years. Summit Bank has seen its CAR drop from negative 46pc in 2020 to negative 65pc in 2021, according to the bank’s annual reports. Much of the deterioration in its Tier 1 capital appears to be driven by unappropriated losses and regulatory adjustments.

Meanwhile, Silkbank saw provisions and write-offs on bad loans jump from Rs2.4 billion in 2019 to Rs9.9 billion in 2020 (the last year for which the bank has filed any results), leading to its loss after tax to rise by 66 percent in that year. “Provisions were taken against specific borrowers engaged primarily in the real estate businesses which were secured against mortgages of land,” the bank said in its Annual Report for 2020. 

To restore its capital, the bank claims it is working on “recovery of real estate loans along with non-banking assets held by the bank, through the Development Real Estate Investment Trust (REIT) schemes” along with seeking a Rs12 capital injection from real estate magnate Aleem Khan, to whom the bank had sold its headquarters back in 2015 for Rs2.37 billion. The balance payment of Rs2.25 billion from that sale had not come in till 2020, when it was due. The Annual Report said only that “the agreement is further extended for the period of one year.”

Silkbank’s capital adequacy ratio has fallen from 10.92pc in 2018 to 5.81pc in 2019 to negative 4.45pc in 2020. In that same year, its Minimum Capital Requirement was short by around Rs6.5bn from the requirement of Rs10bn.