United Bank Ltd (UBL) is contemplating a potential “merger” with Silkbank Ltd, one of the smallest commercial institutions that has struggled for years with undercapitalization issues.
UBL, one of the three largest banks in terms of asset base, will request permission from the State Bank of Pakistan (SBP) to initiate Silkbank’s due diligence, which entails a thorough examination of the target company’s financial statements by the opposing party’s attorneys and accountants.
Silkbank has incurred losses for several years. Its accumulated losses totaled Rs20,2 billion as of the end of 2020, the most recent period for which the bank has released financial statements.
To meet regulatory requirements, the bank desperately needs additional capital. At the end of 2020, its capital was Rs3.16 billion compared to the minimum capital requirement of Rs10 billion.
On December 31, 2020, its capital adequacy ratio was -4.45% against the required level of 11.5%.
Yousuf M. Farooq, director of research at Topline Securities, told Dawn that it was premature to speculate on the nature or magnitude of the potential transaction.
Nonetheless, the use of the term “merger” in the regulatory disclosure suggests that Silkbank’s existing shareholders will receive a proportional number of UBL shares as part of the transaction. If the transaction is structured as an acquisition, the buyer will presumably pay cash for a majority stake in Silkbank.
At the current market rate, Silkbank is worth Rs10.1 billion. Silkbank’s principal shareholders are Arif Habib Corporation Ltd (28.23 percent), former finance minister Shaukat Tarin (11.55 percent), International Finance Corporation (7.74 percent), and Zulqarnain Nawaz Chattha (7.75 percent).
Additionally, Silkbank has faced asset quality issues for some time. Its coverage ratio, which is the reserve for loan losses divided by the total amount of non-performing loans, was already “very low” and may have deteriorated further since 2020 due to the significant increase in interest rates.
It reported a net loss of Rs6.57bn in 2020, compared to a net loss of Rs3.95bn in 2019. Friday’s closing price for Silkbank shares was Rs1.12, a 10.89% increase from the previous day’s close.