Sindh, Summit banks approach regulator for due diligence on proposed merger

KARACHI: Sindh Bank and Summit Bank have approached the central bank to seek permission for conducting due diligence on the proposed merger, in the latest bid for both the lenders, which are looking beyond organic growth to respond to increasing competition and need for greater operational and capital efficiency.

“As per section 48 of the Banking Companies Ordinance 1962 and the State Bank of Pakistan’s (SBP) instructions on the matter, amalgamating entities, before proceeding with the acquisition / merger, are required to seek SBP’s prior approval for conducting due diligence of each other in terms of the applicable laws, rules and regulations, the central
bank’s spokesman replied, while responding to a questionaire, mailed by The News.

“Both Sindh Bank and Summit Bank have approached the central bank in this regard and their requests are being evaluated.” A source, who is a senior banker and part of the merger process, said both the parties would proceed with the financial due diligence—an in-depth investigation of the target business—after receiving approval from the apex regulator.     

Summit Bank and the potential acquirer [Sindh Bank] will submit due diligence report, containing pricing and structure of the transaction, identified weakness, as well as integration plans that outline post-merger compliance and risk management systems, to the SBP once the due diligence process gets completed.       

“The potential transaction would create a combine entity with assets of Rs300 billion and 450 branches nationwide,” said a banker.   The sale of shareholding in Sindh Bank seems an appropriate strategy for a mid-tier Summit Bank, which is struggling to boost capital.   

Analysts said that quite a few banks are still on the border of meeting their capital adequacy ratio …and they are potential acquisition targets.  “Summit Bank Limited [SMBL] is likely to face problems in meeting capital adequacy ratio (CAR), capital conversion buffer  (CCB) and leverage ratio obligations under the Basel III regulations in years to come,” said an analyst.

The CAR of the SMBL stands at 10.02 percent for December 2015.  A 10.65 percent total capital including CCB ratio is mandatory for the banks in 2016.  The State Bank has also increased capital requirements for banks to 12.50 percent till December 2019.

The State Bank of Pakistan allowed relaxation to the bank with regard to capital requirement till December 30, 2016.   The third quarterly report of the SMBL said that its board approved to further increase the paid-up capital by Rs2 billion through issuance of right shares in March 2016. This was subject to regulatory approval.  

The bank received Rs1.854 billion as advance against subscription of shares till September 30. This included Rs1.157 billion received from Suroor Investment and Rs697.20 million from an investor.  SMBL posted a loss after tax of Rs1.275 billion during the nine months (Jan-Sep) of 2016.

Organic revenue growth remains feeble for small and mid tier banks, which are facing compression in earnings due to low interest rate environment. The demand for consolidation is also supported by rising operational cost of the banking industry.

Therefore, they are reluctant to invest additional capital in their own businesses. Banks executives are turning to mergers and acquisitions to foster growth and find new opportunities in their businesses.

The management of the SMBL was looking for local investors and also approached Chinese investors for the merger. “The bank has a strong deposit-base and good following in trade finance, so these strengths made it an attractive takeover target by the Sindh Bank,” said an analyst.

“Following the merger, the combined entity will have the capital, expertise and network to be the preferred financial partner for anyone doing business in the country,” he added.   Regarding the SMBL plan of conversing to a full-fledged Islamic bank, industry commentators see it would establish a wholly-owned Islamic subsidiary.  

Sindh Bank, a public sector bank is still in the process of listing at the Pakistan Stock Exchange.The gross profit of the bank increased to Rs1.7 billion in third quarter of 2016, compared with Rs1.5 billion in the same period of last calendar year.