Sindh, Summit banks start due diligence on proposed merger

KARACHI: Sindh Bank Limited and Summit Bank have begun talks for a potential merger, which, if materialises, will be the second such deal in 2017, industry officials said on Thursday,

“Due diligence exercise has started,” said a senior banker, requesting anonymity. “The proposed merger, however, depends on the financial and legal due diligence as well as approval from regulatory authorities and shareholders of both the banks.”

Officials of both the lenders are evaluating each other operations, competitive positions and future outlook before deciding the merger. Listed Summit Bank hasn’t yet informed the Pakistan Stock Exchange regarding the ongoing due diligence. State-run Sindh Bank is, however, not a listed company.

“The due diligence process usually takes four to six weeks to complete thereby the two lenders are expected to submit a proposal for merger, including transaction price, and the structure to the central bank next month,” said the banker.    

The State Bank of Pakistan (SBP) agreed, on December 27, to allow two banks to start due diligence according to the applicable laws, rules and regulations. Sources said the SBP would decide – based on the valuation – which one from the two banks could be the serving entity.

“However, there are chances that Summit would be merged into Sindh Bank given the latter’s strong balance sheet,” said a source. The gross profit of Sindh Bank rose to Rs1.7 billion in the July-September period of 2016 from Rs1.5 billion in the corresponding period of the preceding year. The bank had a paid-up capital of Rs10 billion with Rs16.402 billion equity at the end of third quarter 2016.

Summit Bank, however, posted a loss after tax of Rs1.275 billion in January-September quarter of the last year. Analysts said if the deal goes ahead it would be a second consolidation among banks this year.

Last month, the boards of MCB Bank and NIB Bank approved merger of the two banks via a share swap transaction. The two smaller Shariah-compliant lenders – Burj Bank merger into Al Baraka Bank – also witnessed amalgamation scheme last year.      

The new combined entity – after merger of Summit and Sindh banks – will have assets worth around Rs300 billion and 450 branches across the country. Summit is likely to gain from Sindh Bank’s financial synergy, while Sindh Bank could benefit from the strong branch network and deposit clientele of Summit Bank.    

“A small-tier Summit Bank is struggling with toughest capital requirements under the Basel III regulations,” said an analyst. The central bank increased capital requirements for banks to 12.50 percent till December, 2019.

Summit Bank was required to have 10.65 percent of total capital including capital conversion buffer (CCB) at end of December 2016. The capital adequacy ratio of Summit Bank, however, stood at 10.02 percent.  Fall in profitability, worsened by low interest rates, and increasing operational costs are also pushing small- and mid-tier banks towards consolidation. They are relying on acquisitions and mergers to spur growth rather than organic means.