UBL considers Silkbank merger, intends to seek regulatory approval

• IMF has been insisting to capitalise two banks; Summit has already been done, Silkbank is left.
  
• Potential merger would remain subject to due diligence, approvals, and documents.
  
• Analyst term UBL's intention a "welcoming development".

KARACHI: United Bank Limited  (UBL) — one of the largest banks in Pakistan —  unveiled its plans for a possible merger with Silkbank Limited, and said it was planning to ask the central bank for permission to begin due diligence.

The development comes as a pleasant surprise to analysts and the market as Silkbank is comparatively a small and financially weak bank.

However, the move should be viewed in light of the continuing efforts being made by the government and the undercapitalised banks in response to an International Monetary Fund (IMF) requirement, which emphasised the need to strengthen the financial stability of the nation's banking system.

“United Bank Limited is exploring a potential merger with Silkbank Limited and intends to seek the permission of the State Bank of Pakistan (SBP) to commence due diligence,” the bank said in a bourse filing.

The potential merger would remain subject to due diligence, internal and regulatory approvals, and definitive documents, it added.

The announcement came after Nasser Abdulla Hussain Lootah, an investor from the United Arab Emirates, acquired a majority stake in Summit Bank, a smaller bank that was having trouble raising capital as required by the SBP.

The International Commercial Bank South Sudan (ICB) announced at the beginning of this month that it had planned to invest up to €50 million ($54.5 million) in Silkbank. 

The IMF has long been concerned about the situation with these two banks.

“The IMF has been insisting to capitalise two banks. Summit has already been done. Silkbank is also looking for investors to increase its capital,” said Mohammad Sohail, CEO of Topline Securities.

Although the most recent financial statement for Silkbank is not yet available, the bank's minimum capital requirement (MCR) as of December 31, 2020, was Rs3.16 billion, and its capital adequacy ratio (CAR) was at -4.45%, both of which were below the corresponding minimum limits of Rs10 billion and 11.50% at the time.

The government of Pakistan promised the IMF that two banks will be placed into "resolution" by May 2023 if they don't complete the first phase of their recapitalisation plan by March, according to a memorandum of economic and financial policies that was included with the IMF's country report on Pakistan published last year. 

Three small banks, two in the private and one in the public sectors, were cited as lacking capital. The government stated it was committed to ensuring compliance with the minimum capital standards and was actively involved with two undercapitalised private banks.

After unsuccessful attempts to raise capital, the government approved the closure of SME Bank Limited in March. The bank was a lender that catered to small and medium-sized businesses.

“It is a welcoming development that a top-tier bank like UBL has shown interest in Silkbank. If it can get a good price for the asset, along with some relaxations from SBP, it might make commercial sense to acquire the bank,” said Fahad Rauf, head of research at Ismail Iqbal Securities.

In the past, such mergers have meant that the bigger bank aims to utilise the smaller bank's assets for achieving strategic objectives. For example, MCB used NIB bank branches to convert them into MCB Islamic branches, according to Taurus Securities head of research Mustafa Mustansir.

“MCB has also recovered a sizeable amount from loss accounts of NIB. I think in this case Silkbank can offer UBL an opportunity on the consumer financing side. Even though UBLs own consumer franchise is very strong,” Mustansir said.

“Silkbank may also be able to offer heavy accumulated losses which may help UBL enjoy tax savings. We must wait for official confirmation of the merger to be able to better gauge the likely synergies,” he added.