Silkbank authorties greenlight merger with UBL

• Potential merger remains subject to further approvals.
• IMF has long been concerned about situation of Silkbank.
• Last week, UBL showed interest in merging with Silkbank.

KARACHI: The Silkbank Limited agreed to formally pursue the "potential merger" with United Bank Limited (UBL) — one of the largest banks in Pakistan, it said on Thursday.

In a surprise move last week, UBL showed interest in merging with Silkbank.

“The Board of Directors of the Bank has reviewed and considered the UBL proposal and granted its approval to the management of the Bank to formally pursue the potential merger and take the required steps, including but not limited to seeking permission of State Bank of Pakistan for allowing due diligence of the Bank and to enter into discussions with UBL, to finalise the terms and conditions/documentation for placing before the Board, for its consideration and approval, if considered appropriate,” the Silkbank said this in a notice sent to Pakistan Stock Exchange.

“The potential merger remains subject to internal and regulatory approvals and appropriate disclosures, in accordance with the applicable laws, rules, and regulations," the notice read.

The International Monetary Fund (IMF) has long been concerned about the situation with Silkbank and Summit bank.

“The IMF has been insisting to capitalise two banks. Summit has already been done. Silkbank is also looking for investors to increase its capital

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 interest demonstrated in Silkbank by a large bank like UBL, according to analysts, is a positive step. It might make financial sense for it to buy the bank if it can negotiate a good price for the asset and some relaxations from SBP.

UBL may have a chance in the consumer financing sector thanks to Silkbank. However, UBL has a very strong consumer lending segment. Additionally, Silkbank might be able to offer substantial accumulated losses that could allow UBL to save on taxes.

According to UBL's quarterly report for the current year, the bank reported a profit after tax of Rs13.9 billion on a standalone basis in the first quarter of 2023 compared to Rs9.5 billion in the same period last year.

The UBL’s domestic deposits averaged Rs1.60 trillion, increasing by 7% over last year with a net incremental increase of Rs105 billion. Bank-level performing advances averaged Rs826 billion growing by 31%, it added.

Bank-level non-performing loans stood at Rs109.9 billion at the end of March 2023, compared with Rs 93.3 billion in December 2022. “The bank seeks to maintain a strong capital base that provides a solid foundation for future growth as well as maintaining adequate buffers over regulatory requirements,” it said.

In the latest assessment carried out by the SBP last year, the UBL has been classified as a designated domestic systemically important bank. It is required to meet the higher loss absorbency capital surcharge, in the form of additional common equity tier 1 capital of 0.5% on a standalone and consolidated basis.

The minimum capital requirement for UBL has increased to 12% . The overall CAR stood at 17.6% in March 2023 with a buffer of 5.6% over the minimum regulatory requirement of 12%.