Eroding share value adds to banks’ woes

[Naveed Yaseen]

By Shahid Iqbal
KARACHI, Dec 24: Eroding share prices on the stock market has pushed the banks in a tight corner which are already facing mounting pressure of global meltdown with serious liquidity crunch and poor deposit growth.

The massive exposure of banks in the stock market could cause serious consequences for the entire banking industry.

Analysts believe that the banks exposure is much more than rough estimates being discussed in the financial sector.

“Our estimates suggest that banks have an exposure in the range of Rs100bn-Rs150bn, which is 20-25 per cent of their equity base,” said Farhan Rizvi, a researcher at JS Securities.

Banks said they were in real trouble as the eroding share values would deprive them of minimum required profit to meet their running expenses.

So far the State Bank of Pakistan and banking industry have unanimously been denying any direct impact of global financial meltdown which has pushed the many developed economies into recession.

Since the exposure of local banks in stocks, real estate and derivative markets was limited, it proved stronger to resist the global financial storm.

“The 100-day virtual closure of the stock market was the major reason which hid the weakness of the banks which now emerged,” said a banker.

The impact of financial storm was initially felt by the small banks which opted to merge with larger banks. Bankers feel more mergers and acquisitions could take place next year.

“Once the stock market turmoil, which wiped out over 25 per cent value in nine days after lifting of the ‘floor’, completes its natural course then banks will be able to judge their strength and more mergers are possible,” said a senior banker.

Banks have been facing tough times due to slow growth of deposits, while the government has emerged as competitor to mobilise deposits through National Savings Schemes which resulted into a shift of bank deposits.

The situation forced banks to offer up to 20 per cent return to raise deposits and some banks are offering advance profit to attract fresh deposits.

According to the JS Securities list, National Bank of Pakistan has the highest exposure of Rs25.215 billion in the stock market followed by Allied Bank with Rs21.838 billion, which is higher than its equity at 102 per cent. The worst situation is with the Bank of Punjab which exposure is 149 per cent (Rs16.332 billion) of its equity.

Habib Bank has invested just two per cent of its equity in the stock market. United Bank has an exposure of Rs12.837 billion or 28 per cent of equity. MCB Bank has Rs10.943 billion or 19.9 per cent of its equity.

“I can see major corrections in the banking industry once the stocks related issues are concluded,” said Mohammad Imran, researcher at First Capital Securities.

http://www.dawn.com/2008/12/25/ebr1.htm