BANK OF KHYBER'S INITIAL PUBLIC OFFERING
The management expects to mobilize around one billion rupee from sale of its 49% shares to general public
By SHABBIR H. KAZMIAug 30 - Sep 05, 2004
Most of the people may have failed in understanding the rationale when the news appeared that Bank of Khyber (BoK) intended to offer its 49% shares to general public. However, it became very clear after the release of circular from the State Bank of Pakistan (SBP) stipulating the enhanced minimum paid-up capital requirements for commercial banks. According to the circular, all the banks are required to raise their paid-up capital to two billion rupees by December 31, 2005. While most of the banks may not face any difficulty in meeting the requirement, the BoK faces a difficult situation.
According to the financial data available about BoK, its current paid-up capital is around one billion rupee, meaning that it has to raise an equivalent amount to meet the new requirement. It is understood that the bank is not in a position to raise the capital simply by issuing Bonus Shares, as was done in the past. The second option could have been issue of Right Shares, which the bank does not wish to avail. Therefore, the last resort is to raise additional capital through offer of shares to general public. Apparently bank seems to have opted the last option by offering 49% shares to general public, which could help in raising one billion rupee.
However, the bank cannot offer its share to general public unless it is listed at the local stock exchanges, appoints financial advisor and underwriter to the issue. According to informed sources, the bank is involved in the listing process but the progress has been rather too slow. The same also seems to be true regarding appointment of financial advisor/arranger. The bank could have afforded to go slow in the past but now the formalities have to be completed expeditiously.
Reportedly, it was attributed to Dr. Munir Ahmed, Managing Directors that of shares of the bank would be offered at a premium. However, fixing the offer price is dependent on a number of parameters, but net asset value remains the most important factor. A closer look at the annual accounts reveals that the bank has been facing highly unstable or inconsistent profit since year 2000. The bank had posted over Rs 157 million loss for the year 2000. Profit of Rs 231 million was earned for the year 2001, which declined to Rs 141 million for the year 2002. Profit exceeded Rs 304 million for the year 2003. The bank also issued Bonus shares worth Rs 300 million and Rs 131 million during 2002 and 2003 respectively to meet the minimum paid-up capital requirement.
An observation, also supported by some banking sector analysts is, "The BoK is relatively smaller size and also has low penetration (fewer number of branches). On top of this its deposits mainly come from provincial government, autonomous and semi-autonomous bodies and the NGOs operating in the region. Ever since its establishment it has not been run as a full-fledged commercial bank. The management vision and policies have remained myopic, which constrained its growth also."
Another issue, as pointed out by some sector analysts, is that its relationship had remained strangulated with the central bank in the past. Reportedly the relationship have improved lately. This was also confirmed by Dr. Munir at a recent press briefing.
It was also reported in the past that the bank had applied for conversion of its status from conventional bank to Islamic bank. It may be true that the NWFP government intends to eliminate Riba-based transactions from the economy but it is also a fact that the objective of eliminating the element of Riba from all types of business transactions is not an easy job. At the best, the bank can create an infrastructure but cannot change the mind set of people.
Historically the bank has been posting very low earning per share when compared with other banks operating in the country. Therefore, raising additional capital through public offer may not be an easy task. Since the government of NWFP and a German agency are the key sponsors of the bank, it would be better that they initially inject the additional equity and once the bank becomes a self-sustaining entity its share should be offered to general public under the divestment plan.
Alternatively, management of the bank should come up with an investment plan and mobilize bulk of the additional capital through private placement and offer shares amounting to less than half a billion rupee to general public. This plan can help in achieving the twin objectives, getting listed at the local stock exchanges as well mobilizing additional capital.
Last but not the least, the management must get rid of the perception that BoK shares could be sold at a premium. The track record does not convince the investors to pay any premium on the shares of a banks, which posted such a low earning per share.