TAMING OF THE BLUE-EYED BOYS - COMMERCIAL BANKS

CHANGING ATMOSPHERE

SHAMSUL GHANI (shams_ghani@hotmail.com)
June 02 - 08, 2008

It seems the extended honey moon period for commercial banks is over. The so called market based monetary policies of the State Bank had afforded a free hand to the blue eyed boys of the financial sector the commercial banks - who trampled on the decent norms of banking at will for an extended period of time. Their bottom line swelled like a malignant tumor calling for an early surgical treatment. This time two surgeons in concert have taken up the dirt cleansing job. First, the Competition Commission of Pakistan (CCP) dealt a severe blow to the pride of the cartel by imposing penalties on seven commercial banks and their abettor Pakistan Banks Association for preparing and publicizing the Enhanced Savings Account scheme (ESA) based on highly exploitative terms. Then, the State Bank of Pakistan's monetary policy decisions aimed at controlling inflation came as a bolt from the blue. The unexpected increase of 150 bps in the benchmark rate (which now stands at 12 per cent) coupled with the one per cent increase each in the Cash Reserve Ratio (CRR) and Statutory Liquidity Requirement (SLR) will squeeze banks" liquidity on one hand and slow down the demand for credit on the other. From control point of view, these two expected changes will appear to complement each other, but these will put a combined pressure on the banks" bottom line. The most telling blow delivered to the banks is the rider that directs the banks to pay a minimum profit of 5 percent to the saving account holders. During the last many years, the saving account holders have not been paid more than a meager 2 percent. The saving deposits of bank average around 43 per cent of the total deposits. The additional pay out of 3 per cent will make quite a dent in their bottom line. A cynic might exclaim, "So what; after all they have amassed huge illegitimate profits during the recent past years".

State Bank's incessant failure to discipline the cartelized commercial banks has made the other economy sectors suffer in consequence. Carrying around 23 per cent of total market capitalization weight, this segment of financial sector seems taken aback by these developments. However, maintaining their threatening posture, they have decided to contest the decision of CCP which they might get reversed in the face of an authoritative deficit that the CCP is in. This deficit essentially ensues from CCP's lack of financial autonomy. The new government will do well to make CCP independent and financially strong.

The interest based economy is notoriously known to have invested the banks with infinite authority to influence a nation's economic development. This power ensues from their ability to generate credit-based money stock so avidly needed by the growing economies. Huge fiscal deficits require fresh stock of money in the shape of external assistance or national debt blow-up. The governments, instead of creating their own money, empower banks to generate credit-based money and then borrow from them. This process continues indefinitely making the banks stronger and stronger. The huge government borrowing during the current fiscal year and its disturbing influence on country's economy is now talk of the town. The government should not only curtail its borrowing from the banking system but should also put a check on banks" powers to create credit-based money.

The banking sector has grown due mainly to the favorable environment created partly by the international events and partly by the controlling bodies" failure to regulate the banks. The atmosphere is now changed and the banks will no more be able to operate on their own terms in total disregard of the canons of equity and justice. The expected budgetary raise in the government saving schemes" profit rates will put further pressure on banks when a sizeable portion of bank deposits will find exit to these schemes.

VULNERABILITY OF STOCK PRICES

Prior to 9/11, our banking sector was struggling in the age of sagging equity values. The economic opportunities created after 9/11 saw our banks flourish in real style. The aggregate bank equity of Rs.500 billion was quoted on stock exchange at Rs.1,509 billions on December 14, 2007. According to the May, 10 figures of scheduled banks, total bank deposits stood at Rs.3,649 billion and total advances at Rs.2,914 billion.

The crashing stock market has gradually but surely eroded bank stock values. This will have its own adverse effects on the over all economy in general and the financial sector in particular The table-1 below shows the gradual reduction in banks" market capitalization vis--vis the fall of stock market index.

TABLE -1 : REDUCTION IN COMMERCIAL BANKS" MARKET CAPITALIZATION.

 

Dec. 24, 2007

April 15, 2008

May 06, 2008

May 28, 2008

KSE 100 Index

14,792

15,538

14,408

12,255

Mkt. Capitalization (billion Rs)

1,509

1,482

1,326

1,053

The erosion in individual stock prices of commercial banks in the fallout of persistent bearish spells has been quite substantial. The table-2 below shows the impact of 3,283-points-fall on the stock prices of some of the leading commercial banks.

TABLE-2 : FALL IN STOCK PRICES OF SOME OF THE LEADING COMMERCIAL BANKS.

BANK

P/E RATIO (15/04/08)

PRICE AS OF 15/04/08

PRICE AS OF 28/05/08

% FALL

Allied Bank

16.38

Rs.124

Rs.87

30

Askari bank

7.51

67

39

42

Bank-Al-Habib

9.85

58

47

19

Faysal Bank

11.88

51

35

31

Habib Bank

24.12

281

198

30

MCB Bank

17.55

427

304

29

National Bank

10.17

237

161

32

United Bank

16.18

168

109

35

As against a 21 per cent fall in the KSE 100 index during the last six weeks, the corresponding averaged fall of more than 30 per cent in the share prices of leading commercial banks is proof that the prices were a bit inflated.

Note: This article presents an independent view and in no way carries any suggestions to invest or not to invest in any particular scrip.