Silk Bank has suddenly attracted a lot of activity at the local bourse. But while amongst the volume leaders, its stock price is moving against the direction of rapidly rising stock market.
In just the last one month, since former finance minister Shaukat Tarin left his office to look at the affairs of Silk Bank, the banks share price fell about 8 percent. But Tarin isn to be blamed for this.
The downward journey in Silks stock stems from the dilution emanating from its massive rights issue of 311 percent, aimed to capitalize the bank to provide it the necessary impetus to turn around.
With over Rs 7billion in cumulative losses and equity at mere Rs 1.7 billion by September 09, the rights issue, which was offered at a steep discount of 75 percent, was much needed to raising Rs7 billion.
But raising equity in tough economic times amid toxic assets has itself been an undeniably daunting task. Even, after three months of efforts, the banks principal investors kept a hands-off approach, forcing the bank to find other financiers.
Reportedly, all the key sponsors bought the rights shares issue, barring the Bank of Muscat. This sent Tarin on an eleventh hour hunt to find fresh investors to inject around Rs2.4 billion; hence, the request to SECP to allow a delay in the issuance of the banks annual accounts.
With the rights issue finally resolved, Silks book value is going to be diluted by 24 percent to Rs 2.79 per share, whereas the share price of the bank has dipped by 26 percent since the start of December, when the rights issue was first announced.
The stock, which closed at Rs3.25 on Friday, is currently trading at about an ex-rights price-to-book multiple of 0.96.
Falling stock price, however, is the least of concerns, as a massive house cleaning is needed at the bank. Though, Silks managed to recover a billion in reversal in provisioning during first nine months, its gross infection ratio was as high as 34 percent by the end of September.
Apart from higher nons performance, the banks net interest margin is also very low. The banks interest earned and interest expense was virtually same for first nine months of 2009. This could be due to a higher share of time liabilities in the deposit mix. Time liabilities stood at 83 percent at the end of 2008.
Even though the practice is against the industry trend, its optimum to have long-term assets. To bring the bottom line in black for short to medium term, more demand liabilities ought to be brought in the mix.
But with downward movement in interest rates, going forward, long-term project financing is a more viable business.
Yes, globally this does not fall under the realm of commercial bank, but owing to the non-existence of corporate debt markets and the dying DFI business, long term financing is left to commercial banks.
The good thing is that Silk Bank has over Rs5 billion in long-term PIBs with an intention to hold till maturity. A falling interest rate scenario, becoming increasingly likely, will reap gains for the bank.
Plus, knowing Tarins deft handling (remember the turnaround in Union Bank) and also his first hand experience with the economy, the bets is in favour. Not so bad days ahead for Silk bank.
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SILK BANK - RIGHTS SHARE STATS
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April 2nd closing price (Rs) 3.23
No. of pre-right shares (mn) (A) 900
Mkt Cap (Rs mn) (B) 2,908
No. of right shares (mn) ( C ) 2,800
Right issue size (Rs mn) (D) 7,000
Ex right Shares (mn) (A+C) 3,700
Ex right Mkt Cap (Rs mn) (B+D) 9,908
Ex right Price ((B+D)/(A+C)) 2.68
Ex right Price to book multiple 0.96
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Source: Company accounts, BR Research
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