Small banks offer a strong case of mergers with larger banks. But, given the international financial landscape, neither the multinational financial institutions seem particularly interested in scooping up the offering nor the local giants find synergies in acquiring small and scattered banks.
Amidst the tight liquidity regime, and stringent solvency regulations by the central bank, small banks have been diluting share value with offers of rights shares at discounted values. Silk Bank, for one comes to mind as a recent example.
SBP should incentivize larger financial institutions to consolidate the sector. But until such time the market has another issue to take care of.
JS Bank has announced its intention to offer 33 percent rights shares at Rs3 per share. Knowing that pre issue shares stand at 612 million, another 202 million shares are due to be floated pending shareholder and regulatory approvals.
Major sponsors for the bank are JS Group and American Express, so approval from the board might not be too much of a roadblock.
The real challenge for the bank will be convincing the minor investors to scoop the offering at a 4 percent premium to the current trading price of its stock at the local bourse. JSBLs share price ended slightly higher to Rs2.89 on Thursday.
"It is likely that the rights issue is going to be picked up by the sponsors or the underwriter, why would an investor buy the share at Rs3 when it is available for less than that value" says Raza Jafri, banking analyst at AKD Securities.
Banking regulation in Pakistan enforces a minimum capital requirement (MCR) of Rs6 billion as of December 2009. SBP had granted an extension to 18 banks from the requirement, which included JSBL. MCR is scheduled to be scaled up by Rs1 billion every year, to Rs10 billion in 2013.
"There is good possibility that JS Bank might be back with another rights offering next year to meet MCR" said an analyst closely following the industry.
On paper, quality of loans at JS Bank seems promising, registering NPL as of March 31 at 7.3 percent against the industry average of around 13~14 percent, but the advance-to-deposit ratio is 52 percent, much lower than its peers.
Loans disbursed by the bank are "likely to be more expensive than its peers or concentrated in blue chip companies, whose appetite has dried up in recent months" add Raza Jafri.
"There is no direction, strategy of defined future for the small banks" commented Hamza Marath at KASB Securities. He added that the way forward for the banking sector is consolidation.
And merging two small problems - read banks - into a larger one doesn solve the problem. Larger banks will be seeking synergies that add value to their portfolios
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JS BANK - RIGHTS SHARE STATS
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July 1 closing price (Rs) 2.80
No. of pre-right shares (mn) (A) 613
Mkt Cap (Rs mn) (B) 1,716
No. of right shares (mn) ( C ) 202
Right issue size (Rs mn) (D) 607
Ex right Shares (mn) (A+C) 815
Ex right Mkt Cap (Rs mn) (B+D) 2,322
Ex right Price ((B+D)/(A+C)) 2.85
Ex right Price to book multiple 0.38
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Source: Company accounts, BR Research
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