Silk Bank was formerly known as Saudi Pak Commercial Bank which came into existence as the management and associates of the Saudi Pak Industrial and Agricultural Investment Company (Pvt) Ltd (SAPICO), under the supervision of the State Bank of Pakistan, acquired the institution then known as the Prudential Bank.
On March 31, 2008, a Consortium comprising of IFC, Bank Muscat, Nomura International and Sinthos Capital led by senior bankers Shaukat Tarin and Sadeq Sayeed acquired a majority stake in Saudi Pak Bank for around $213 million (Rs29.3 per share). The bank changed its name to Silk Bank Limited in June 2008.
Silk Bank mainly focuses on SME and Consumer financing which are largely neglected by the bigger banks.
Financial Performance, 9M CY13
Silk is essentially a core banker which focuses on private sector advances rather than recklessly parking funds in government securities. However, 9M CY13 appears to be the period where the bank has momentarily changed its focus in favour of investments perhaps to take the advantage of rate-cuts and book capital gains on its "Available for sale" investment portfolio.
Silk's top line dipped by 15 percent year on year in 9M CY13 owing to rate-cuts during the period coupled with lesser focus on advances which grew only marginally-by 5 percent year on year while investments swelled by 26 percent year on year during the period. Despite this Advances-to-Deposit Ratio (ADR) hovers well above the Investment-to-Deposit Ratio (IDR) (see the table)
The bank religiously focused on low-cost deposits during the period to shield its bottom line against the dicey top line. The deposits grew by modest 5 percent year on year but mark-up expenses massively shrank by 22 percent. This notably improved the spread ratio from 21 percent in 9M CY12 to 27 percent in 9M CY13.
Despite a sizeable 17 percent year-on-year drop in Non-Performing Loans (NPLs) which took the infection ratio to 19 percent in 9M CY13 from 24 percent in the corresponding period of last year, Silk accrued a provisioning expense of Rs330 million during the period. This appears to be an endeavour to improve the loan coverage which stood at a skimpy 42 percent year on year in 9M CY12.
The focus on investments (as discussed above) bore fruits as the bank enjoyed healthy capital gains and dividend income during the period. Silk also booked gains on the revaluation of investments held for trading. During 9M CY13, the bank received remittances of over Rs7.62 billion, boasting an increase of 60 percent over the similar period of last year. This coupled with Bancassurance, point of sales and ATM business also registered growth during the period.
The bank rationalised the administrative expenses during the period through synergies and process reengineering.
Despite better performance on non-mark-up front, thin top line and high mark-up expense took its toll on the bottom line. The losses after tax exacerbated during the period reaching Rs624 million against Rs63 million in 9M CY12.
Summing up past performance (CY11-12)
CY12 appears to be a tough year for Silk bank as the bank posted a loss after taxation of Rs344 million as against the profit of Rs695 million in the previous year. However, a meticulous look at the financial accounts indicates that in 2011, the bulk of the bank's profitability came from recovery/reversal of provisions of around Rs2.60 billion. However, the corresponding figure in 2012 was Rs580 million, a variance of approx. Rs2.0 billion, plotting a major hit to the bottom line. The massive reversals in 2011 came on the back of interim instructions issued by SBP on classification/provisioning requirement of rescheduling/restructuring of loans and advances that are overdue by less than one year at the time of rescheduling/restructuring.
During CY12, bank's earning assets fell by 9 percent year on year with the fall mainly coming on the heels of lesser investments made during the year. Lethargy on the earning assets front coupled with low interest rates wreaked havoc on the top line which could barely muster a 2 percent year-on-year growth.
During the year, bank's deposits grew by 8 percent year on year. Coming on the heels of current accounts, CASA ratio also jumped from 48 percent in CY11 to 50 percent in CY12, hence curbing the mark-up expenses and keeping the spread ratio in check.
The non-mark-up income also grew incredibly during the period. In 2012, the Bank invested in core segments of its future growth platforms including credit cards, Islamic Banking and other consumer products leading to an increase in administrative expenses.
During the year, the bank made strategic investments in new businesses and successfully launched a Credit Card and an Islamic Banking business.
The Business also developed new avenues for growth including Bancassurance, remittances and alternate delivery channel business. The bank emerged as a major player in the growing remittances business, and received remittances of over Rs5.5 billion, and plans on further expansion through partnerships with more exchange Companies. In addition the bank's first Takaful products, the Silk Secure Takaful and the Silk Education Takaful, and an exclusive retirement plan, the Silk Retirement Plan, offering a guaranteed pension underwritten by major Insurance Companies, were launched during the year.
Future Outlook
Silk bank has brighter prospects going forward as its inclination towards advances vis-à-vis investments would enable it to reap the utmost benefits of rate-hike. Besides, the bank's focus on current accounts off-late would also protect the spreads. The remittance, Bancassurance and Alternate Delivery Channel (ADC) business is also expected to keep the non-mark-up income healthy.
What could take its toll on the bottom line is the provisioning expense. The bank had been booking provisions all through 2013 as against the reversals made in the previous year, perhaps in an effort to boost its loan coverage which stands at 53 percent as of September 2013 as against the peer-size average loan coverage of 64 percent. This is despite the fact that the bank's NPLs have been ticking down.
If the similar exercise continues in the future, it can batter the bank's bottom line as it did in 2013. However, by performing better on other fronts (top line, spreads, non-mark-up heads), the bank can put the culprit of tall provisioning expenses in the shade.
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SILK BANK LIMITED
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Rs (mn) CY11 CY12 9MCY13
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Markup Earned 8,386 8,564 5,611
Markup Expenses 6,515 6,681 4,085
Net Markup Income 1,871 1,902 1,526
Provisioning/(Reversal) (2,630) (580) 334
Net Markup Income after provisions 4,501 2,483 1,193
Non Mark-up / Interest Income 847 1,065 1,054
Operating Revenues 5,347 3,547 2,247
Non Mark-up /Interest Expenses 3,988 4,077 3,137
Loss Before Taxation 1,359 (529) (890)
Taxation 664 (185) (266)
Loss After Taxation 695 (344) (624)
EPS (Rs) 0.260 (0.130) (0.230)
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Source: Company Accounts
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SILK BANK LIMITED
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Indicators CY11 CY12 9MCY13
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Infection Ratio 22% 22% 19%
Coverage Ratio 49% 46% 53%
Spread Ratio 22% 22% 27%
IDR 27% 18% 21%
ADR 78% 71% 74%
ROA 1% -0.4% -1%
ROE 12% -6% -9%
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Source: Company Accounts
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