Strategic Financial Analysis & Design

Assignment # 1

Daniyal Mirza (63280)

SUBMITTED TO:
Dr. Arsalan Hashmi

PROGRAM: (MBA)
 KASB Bank Limited: Capital Shortage

Q1: Why was the moratorium placed on the KASB Bank by the State Bank of Pakistan?
Determine the Tier I capital shortage for the years 2012 and 2013 assuming there was no
reduction required as per Exhibit 5.

KASB bank was amalgamated in 1994 which was a public limited company. KASB bank was
listed on Pakistan stock exchange. The KASB bank started to report a loss due to their poor
probability, because of which KASB bank capital fell below the minimum requirement of State
Bank of Pakistan. The reason behind such a loss was due to Non-performing loans given to low
quality borrowers, which KASB bank could not recover and as a result, their regulatory capital
was eroded.
The reason behind placing the moratorium on KASB bank was because the State Bank of
Pakistan wanted to protect 57 Billion (PKR) in customer deposits. The moratorium did not
entirely close the bank, but it only restricted KASB bank from paying the certain debts. The State
Bank of Pakistan permitted the depositors to withdraw up to 300,000 in order to operate their
accounts normally.

Q2: What methods were adopted by KASB Bank management to resolve the shortage of
capital?

During the year 2008, the bank underwent in a restructuring of the KASB group. This
restructuring involved the separation of the non-banking financial businesses from the bank. As a
result of this, a new non-banking financial conglomerate was formed named as KASB capital.
After this formation, the bank invested in the KASB capital of 68 million shares which was
27.5% shareholding of their new entity. However, later in 2008, there was a global financial
crisis that changed the economic condition for the banks drastically for which an immediate
action needed to be taken from the KASB bank’s management and their board of directors.
The board of directors decided to merge KASB with KCL and NLCL which was permitted by
the State Bank of Pakistan. 27% of the KCL shares were held by the KASB bank and KCL held
78.84% shares of the NLCL. By the end of December 2008, the bank obtained the residual
72.5% of the KCL shares in order to merge it with the bank. Ultimately, the bank became the
holder of 78.84% of NLCL shares as a result of this amalgamation. The residual 21.16% of the
shares were then acquired to merge with NLCL.
As a result of the issuance of shares of PKR 3,618 million upon the KCL’s and NLCL’s
amalgamation, the pay-in capital was risen up to PKR7,632 million. A share premium of PKR
1,989 million was then recognized in the bank’s book. Later, on 28 August 2009, the board of
directors mutually agreed upon issuing bonus shares of 26 ordinary shares for every 100 shares
by using PKR 1,989 million of share premium. Supplementary shares had been issued in the two
tranches including the issuance of 3,618 million shares in the first as common shares. Later, the
remaining incentive shares of 1,962 million were in the opposition of the share premium of KCL
and NLCL. As a result of this, on December 31, 2009 the paid-up capital of the bank was raised
up to PKR 9,508 million.

Q3: What plan was prepared by the Board of Directors (BOD) to deal with the situation
and what is your opinion of this plan?

In 2013, bank used a diversified approach and started implementing new ideas which included
the conversion of 20 branches into business branches to separate them from common branch
banking system. The purpose of this conversion was to reduce the branch losses and deliver the
entire banking services at customer’s doorsteps. Their main concentration was on the growth of
non-funding revenue. The bank later started to offer mobile banking services in order to tap the
unbanked markets after reviewing its cash management services and correspondent banking.
After setting up the central budgeting control cell, a requirement for the expense rationalization
was addressed. There was also a freeze in new hiring apart from the staff for the new products.
The BOD started focusing on the following things:

 Recognition and rewards for people

 Monitoring of the service quality
 Improvement in the corporate communication
 Focus on the training and development
 Process of re-engineering to enhance efficiency

The plan of KASB bank was good, but unfortunately the circumstances weren’t with them since it
needed a lot of time to manage all these things. It was not possible for them to implement all these
things within the time given by SBP. Amalgamation was the best way to retain KASB bank.

Q4: Analyze the conditions prevailing during 2009 to 2014 that affected the small bank
such as KASB Bank.

The banking industry in Pakistan had grown at an annual compound rate (CAGR) of 13.2% over
the period 2009-2014. However, the Minimum Capital Requirement was continuously increasing
during the period of 2008-2014 by the State Bank of Pakistan. In 2008, the MCR was PKR 5
billion which was increasing every year and in 2013, it was reached to PKR 10 billion.
Therefore, it became very difficult for a small bank like KASB to meet the MCR of SBP.

On one hand, The KASB bank required to raise their capital in order to meet the MCR of State
Bank of Pakistan while on the other hand, they also had to manage the current situation of the
bank. Therefore, it became very difficult for KASB bank to work under the given circumstances
and to provide return to their shareholders.
Q5: Do you think the State Bank of Pakistan acted impartially in resolving the KASB Bank
situation and what is your opinion of the amalgamation of the bank into Bank Islami?

Yes, SBP rightly imposed a moratorium on KASB bank in order to protect 57 Billion (PKR) in
customer deposits because despite giving the breathing time to KASB bank, they could not meet
the minimum capital requirements of SBP. KASB bank tried everything they could, but the
failed.

The State Bank of Pakistan held negotiations with various banks which include Habib Bank
Limited (HBL), Saudi American Bank (SAMBA), Allied Bank Limited (ABL), National Bank of
Pakistan (NBP), and Bank AL Habib Limited (BAHL) and gave him an offer to takeover or
merge with KASB bank, but none of these banks showed any interest because of the negative
equity of KASB. Later on, SBP added four more banks that were Askari Bank, Sindh Bank, JS
Bank and Bank Islami, these banks showed their interest in the possible acquisition of KASB
Bank.

In order to protect the job of the employees, and to protect the lifelong savings of the depositors
which were around PKR57 million, as well as to insure financial stability as a whole, the
amalgamation of KASB bank with Bank Islami was considered to be the most appropriate and
best option since no other big names were interested in amalgamation with KASB.