The SBP has approved Silk Bank’s merger with and into United Bank, which will entail one new ordinary share of UBL being issued for every 325 shares of SILK. This will increase UBL’s outstanding shares from 1,224mn to 1,252mn, leading to small dilution for existing shareholders. Addressing problem banks is an IMF conditionality and this merger will achieve this objective.
SILK released its 2024 financial statements last week. Our initial thoughts on the merger include:
§ SILK’s CAR stood at negative 149.8%, which may drag UBL’s capital ratios (T1: 15.5%, CAR: 20.6%). However, there are several offsetting elements at play. UBL has preemptively announced an ADT-1 issuance of up to PKR20bn alongside its 4Q24 results, and has ample room to reposition its balance sheet. To note, UBL still has unrealized capital gains on government securities on its books (PKR76bn or c 50% of its pre-tax CY24 profits) and significant room to unwind its OMO positions to bring up the Leverage Ratio.
§ SILK’s NPL stock stood PKR51.5bn on Dec 31’24 but provisions trailed at PKR40.4bn. There are two considerations: (i) UBL may have to immediately provide for the balance unless it receives SBP approval for a staggered charge, and (ii) there should be a recovery pipeline as we advance. For example, MCB acquired NIB Bank in 2017 and has so far been able to recover PKR10.6bn out of NIB’s NPL stock of c. PKR29bn.
§ SILK’s deferred tax assets stood at PKR43.0bn on Dec 31’24 of which PKR15.1bn pertained to tax losses carried forward. It is possible that UBL can utilize these tax losses to bring its overall tax rate down. The MCB-NIB merger provides precedence again – effective tax rate for MCB was 28%/34% in CY17/CY18 vs. 40% for the banking sector.
§ UBL should be able to increase its domestic branches close to +1,500, with SILK’s 106 branches primarily in urban centers. UBL may consider transforming these into Islamic branches, in keeping with its intended push in that space, and/or look to dispose owned properties if there are decent capital gains in the offing.
§ UBL’s consumer portfolio, currently estimated at c 3% of loans in the domestic market, may receive a minor boost from SILK’s positioning in the consumer banking space. SILK’s overall market share is less than 0.5% of loans where we understand that c. 40% of the loan portfolio was geared towards Consumer & SME.
SILK’s merger with and into UBL brings both positives and negatives. We think that so long as UBL can maintain its high cash payout ratio, it will be able to justify current valuations. High capital gains potential on government securities and the recently announced ADT-1 issuance provide comfort in this direction. That said, most positives appear to be baked into UBL’s valuations (CY25f P/B: 1.4x, P/E: 6.1x not including SILK). We are Neutral on the name with a TP of PKR380/sh. We await post-merger accounts for March 2025 to revisit our estimates and recommendation.
Courtesy – IMS Research
