The ministry of finance (MoF) and the country’s leading banks are said to have agreed to adjusting the existing circular debt-related term finance certificates (TFCs) and loans through the issuance of long-term government bonds like Pakistan Investment Bonds (PIBs) at close to market yield of 13.5 per cent.
Due deliberation: Citing media reports, analysts at Topline Securities said the total amount was expected to be around Rs280 and295 billion, which includes mark up accrued during last couple of years. “And it is likely that the bonds will be issued within next few weeks,” said Farhan Mahmood. The analyst said the government had taken the decision after due deliberations and discussions with the companies’ management. Though the transaction is just a book entry, he said, it also has some positive implications on few banks. Firstly, the current arrangement is positive for the banks as they would start getting six monthly coupon and they can also sell the bonds in the secondary market if they want, he added. Secondly, Farhan said, those banks which have not recognised interest income as it was due but not actually paid would book all the previous period income once these PIBs were issued, may be in third or fourth quarter of 2011, hence improving their reported profits. “The current PIB is related to the old dues which have not been paid to the banks yet,” the analyst said adding this included two TFCs of Rs165 to Rs170 billion which were issued in last two years to rescue energy firms from circular debt driven liquidity problems.
Interim arrangement: “According to our estimates, this PIB also includes loans amounting to Rs80-85 billion provided to firms in last couple of years which were disbursed as an interim arrangement to arrest cash flow problems of energy firms,” he said. And lastly, the analyst said, the mark up which had not been paid by the government and was expected to be around Rs35 to Rs40 billion, assuming a delay of 1-1.15 years would also be a part of this bond issue. The analyst sees five banks, NBP, HBL, ABL, UBL and BAFL, having higher exposure, approximately 75 to 80 per cent, in the circular debt. “Out of 24 banks listed in Pakistan, we believe four banks… have highest exposure in circular debt,” he said and added that: “Out of Rs165-170 billion TFC, HBL has a share of Rs57 billion, NBP (Rs44 billion), UBL (Rs23 billion), BAFL (Rs 18 billion) and ABL (Rs 26 billion), according to the latest company accounts.” As far as advances are concerned, the analyst said, the National Bank had the major share which was expected to be around Rs28 to Rs30 billion. “Now if we assume that banks have already accounted the interest income in their P&L (despite no cash outlay from government) there would be no impact of Rs35-40 billion mark up on the banks’ P&L. However, assuming that no bank has recognised income during this period, then their current year 2011 earnings have to be upward adjusted by Rs35-40 billion,” Farhan viewed.
Recognising interest income: According to analyst, since the recognition of interest income is solely depended on the bank’s policy, it was difficult to ascertain how much income each bank had recognised and how much not. However, he said, “after going through detailed accounts and discussion with the banks, we found out that NBP and BAFL are the two banks which have not recognised a major portion of interest income on those loans/TFCs during the period and hence their NII could be upward adjusted in 2011”. “According to our preliminary estimates, NBP benefit on both its TFCs and loans is around Rs3/share. On BAFL, the earnings impact is expected to be around Rs1.2-1.4/share,” the analyst said. About UBL and the ABL, Farhan said the positive impact was likely to be minimal as the two banks had already recognised majority of the interest in their P&L. “On the other hand, we do not know the impact on HBL as we still need further clarification about the bank’s policy,” the analyst said.
