JS Securities Limited – JS Research (17-01-2020)

Karachi, January 17, 2020 (PPI-OT): Banks: Agreement signed to establish Pakistan Corporate Restructuring Company Limited

To revive sick industrial units, key heads of ten commercial banks have signed a shareholder’s agreement through which Pakistan Corporate Restructuring Company Limited (PCRCL) would be formed in Pakistan.

We believe, following international practice, PCRCL could acquire, restructure and recover non-performing assets of the industry, which can later be transferred and/or disposed.

Other restricting activities could include dealing with and raising finance for non-performing assets, gaining control over properties and other collaterals through partnerships, joint ventures and other profit/loss sharing agreements.

Taking cue from the model of restructuring companies practiced globally, the concept being introduced in Pakistan is a positive development towards reviving the sick industrial units. At the moment, it is too early to comment on any impact on Pakistan’s Banking sector.

First restructuring company to be established in Pakistan

In order to revive sick industrial units, key heads of ten commercial banks (refer list) have signed a shareholder’s agreement to form Pakistan Corporate Restructuring Company Limited (PCRCL). This is the first time that the concept of a restructuring company is being introduced in the country. The objective of PCRCL will be to transform financially distressed companies into financially viable companies. This kind of arrangement is made to benefit to both, the buyer and the seller of the non-performing asset. The non-performing assets are likely to be purchased at deep discounts while also make room on the seller’s books for fresh loans and improve overall asset quality. The discount buying would give the buyer higher return potentials even with partial improvements in the non- performing assets.

Activities that may include in restructuring

We believe that, following international practice, PCRCL could able to acquire, restructure and recover non-performing assets of the industry, which can be later transferred and/or disposed. For example, in the case of bad loans/TFCs etc., PCRCL may renegotiate terms and structure of the initial loan as per current financial and operational conditions that may increase the probability of recovery from the borrowers, and at the same time provide a return to PCRCL on its buying cost. Other activities of PCRCL could also include dealing with and raising finance for assets, gaining control over properties and other collaterals through partnerships, joint ventures and other profit/loss sharing agreements.

Current NPLs stand at Rs758bn

Pakistan’s total Non-Performing Loans (NPLs) of banks accumulated to Rs758bn as at Sep-2019. These translate to a 9% Gross Infection ratio. Almost one third of the NPLs have been stocked by fixed investments of the corporate sector. Moreover, the Agriculture and SME segments currently hold the highest Gross Infection ratios, which collectively contribute 20% to the overall NPL stock. From JS Banking Universe, we highlight Bank of Punjab (BOP), National Bank of Pakistan (NBP) and Faysal Bank Ltd (FABL) that hold higher Gross Infection ratios on their respective domestic loan books. Taking cue from the model of restructuring companies practiced globally, the concept being introduced in Pakistan is a positive development towards reviving the sick industrial units. At the moment, it is too early to comment on any impact on Pakistan’s Banking sector.

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