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Pakistan Banks: Omni Group Case; Potential Impact on Exposed Banks

• We perform a sensitivity analysis on the potential impact of ongoing Omni group case on Pakistan’s banking Sector due to loan exposure of select banks to the said group.
• To recall, in the ongoing Omni group case, as per news reports it has been alleged that the said group has laundered approximately Rs35bn. Hence during the course of the case and following the investigations, Omni group bank accounts were frozen. Resultantly, the group companies are unable to pay either interest or the principal on loans taken from various banks. As per news sources, the total amount of such loans stands at approximately Rs35-40bn.
• Upto four Banks have been named in news reports that have exposure to the above stated amount. These banks include National bank of Pakistan, Silk Bank, Sindh Bank (not listed) and Summit Bank. Although these are the only banks named, the potential exposure of other banks cannot be ruled out.
• The above stated amount includes both collateralized and uncollateralized loans. As per news reports, during court proceedings, it was discovered that the sugar used as collateral, amounting to Rs11.5bn had vanished from sugar mills leaving Banks with just Rs2bn of collateral sugar stock (out of a total of Rs13.5bn). However, as per our channel checks, banks also have a claim over fixed assets of sugar mills (including land, machinery etc.) which will be used to settle claims in the event of default by the group, in our view.
• Given the lack of clarity on the issue, we are performing sensitivity analysis for each bank assuming each stated bank’s exposure is maximum in accordance with per party limit of loans set in Prudential Regulations.
• As per Regulation R1, the maximum exposure allowed into a group by a Bank is restricted to 25% of banks equity where equity includes paid-up capital in respect of ordinary shares, general reserves, balance in share premium account, reserve from the issue of bonus shares, statutory reserves and retained earnings as disclosed in latest annual audited financial statements. Reserves shall also include revaluation reserves on fixed assets upto a maximum of 50% of their value.  
• Moreover, it must be noted that the Joint Investigation Team (JIT) formed for the purpose of investigating the case is still working based on which the exposure of each of the mentioned banks could vary since the case is pending in the courts.
• In the following sensitivity analysis, we take maximum per party limit to be the exposure value for each bank and then use different levels of assumed collateralization to derive sensitivity of impact on each bank.
• Moreover, if the actual exposure is 50% of per party limit, then the impact calculated in our analysis also reduces to half of the calculated amount.