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LOC holders: Govt likely to permit NBP, BoP to redeem 10 pc NIT units

* Major purpose of the redemption option is to facilitate these banks in taking tax advantage ahead of a year with capital gain tax

KARACHI: After the government’s permission to redeem 10 percent of NIT units held by Faysal Bank, the likelihood has significantly increased that the other LOC holders (NBP and BOP) of the NIT units will also be offered to opt for the same.

Mohammad Imran Khan, research head at First Capital Equities Limited said in his report, “the major purpose of the redemption option is to facilitate these banks in taking tax advantage ahead of a year with capital gain tax.” In the budget 2007-08, the government has announced levy of capital gain tax that will be applicable from the year 2008.

The analyst said the possible implications for National Bank of Pakistan (NBP) and Bank of Punjab (BOP) if both the banks are also allowed to redeem 10 percent NIT units from their holdings will be an expected capital gain of Rs 1.8 billion and Rs 764 million to NBP and BOP on the holdings of respective 372.5 million and 159 million units of NIT.

The redemption of 10 percent NIT units that is 37.25 million for NBP and 16 million for BOP is likely to result in a capital gain of Rs 1.8 billion (per share Rs 2.2) and Rs 764 million (per share Rs 1.8) to these banks respectively.

These gains will help both banks to more than offset the probable declines in their 2007 earnings due to the SBP’s withdrawal of the benefit of forced sales value of the assets on loans.

As per nine month of 2007 accounts, the analyst said NBP and BOP have to book excess provisions of Rs 1.3 billion (per share Rs 1.65) and Rs 406 million (per share Rs 0.96) respectively. “The expected capital gain and the incremental provisioning both are one-off items and we have not considered them as a part of recurring earnings,” he added.

However, as these items have some impact on the retained earnings, the payout pattern of these banks may witness changes in the upcoming 2007 results. On the other hand, as a matter of fact, this redemption will ultimately lower the future NIT dividend receipts for these banks.

Currently, the books of NBP and BOP consider NIT holdings for the calculation of SLR on the basis of book value or market value which ever lower. In order to fulfill the criteria of SLR, the said redemption will force these banks to increase their exposure in government securities.

However, the comfortable liquidity positions of these two banks will not create any problem as according to nine month 2007 accounts both NBP and BOP depicted respective ADRs (Advance to deposit ratio) of 61 percent and 63 percent.

Furthermore, as the market value of NIT units is significantly higher (Rs 61/unit) than the original cost in these banks’ books (Rs 13.7/unit), the redemption is expected to implicate positively on the overall liquidity of these banks in the form of higher tier 1 capital.

Also it will increase the capital adequacy of NBP and BOP by 30bps and 40bps, the report said.

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