Within the listed banks’ space, nine banks had failed to meet CY09 Minimum Capital Requirements (MCR) as of Jun 30’10 even after deadline extensions. Not surprisingly, these banks trade at the cheapest valuations (<0.5x trailing P/B) within the listed banking space despite some having already initiated steps to meet aforementioned requirements. This is because a stipulated laddered increase in MCR to PkR13bn in CY13 indicates capital raising will likely be an ongoing exercise over the next three years. While this flags these banks as potential M&A plays, attractive valuations have as yet failed to attract the bigger players (MCB-RBS was an exception, in our view). In a scenario where capital constrained banks fail to appeal to stronger banks and also fail to merge within peers, the realistic options available to the SBP other than deadline extensions are to 1) reduce MCR or 2) force mergers. That said, we believe such drastic measures will likely be unnecessary and that market forces will lead to consolidation by CY13.
