The profitability of the National Bank of Pakistan (NBP) is likely to receive a negative impact during the next two years due to the huge liability of Rs. 47.7 billion the bank faces on account of pensioners’ pending payments.
The liability on the bank was maintained by Supreme Court of Pakistan (SC) which set aside the decision of Peshawar High Court and maintained the decision of the Lahore High Court given on the 15th of January 2016 on National Bank’s (NBP) Pension Liability Contingencies.
According to analysts, the liability would result in a Rs. 14.6/share hit to Book Value of Equity per Share (BVPS) which currently stands at Rs. 80.3. BVPS would subsequently reduce to Rs. 65.7/share.
In terms of profitability, the amount would wipe out roughly 2 years of profitability, in addition to increasing the recurring impact of pension expense on the bottom-line going forward.
This would also result in a 3.85% deduction from Tier-1 Capital based on 2016’s Tier 1 Capital and risk-weighted assets. Tier 1 ratio would reduce from 11.86% (December 2016) to 8.8% by December 2017 if the bank chooses not to pay any divided for 2017. This would result in the bank meeting the Tier 1 capital requirement by a few basis points.
The regulatory capital limit is 7.775% based on 6.0% Tier 1 Requirement, 1.5% Additional Tier 1 Requirement and 1.275% Capital Conservation buffer.
NBP recorded a decline of 36 percent in profits during the second quarter of 2017 mainly on the decline of income from interest margins. The liability is likely to squeeze its profitability in the next quarters as well.
It is likely that NBP will skip dividends in 2017 and potentially in 2018 to shore up its CAR.
Background of Pensioner Case
In 1977, the government directed all nationalized banks via circular enlisting certain pension benefits for retired employees, which was annulled in 1997 where banks’ management were empowered to frame their own policies.
However, NBP employees went to Peshawar High Court (PHC) and Lahore High Court (LHC) challenging the 1997 order. The PHC, in June 2014, ruled in favor of NBP. However, the LHC ruled in favor of the employees in January 2016, which was subsequently appealed in the LHC by NBP. The appeal was dismissed through a judgement in January 2017 by the LHC.
NBP had an ongoing contingency with regards to its pension liability case. As per the 2016 annual report, NBP, on the 1st of January 1999, through Circular No.37/1999, revised the pay structure of its employees where the compensation formula was altered from 70% of gross emoluments to 33%. At the same time, the bank raised salaries, which resulted in the gross pension amount remaining roughly the same.