Stock market turmoil to hit banks

KARACHI: The current equity market turmoil has raised concerns over its impact on various stakeholders, particularly the banking sector, which carries substantial exposure through a combination of direct investment, margin financing and CFS financing.“The banking sector is already going through a tough phase due to declining deposit growth and rising bad loans because of high interest rates and credit crunch. Our estimates suggest that banks have an exposure in the range of Rs100-150 billion in the stock market, which is 20-25 per cent of their equity base,” stated Farhan Rizvi, analyst at JS Research, in a report.With the Karachi Stock Exchange index already down 24 per cent since the lifting of floor on Dec 15, “we think further erosion in the sector’s book value along with capital adequacy ratio (CAR). Moreover, default on margin financing and Continuous Funding System (CFS) exposures also remain significant risks for the sector.”According to an analysis of 11 JS Universe banks (78 per cent of the banking sector), he said the exposure in capital markets was in excess of Rs100 billion ($1.3bn) as of Sept 30, which was 24.6 per cent of their equity. That did not include margin financing against shares whose statistics were not available and were reported to be in the range of Rs30-50bn for all banks.“We have already seen a sharp decline in revaluation surplus during the quarter ended Sept 30, with Rs23bn fall in investment revaluation reserve,” he added.Apart from concerns over equity investment, other major risk facing the banking sector is exposure in CFS MK-II and margin financing. The CFS has been particularly in the limelight due to a lawsuit filed by a few brokers and counter-suit by some banks.According to Sept 30 financial accounts, total exposure of banks in JS Universe in CFS MK-II was Rs9bn (60 per cent of total outstanding amount of Rs15.2bn). Moreover, according to various news reports, exposure in margin financing was in the range of Rs35-50bn.The banking sector continues to remain under stress due to a combination of economic slowdown, liquidity crunch and increasing asset quality concerns, which has forced banks to make heavy provisions for non-performing loans (NPLs).According to official data released by the State Bank, total banking sector provisions rose by Rs44bn till Dec 13.