KARACHI - The Bank of Punjab (BoP) is expected to start the process of recovering bad loans from the accused defaulters soon in the backdrop of recent Supreme Court decision and with the induction of new management in the said bank, research analyst told The Nation on Thursday. Kamran Rehmani, a research analyst at FECL said investors confidence on BoP has been revised owing to improved operational prospects of the bank. Since last couple of trading sessions, BoP has become the volume leader at Karachi bourse with a turnover of 10.4 million shares while its share price also closed at upper circuit, he added. A possible bad loan recovery is being anticipated by some market players, which could led to a heavy reverse provisioning in the books of BoP. It is pertinent to mention here that the Supreme Court had directed the National Accountability Bureau (NAB) to submit the report on Haris Steel Mills loan scam by December 2, 2009. It must be recalled that the bank of Punjab (BoP) witnessed a severe reputation crisis in 2008 due to a multi-billion lending scam that revealed after the change of the ruling office in the Punjab. The new management has started functioning in order to revive the banks reputations, besides streamlining operations, strengthening system and controls and improving efficiency. Rehmani assumed that the bank would have classified the said NPLs under loss category and fully provisioned as the collaterals against the loan were nominal in true sense and illiquid in nature. There are two scenarios of bad loan recovery from the bank: a) full recovery b) restructuring of the loans, Rehmani said adding that in the first case it is assumed that the convict would pay-off the full amount of Rs8.6b to the bank. As per the assumption, bad loan pertaining to Haris Steel would be removed from NPLs and respective provisions that have been already provided would be reversed back. This would provide one time impact of Rs10.57/share on after tax basis. We think this is an optimistic scenario as historically we have not witnessed such a huge single cash recovery in a willful loan default case. The last prominent recovery was made by NBP where an old bad loan of the bank in Mehran Bank scandal was recovered. It that case, the National Accountability Bureau (NAB) had recovered Rs1.6b by selling the property of defunct chief of Mehran Bank, he said. While in the second scenario the loan would be restructured and payment would be in trenches based on the agreement between the related parties. The SBP recently amended the restructuring rule which is applicable on loans that are overdue by less than 1 year only. Under the new regulation, banks are allowed to upgrade the NPLs by one notch upon the restructuring/rescheduling of the overdue loan. Since the said loan is overdue by more than 1-year, the restructuring would not be made under previous guidelines. In this respect, remaining loan would be declassified from NPLs to performing loan upon successfully receiving the agreed payment over the period of one year. After a year, remaining provisions would also be reversed back. In this case, total after tax impact of Rs10.57/share would be split over financial years. Over the years, BoP has witnessed sharp deterioration in its asset quality. From a level of Rs2.3b in 2006, BoPs NPLs have surged to Rs42.7b at the end of 2008. This has also caused the bank to take heavy battering on its P&L due to resultant hike in provisioning. As per the credit rating agency of the bank, around 80 per cent of the loans are categorised into corporate sector. Meanwhile, the bank has taken certain large exposures with top 20 advances representing 51 per cent of the loan book. With heavy loss of Rs10b in 2008, the banks tier-I equity base shrank to Rs5.0b from Rs15.1b in the previous year. In addition to this, tier-II capital reduced to Rs3.7b due to impairment on revaluation of investments from Rs19.0b, a year earlier. As a result, the banks CAR dropped from 9.78 per cent in 2007 to only 1.92 per cent at the end of 2008. This was far below the regulatory requirement of 9 per cent for 2009. However, the banks major sponsor, The Government of Punjab, injected Rs10.0b as an advance payment for right share subscription. After the infusion of addition equity, CAR of the bank would be at 7.6 per cent still below the regulatory requirement. The bank has been granted compliance extension by the central bank till end-2009.