Technical, but I can clarify if necessary: a bank is financed by a combination of creditors or liabilities (current, saving and term deposits and borrowing) and equity. The liabilities have an explicit cost where the bank has to make scheduled payments to its creditors

The equity has a variable cost and is only entitled to the profitability that the bank generates, which can be retained or distributed as dividends.

The total value of a bank's equity is generally determined by its book value (initial capital + retained earnings over the year).

The return or net profit that a bank makes is generally measured against its book value so if the bank makes Rs. 10 and its book value is Rs. 100, it has a return on equity of 10%. This is what shareholders earn and in turn what it costs the bank to keep those shares outstanding.

In the current environment in Pakistan, many blue chip banks generate return on equity of 16-17%. BUT, their shares on the market trade at 0.6x their actual book value. This means that if you buy their shares on the market, YOU, the shareholder, are earning an implied 30% profit.

At the same time, the banks' blended cost of their liabilities is only 4 to 5%. Which means that the banks are paying up to 5% on the one hand to creditors and 30% to shareholders on the other hand.

Consider this: if you have a redeemable bond that costs you 30% in a 4 to 5% interest rate environment, and you have ample liquidity, would you not consider it criminally negligent not to redeem that bond?

These banks are also very well capitalised, which means they have ample liquidity and are not risky. They are also allowed to do share buy backs. Which means that they would borrow money at up to 5% and use it to buy their own shares in the market and retire those shares.

Each share repurchased would mean that the bank would have substituted that proportional amount of its equity, which costs 30%, with borrowing, which costs 5%, without having almost any impact on its riskyness.

In which world is the cost of equity 6x that the cost of debt. We are talking about overcapitalized blue chip banks not some broke oil marketing company. The management of these banks that are not buying back their shares is not doing a great job from a capital structure angle