JCR-VIS reaffirms entity ratings of Meezan Bank Limited at AA/A-1+

Karachi, June 29, 2015 (PPI-OT):JCR-VIS Credit Rating Company Limited has reaffirmed the entity ratings of Meezan Bank Limited (MBL) at ‘AA/A-1+’ (Double A/A-One Plus). Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on June 24, 2014.

The assigned ratings incorporate MBL’s well-established domestic franchise, solid funding base, healthy profitability, sound liquidity profile and strong Shariah governance infrastructure. MBL has pursued an aggressive branch expansion strategy which has allowed the bank to increase its market share in Islamic and domestic banking sector deposits to 35.6% and 4.56%, respectively, by year-end 2014. Deposit base features granularity; MBL has one of the highest proportion of retail deposits while deposit concentration is low and has improved further on a timeline basis.

While net equity of the bank has increased in absolute terms due to internal capital generation, overall Capital Adequacy Ratio (CAR) of the bank declined due to sizeable growth in Risk Weighted Assets (RWAs). CAR of MBL stood at 11.88% at year-end 2014. Financing portfolio of the bank witnessed healthy growth in 2014. Asset quality indicators compare favourably to peers. Going forward, MBL plans to increase the proportion of consumer and commercial segments in financing mix while adding new clients in the corporate portfolio to reduce concentration risk.

Despite increase in expense base on account of aggressive branch expansion being pursued by the bank, operating profitability of MBL increased significantly during 2014. Going forward, spreads and profitability are expected to come under pressure in the backdrop of decline in market benchmark rates and increase in expenses due to branch expansion.

Management is focusing on volumetric growth in earning assets and enhancing income from ancillary sources in order to mitigate the impact of declining spreads and increasing expense base. There is also a strong focus on improving efficiencies and enhancing fee based income by way of delivery of ancillary products and services through the bank’s branches.

Liquidity profile of the bank is strong; it is however not easy to manage because of lack of avenues for deployment. Introduction of Sukuk backed open market operations based on Bai Muajjal in October’2014 has opened a new avenue for deployment; however availability of GoP Ijarah Sukuk is a requirement to undertake these transactions.

Almost the entire maturity of MBL’s holding of GoP Ijarah Sukuk falls due in the ongoing year. Deployment of the same may be a challenge for the bank. During 2014, MBL completed the successful acquisition of HSBC Pakistan Operations. Through the acquisition, 10 branches were added to MBL’s branch network while the bank also gained access to some top-tier customers.

For more information, contact:
Ms. Sobia Maqbool
JCR-VIS Credit Rating Company Limited
VIS House, 128/C,
25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi
Tel: +92-21-35311861-72
Fax: +92-21-35311873
Email: sobia@jcrvis.com.pk

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