JCR-VIS reaffirms ratings of National Bank of Pakistan at AAA/A-1+

Karachi, June 30, 2015 (PPI-OT):JCR-VIS Credit Rating Company Limited (JCR-VIS) has reaffirmed the entity ratings of National Bank of Pakistan (NBP) at ‘AAA/A-1+’ (Triple A/A-One Plus) with ‘Stable’ Outlook. The previous rating action was announced on June 30, 2014.

The assigned ratings are driven by the bank’s ownership structure with majority shares held by the Government of Pakistan (GoP) in addition to which security of deposits is guaranteed under the Banks’ Nationalization Act. The assigned ratings also take into account NBP’s role in handling treasury transactions for the GoP as an agent to the State Bank of Pakistan (SBP).

The rating also reflects the bank’s positioning as the second largest bank in the country having market share of 13.5% (2013: 13.3%) in domestic deposits. The bank’s strategy, going forward, is focused on enhancing the proportion of non-remunerative deposits in the deposit mix, in addition to achieving overall growth in deposit base, to re-capture its positioning as the largest bank in the country.

Capitalization indicators feature improvement on a timeline basis; continuation of this trend is considered important in the backdrop of increased CET-1 requirements under Basel 3, higher risk charge on unrated exposures and an additional risk charge for Significantly Important Financial Institutions, that may be applicable to the bank. Enhanced retention levels may facilitate in achieving the same. The bank’s Common Equity Tier-1 (CET-1) ratio is currently lower than peer banks.

Over the last five years, NBP’s exposure to the sovereign by way of advances and investments has grown significantly. This includes NBP’s exposure against state owned enterprises (SOEs) undergoing financial stress which has exposed the bank to economic losses.

Asset quality indicators of the bank compares less favourably to peers, with net infection median of 1.3% in case of banks rated AAA and AA+ versus NBP’s net infection ratio of 3.1%. In case of domestic loan book, healthy growth has been witnessed in the retail portfolio which now represents around one fifth of the loan book. Given the product structures, infection in the retail segment has been recorded well below industry norms.

Overall profitability posted a sizeable jump in 2014 on the back of increase in net interest income, higher gain on sale of securities and lower provisioning charges. Spreads may come under pressure with maturity of PIBs in 2016, if the low interest rate environment persists.

Management plans to pursue aggressive growth in low cost deposits and increase financing in high yielding segments while focusing on recoveries to augment profitability levels. The advances to deposit ratio in the banking sector is considerably low; the current interest rate environment may encourage private sector credit off-take if other concerns of industry players are addressed.

The bank is in the process of implementing its core banking application across all branches. The same is targeted to be completed by year-end’2015. This alongwith implementation of an effective fraud risk management framework will strengthen the control environment at the bank.

For more information, contact:
Ms. Sobia Maqbool
CFA
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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