JCR-VIS Maintains Entity Ratings of Al-Baraka Bank (Pakistan) Limited

Karachi, June 29, 2018 (PPI-OT): JCR-VIS Credit Rating Company Limited has maintained the entity ratings of Al-Baraka Bank (Pakistan) Limited (ABPL) at ‘A+/A-1’ (Single A Plus/A-One). Outlook on the assigned ratings has been revised from ‘Stable’ to ‘Negative’. The previous entity rating action was announced on May 17, 2017.

ABPL’s is part of Al-Baraka Banking Group (ABG); a prominent Islamic Banking Group having diversified operations in 16 countries. The Islamic International Rating Agency (IIRA) and Dagong Global Credit Rating Company Limited have jointly assigned ratings of BBB+/A3 (Triple B Plus/A Three) to ABG on the international scale. IIRA has also assigned ratings of BBB-/A3 (Triple B Minus/A Three) to Al Baraka Islamic Bank B.S.C., the major sponsor, on the international scale. Revision in rating outlook is on account of weak capitalization indictors. Asset quality and profitability indicators have shown improvement in the ongoing year but they continue to remain below benchmarks for the assigned ratings.

Financing portfolio increased by 6% during 2017. Growth in financing portfolio was witnessed in high yielding consumer and CBSME segment. Overall exposures are diversified with the largest sectorial exposure being to food and beverage, textiles and chemical and pharmaceutical segment. Moreover, significant increase in infection in the CBSME portfolio has been noted. Given the sizeable overdue portfolio, risk of fresh accretion in NPFs remains. Enhanced focus on recoveries is planned to continue which has resulted in some improvement in asset quality indicators in the ongoing year.

Liquidity buffers continue to remain over regulatory requirements. Deposit base witnessed attrition in the outgoing year as part of a deliberate strategy to improve deposit mix; cost of deposits depicted a noticeable decline. Proportion of CASA in deposit mix increased to 76% (2016: 67%) while cost of deposits decreased to 2.95% (2016: 3.4%). Moreover, deposit base has witnessed growth in the ongoing year. In the backdrop of increasing regulatory CAR requirements, higher deduction of deferred tax from Tier-1 capital and growth plans of ABPL, maintaining buffer over regulatory requirements in line with benchmarks for the assigned ratings through internal capital generation will be challenging. Proposed Additional Tier-1 issuance in the ongoing year is planned to allow ABPL to achieve compliance with regulatory requirements.

Quantum of operating losses witnessed a declining trend during 2017 due to improvement in spread, rationalization of administrative expenses and increase in fee based income. ABPL achieved operational break even during 1Q18 with efficiency (cost to income) ratio being reported at 100%. Given the volumetric growth in earning assets, expected increase in spreads due to hike in benchmark rates and limited increase in administrative expenses, efficiency ratio is projected to reduce going forward. Further reduction in the same in line with JCR-VIS’s benchmark for the assigned ratings is considered important. Quantum of overall profitability would depend on materialization of planned recoveries.

For more information, contact:
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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