Press Release

VIS Reaffirms Instrument & Entity Ratings of Bank Alfalah Limited

Karachi, June 30, 2020: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Bank Alfalah Limited (BAFL) at ‘AA+/A-1+’ (Double A Plus/A-One Plus). Rating of BAFL’s Basel 3 Tier-1 debt instrument has also been reaffirmed at ‘AA-’ (Double A Minus). Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on July 2, 2019.

Ratings assigned to BAFL take into account strong profile of majority shareholder, Abu Dhabi Group, which is a diversified business conglomerate owned by the Abu Dhabi Royal Family. Furthermore, the ratings reflect BAFL’s established franchise in the domestic market, as well the bank’s overseas operations - situated in Bangladesh, Afghanistan, Bahrain and United Arab Emirates - which contributed 8.3% of the bank’s pre-tax profits in 2019 (2018: 8.6%). The bank has operations across various business areas such as Asset Management (Alfalah GHP Investment Management), Insurance (Alfalah Insurance) and Brokerage (Alfalah CLSA Securities).

In 2019, BAFL resumed branch expansion, growing its branch network to 698, including 24 sub-branches (Dec’18: 649 branches, including 25 sub-branches). Akin to the industry, amidst an ongoing macroeconomic adjustment phase, a slowdown in lending was noted. As a result, with excess liquidity being channeled towards liquid assets, both liquidity and capitalization metrics have improved on a timeline. As of Mar’20, the bank’s capital adequacy compared favorably to peers, while subsequent to improvement, liquidity indicators are considered adequate.

Akin to the industry, BAFL’s asset impairment ratio has been impacted, with gross infection having risen from 3.6% (Dec’18) to 4.5% (Mar’20). As per management, this ratio incorporates the impact of subjective provisioning taken by the Bank based on prudence. Going forward, the oncoming pandemic-induced headwinds are expected to test portfolio asset quality. So far, SBP has taken notable measures to ensure continued credit supply to the economy and maintain confidence in the banking system. These measures are expected to delay the impact of prevailing headwinds on portfolio asset quality indicators. The operating environment remains precarious, amidst intermittent lock downs with no definite deadline. In view of the same, the full impact of the pandemic on the banking industry is uncertain.

BAFL’s profitability indicators have improved on a timeline and compare favorably to peers. However, sector-wide profitability is expected to weaken on account of projected spread shrinkage, increased impairment, and lower fee income on account of depressed economic activity. In view of the same, the bank’s capital adequacy is expected to slightly recede going forward. Nevertheless, capitalization buffers, built up over the past few years, are expected to provide adequate cushion to absorb projected impairment. Our credit impairment expectations are conservative, albeit downside risk is elevated, amidst an uncertain economic environment. VIS will continue to closely monitor the bank’s performance metrics on quarterly basis.

For further information on this rating announcement, please contact the undersigned (Ext: 201) at 021-35311861-70 or fax to 021-35311872-3.

Faryal Ahmad Faheem
Deputy CEO

Applicable rating criterion: Commercial Banks Methodology - March 2018

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited (VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.VIS , the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report.VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2020 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .

VIS Credit Rating Company Limited