Press Release

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

Karachi, June 23, 2021: VIS Credit Rating Company Limited has reaffirmed the entity ratings of Al-Baraka Bank (Pakistan) Limited (ABPL) at ‘A+/A-1’ (Single A Plus/A-One). Long term rating of ‘A+’ denotes good credit quality and adequate protection factors; risk factors may vary with possible changes in the economy. Short term rating of A-1 depicts high certainty of timely payment and excellent liquidity factors supported by good fundamental protection factors. Rating of the outstanding Tier II Sukuk (issued in August 2017) amounting to Rs. 1.5 billion has also been reaffirmed at ‘A’ (Single A). The proposed Tier II Sukuk of Rs. 2 billion, including a green shoe option of Rs. 500m, has also been assigned a preliminary rating of A (single A). Preliminary rating assigned to the proposed Sukuk will be finalized upon review of signed legal documents. Outlook on the assigned ratings is ‘Stable’. The previous entity and instrument rating action was announced on June 27, 2020.

A key rating driver to the assigned ratings is ABPL association with Al-Baraka Banking Group (ABG), a prominent Islamic Banking Group having diversified operations in 17 countries. The Islamic International Rating Agency (IIRA) has assigned ratings of BBB+/A3 (Triple B Plus/A Three) to ABG on the international scale.

Portfolio growth picked up in 2020 on the back of capital support from sponsors as well as deposit mobilization, albeit focus remained on cautious lending with growth largely manifested in corporate(sovereign, low risk weight exposures) and consumer segment. Financing portfolio remains fairly diversified. Asset quality indicators recorded improvement in 2020 on account of relatively intact Non-Performing Financing (NPF) and higher provisioning, however ratings remain constrained due to elevated credit risk, on account of expected credit impairment in the current portfolio with certain NPL addition in pipeline along with uncertainty regarding performance of portfolio under COVID deferment, which will be reflective in the second half of current year.

Deposits recorded a healthy growth of 23% in 2020, in line with the industry, however deposit mix and concentration needs further improvement. The funds were channeled mainly into government guaranteed Sukuk investments, which doubled in 2020. Resultantly, credit risk emaciating from the investment portfolio remains low while liquidity buffers remain comfortable. In accordance with the plans, the bank was able to post profitability in 2020 after four years of losses, on the back of volumetric growth in earning assets and strong focus on cost management, including streamlining of loss making branches and bringing in operational efficiencies. In line with rating benchmarks, significant improvement in efficiency ratio on a timeline basis has been noted. However, provision charges continue to be a drag on overall profitability.

The bank remained in compliance with all regulatory requirements with respect to capitalization. Capital Adequacy Ratio (CAR) was recorded at 12.7% at end Q1’FY21. ABPL is in the process of issuing a Basel 3, Tier 2 Shariah compliant Sukuk which will allow room to increase risk weighted assets. Subsequent, to issuance of the Tier II Sukuk, CAR is projected to cross 14%. Maintaining capital buffer over regulatory requirement and improving asset quality and profitability indicators in line with VIS benchmark will be important over the rating horizon.

For further information on this rating announcement, please contact Ms. Sara Ahmed (Ext: 207) or the undersigned (Ext: 201) at (021) 35311861-66 or email at info@vis.com.pk.


Javed Callea
Advisor

Applicable rating criterion: Commercial Banks Methodology - June 2020
https://s3-us-west-2.amazonaws.com/backupsqlvis/docs/Meth-CommercialBanks202006.pdf

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