Press Release

VIS Reaffirms Entity Ratings of Faysal Bank Limited

Karachi, June 30, 2021: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Faysal Bank Limited (FBL) at ‘AA/A-1+’ (Double A/A-One Plus). Long term rating of ‘AA’ indicates high credit quality; protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. Short term rating of ‘A-1+’ indicates highest certainty of timely payments; short term liquidity, including internal operating factors and/or access to alternative source of funds, is outstanding and safety is just below risk free Government of Pakistan’s short term obligations. Outlook on the assigned ratings is ‘Stable’. Previous rating action was announced on June 29, 2020.

Assigned ratings incorporate FBL’s strong capitalization, sustained market share (both in terms of advances as well as deposits), improvement in profitability and growing Shariah-compliant operations with a healthy conversion pace of conventional loan portfolio and branch network while further expansion of Islamic branches is on-going. Liquidity profile has improved on the back of strong uptick in deposit base along with sizeable liquid assets in relation to deposits and borrowings; however, room for improvement exists in deposit granularity. Reaffirmation of ratings captures overall performance of the Bank and sound asset quality indicators during pandemic and subsequently in the ongoing year. The Covid-19 impact on loan portfolio was in line with the industry. However, credit risk emanating from loan book would remain elevated due to possible headwinds that might arise post expiry of Covid-19 deferments/ restructuring and is considered important from a rating perspective.

Management remains committed to convert into a full-fledged Shariah compliant Bank in a financially prudent manner. At end-2020, total Sharia compliant deposits as proportion of total deposits increased to 46% (2019: 26%) on the back of two-fold increase in Islamic deposits. On advances front, FBL managed to achieve the conversion target of two-third (67%) of financing portfolio under Islamic modes as at end-1Q’21. The Bank’s footprint spreads over 207 cities across Pakistan with 576 (2019: 555) branches; of which 87% (500 branches) are currently dedicated for Islamic banking. In 2020, FBL added 21 (2019: 100) new branches and converted 65 (2019: 59) conventional branches to Islamic (including 5 flagship branches). Over the last two years, Islamic branch network has almost doubled, reaching to 500 branches (compared to 254 branches in 2018). The management plans to convert another 66 conventional branches to Islamic (as a result 98% of the branch network will be offering Sharia-compliant products) along with the addition of 30 new Islamic branches during 2021.

Asset growth in 2020 was mainly driven by deposit growth which was channeled primarily towards the investment portfolio. On a timeline basis, the asset mix depicts a rising trend in investments, thus resulting in ADR declining to ~52% in 1Q’21 (from 68% in 2019). FBL’s gross financing portfolio registered a nominal growth of ~2% (vis-à-vis industry growth of ~4%) in 2020. Prudent lending strategy amid uncertain macroeconomic environment led to subdued portfolio growth as credit demand remained muted. Investment portfolio witnessed a sizeable increase with majority deployment in long-term Ijara Sukuk and PIBs. Conversion of investment portfolio into Islamic with yields similar to conventional remains a challenge for the Bank.

Assessment of profitability profile indicates improvement on a timeline basis. Despite a steep decline in benchmark rates, net interest income increased by 16% in 2020 driven largely by spread improvement while bottom-line profitability grew by ~ 8% in 2020 albeit higher provisioning charges Profit retention has noticeably strengthened capitalization over the years while the same is expected to maintain cushion over the regulatory requirement.

For further information on this rating announcement, please contact the undersigned (Ext: 201) or Mr. Muhammad Tabish (Ext: 204) at 021-35311861-71 or fax to 021-35311872-3.

Javed Callea

Applicable rating criterion: VIS Commercial Banks Methodology

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 2021 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .

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