Press Release

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

Karachi, May 17, 2017: JCR-VIS Credit Rating Company Limited has upgraded the entity ratings of Al-Baraka Bank (Pakistan) Limited (ABPL) to ‘A+/A-1’ (Single A Plus/A-One) from ‘A/A-1’ (Single A/A-One). The proposed Rs. 2billion Basel 3 Tier-2 Sukuk has also been assigned a preliminary rating of A (Single A). Preliminary rating assigned to the Sukuk will be finalized upon review of signed legal documents. Outlook on the assigned ratings is ‘Stable’. The previous entity rating action was announced on June 30, 2016.

A key rating driver to the assigned ratings is ABPL association with the Al-Baraka Banking Group (ABG); a prominent Islamic Banking Group having diversified operations in 15 countries. Standalone ratings of ABPL have been notched up to account for sponsor support to arrive at the assigned ratings. 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. Ratings also reflect improved capitalization levels, extended outreach and greater diversification in financing and deposit mix post-merger.

The amalgamation of Burj Bank Limited (BBL) with and into ABPL has expanded ABPL’s footprint and increased financing and deposit base. Post-merger, financing mix has improved with portfolio now comprising a healthy mix of corporate, consumer and commercial & SME lending. Moreover, counterparty concentration (excluding government exposures) in the portfolio has witnessed a noticeable improvement over the last two years. Non-performing financings (NPFs) inherited from BBL and further accretion of NPFs in ABPL’s loan book has increased the level of infection. Net infection of the financing portfolio stood at 4.4% at end-Dec’2016 as compared to peer group net infection of 3.2%. ABPL seeks to gain potential upside from recovery of non-performing exposures, and is actively mobilizing efforts for recoveries of NPFs.

Net equity of ABPL increased to Rs. 11.4b at end-Dec’2016 while MCR eligible capital increased to Rs. 10.8b. 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-2 Sukuk, CAR of ABPL is projected to increase to 12%. Maintaining capital buffer over regulatory requirement in line with JCR-VIS’s benchmark is considered important. Net-NPF in relation to Tier-1 equity is on the higher side and needs to be reduced, going forward. Deposit profile of ABPL has depicted improvement and depositor concentration levels have reduced by almost half during the last two years. Liquid assets in relation to deposits & borrowings have declined on a timeline basis but remain at adequate levels.

Quantum of operating losses has reduced while ABPL posted marginal profits in 1Q17. Improvement in profitability is on the back of significant reduction in cost of deposits during 1Q17. The management has also undertaken cost reduction initiatives including consolidation of branches which alongwith synergies from the merger are expected to result in significant expense savings. Realization of profitability targets depends on optimization of cost structure and improving revenue streams.

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

Javed Callea

Applicable rating criterion: Commercial Banks Methodology - November 2015

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 not an NRSRO and its credit ratings are not NRSRO credit ratings.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 2017 VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to VIS.

JCR-VIS Credit Rating Company Limited