Press Release

Ratings of Zarai Taraqiati Bank Limited

Karachi, June 28, 2018: JCR-VIS Credit Rating Company Limited (JCR-VIS) has reaffirmed entity ratings of Zarai Taraqiati Bank Limited (ZTBL) at ‘AAA/A-1+’ (Triple A/A-One Plus). JCR-VIS has also reaffirmed ratings of ‘AAA/A-1+’ (Triple A/A-One Plus) assigned to Government Guaranteed Obligations of ZTBL. Outlook on the assigned rating is ‘Stable’. The previous rating action was announced on June 20, 2017.

The ratings assigned to ZTBL take into account the implicit support of Government of Pakistan (GoP) being the sole shareholder of the bank. The ratings also derive strength from the agriculture sector development role of ZTBL as a financing arm by the GoP. However, the financial risk profile of the bank has been adversely impacted during FY17 owing to a large one time provision against staff retirement benefits amounting Rs. 10.6b, leading to some erosion in equity. Capital adequacy ratio, however, remained well above regulatory requirement exhibiting sufficient loss absorption capacity of the institution. The bank’s profitability has also been affected by increasing provision requirement against non-performing loans in FY17 and 1QFY18. Pressure on spreads has also been witnessed on a timeline basis. Given the government’s support to the agriculture sector, the bank remains exposed to downward pressure on mark-up rates on loans. Markup expense increased on account of higher interest pertaining to preference shares and high expense related to fixed and saving deposits. Primarily owing to one-off provision against staff retirement benefits, the bank posted a significant loss of Rs. 6.4b during FY17.

The gross advances portfolio exhibited steady increase owing to favorable environment in the agro based economy. Asset quality indicators witnessed nominal deterioration during FY17 with gross infection increasing during the outgoing year; however the same was somewhat curtailed by end-1QFY18. Going forward, the management projects downward trend in infection ratios by adopting more forceful measures.

ZTBL’s investment portfolio is largely concentrated in government securities; hence, overall credit risk originating from the same is considered minimal. Exposure in PIBs declined; given size of investment in PIBs in relation to total assets, interest rate risk is considered manageable. The equity portfolio comprises investment in a blue chip stock which carries sizeable unrealized surplus; the bank also receives regular dividend from the said company. Liquidity profile remains underpinned with sizeable investment in government securities carried on balance sheet. Moreover, deposit base posted growth of around 18% during the outgoing year. In addition, the deposit concentration remains on a higher side. Until the required granularity in deposits is achieved, the institution requires to maintain a sizeable liquidity cushion.

Government of Pakistan has recently nominated the Board of Directors of ZTBL which has not been functional since August 17; FPT Clearance of the same is under process through State Bank of Pakistan. ZTBL is in the process of acquisition of Core Banking Software for which approvals are being sought.

The assigned ratings would continue to be dependent upon the implicit support of GoP in capitalization and the explicit guarantee on deposits under the Bank’s (Nationalization) Act, 1974 along with management focus on improving the asset quality and concentration levels in deposits.

For further information on this rating announcement, please contact the undersigned at 021-35311861-70 or Mr. Maimoon Rasheed at 042-35723411-13.

Javed Callea

Applicable rating criterion: Government Supported Entities (June 2016);

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 2018 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