Press Release

VIS Maintains Entity Ratings of Silk Bank Limited; Outlook revised to ‘Stable’

Karachi, June 27, 2019: VIS Credit Rating Company Limited has maintained the entity ratings of Silk Bank Limited (Silk) at ‘A-/A-2’ (Single A Minus/A-Two). Outlook has been revised from ‘Positive’ to ‘Stable’. The previous rating action was announced on June 29, 2018.

The ratings take into account increase in profitability supported by higher topline and controlled growth in operating expense. Despite accretion of fresh non-performing loans (NPLs), asset quality indicators were maintained around prior year levels on account of relatively higher growth in advances. However, with declining liquid assets in relation to deposits and borrowings and high deposit concentration, liquidity profile of the bank has weakened. Moreover, capitalization indicators are below regulatory requirements. Accordingly, outlook on the assigned ratings has been revised from ‘Positive’ to ‘Stable’. The management has initiated work on issuance of Additional Tier 1 instrument and optimization and reduction in risk weighted assets (RWAs) which is projected to result in buffer over regulatory liquidity & capitalization requirements. Ratings will remain under pressure over the short-term in case liquidity and capitalization indicators remain below regulatory requirements.

Gross advances of Silk increased by 14.9% to reach Rs. 103.6b (2017: Rs. 90.1b) at end-2018. Counterparty and group portfolio concentration (client and sector) remains on the higher side. Select corporate clients may result in asset quality pressures while restructured clients may also require close monitoring. Consumer financing continued to depict double digit growth across all three products while infection levels in the segment remained well below industry norms. While consumer assets are expected to continue to grow in 2019, the bank plans to reduce overall advances by shedding corporate exposure against large customers while focusing on increasing non-fund based business. Maintaining asset quality indicators in the advances portfolio in general and consumer portfolio in particular in the backdrop of weakening macro-economic dynamics will be an important rating consideration given the sizeable contribution of the segment to Bank’s overall profitability.

While declining on a timeline basis, non-earning assets remain sizeable in relation to total assets and bank’s own equity. Capital Adequacy Ratio (CAR) of the bank was 10.79% as at March 31, 2019, against the minimum requirement of 11.90% for December 31, 2018. The bank has applied for exemption from SBP, for meeting the Tier-1 and overall CAR requirements till September 30, 2019 along with capital improvement plan. Timely achievement of planned reduction in RWAs, disposals of non-banking assets, quantum of future profits and quality of exposures will be important determinants for achieving projected capitalization indicators.

Silk has issued a Basel 3 Compliant Tier-2 capital instrument to the tune of Rs. 2billion. The instrument carries a guarantee by a AA- (Double A Minus) rated Commercial Bank to the tune of Rs. 200million (covering upcoming interest payment) which expires in September’2019. As per regulatory Basel 3 guidelines, the instrument is subject to lock-in-clause (interest payment cannot be made due to CAR non-compliance) in case the Bank is non-compliant with CAR requirements. Given that the Bank is non-compliant with CAR requirements, there is a risk that the Bank will not be allowed to make the mark-up payment due on August 10, 2019. However, presence of the guarantee will allow timely payment to investors.

For further information on this rating announcement, please contact the undersigned at (+92-21) 35311861-70 or fax to (+92-21) 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 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 2019 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .

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