JCR-VIS Reaffirms Entity Ratings of Bank Alfalah Limited

Karachi, June 28, 2019 (PPI-OT): JCR-VIS Credit Rating Company Limited (JCR-VIS) has reaffirmed the entity ratings of Bank Alfalah Limited (BAFL) at ‘AA+/A-1+’ (Double A Plus/A-One Plus). Rating of BAFL’s Basel 3 Tier-1 debt instrument has also been reaffirmed at ‘AA-’ (Double A Minus). Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on January 17, 2018.

The assigned ratings are underpinned by established franchise, strong sponsors and comfortable financial risk profile of the bank. The bank has continued to focus on broadening its already extensive portfolio of services through product innovation while leveraging information technology for customer experience enhancement. The bank also has presence in asset management, insurance and brokerage sectors through its associates and subsidiaries and has overseas (Bahrain, Afghanistan, Bangladesh and Dubai) and Islamic banking operations as well.

Aggregate exposure to sovereign/public sector by way of advances and investments represented almost half of the balance sheet. Growth in BAFL’s loan book in 2017 was primarily driven by high yielding consumer and Small and Medium Enterprise (SME) financing while focus on these segments is expected to continue over the ongoing year along with enhancing return on capital on corporate loans. Although counterparty concentration risk in advances portfolio remains, the same is mitigated by financing to government guaranteed exposures and well-established lending relationship with most clients. Overall credit risk profile of the bank has improved overtime with reduction in infection levels and increase in provisioning coverage.

Over the last two years, market share in terms of domestic deposits has witnessed reduction as part of bank’s deliberate strategy to reduce its cost of funding by improving deposit profile and focusing on low cost deposits. Ratings are supported by stable liquidity profile as evident from steady increase in low-cost funding. Resultantly, proportion of non-remunerative current account in deposit mix remains the highest amongst peers. However, depositor concentration levels depicted slight increase on timeline basis. Sizeable liquid assets carried on balance sheet also support assessment of bank’s liquidity profile. Capitalization levels have improved and remain comfortable supported by healthy internal capital generation and recent issuance of Tier 1 instrument. Ratings going forward would remain dependent upon continued maintenance of strong asset quality and capitalization indicators along with improvement in operational efficiency.

With spreads under pressure, profitability was sustained by volumetric growth in earning assets, higher non-markup income, including fee-based earnings, which continue to be sizeable vis-a-vis peer banks and recoveries from non-performing loans. Increase in administrative expenses during the outgoing year is partially attributed to one-off expenses, including staff restructuring cost due to organizational changes. Nevertheless, given the high operating cost regime in relation to peers, efficiency ratio of the bank remains on the higher side. Accordingly, cost control continues to be a fundamental point of BAFL’s strategy for 2018. Senior management has witnessed changes at key positions since last review. Effective implementation of the envisaged business strategy will be a key rating sensitivity.

For more information, contact:
Director Compliance and Rating Analytics,
VIS Credit Rating Company Limited
VIS House, 128/C, 25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi, Pakistan
Tel: +92-21-35311861-72
Fax: +92-21-35311873
Email: bilal@jcrvis.com.pk
Website: http://jcrvis.com.pk/