VIS Maintains Ratings of Khushhali Microfinance Bank, Notes Challenges and Recovery Efforts

Karachi, VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Khushhali Microfinance Bank Limited (KMBL) at ‘A-/A-2’, indicating good credit quality and sound company fundamentals but with a continued ‘Rating Watch – Negative’. The announcement reflects ongoing economic uncertainties that could affect the bank’s risk factors.

According to VIS Credit Rating Company Limited, the medium to long-term rating of ‘A-‘ suggests that while KMBL maintains adequate protection factors, fluctuations in the economy could influence risk. The short-term rating of ‘A-2’ assures good certainty of timely payment. However, the Tier-II debt instruments, TFC-I and TFC-II, are rated ‘B’, indicating payment issues and a less optimistic future outlook, although the ‘Rating Watch – Negative’ status for these instruments has been changed to simply ‘Negative’.

Founded in 2000 under the Khushhali Bank Ordinance and transformed into a public limited company in 2008, KMBL aims to serve Pakistan’s underserved and unbanked populations, with a focus on poverty mitigation and social welfare. The bank faces a challenging operating environment, with significant asset losses over recent years and negative equity. However, a recovery plan is in place, focusing on secured lending and network consolidation. Despite a decline in the liquid assets to deposits and borrowings ratio, KMBL has improved its funding profile through increased diversification.

While KMBL recorded a notable increase in net markup income in CY23, high operating expenses and substantial provisions for losses dampened profitability. The bank has also been managing the transition impact of adopting IFRS 9, with efforts focused on asset repricing to align more closely with market dynamics.

Capitalization remains a critical concern, with negative equity and a capital adequacy ratio below regulatory thresholds. The bank’s approval of a strategic and restructuring plan indicates a commitment to addressing these capital shortfalls and revitalizing its financial standing. The successful execution of this plan is crucial for the bank’s sustainable growth and profitability recovery. VIS will continue to monitor the bank’s progress in operational and capitalization efforts, noting that any deviations from the planned improvements could prompt a reassessment of the ratings.

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