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Page 1: APNA MICROFINANCE BANK LIMITED - Pakistan … Bank...The Pakistan Credit Rating Agency Limited MICROFINANCE APNA MICROFINANCE BANK (APNA BANK) April 2015  RATING ANALYSES

APRIL 2015

The Pakistan Credit Rating Agency Limited

NEW [APR-15]

PREVIOUS [MAY-14]

REPORT CONTENTS

Entity

1. RATING ANALYSES

Long Term BBB+ BBB

2. FINANCIAL INFORMATION

Short Term A3 A3

3. RATING SCALE

Outlook Stable Positive 4. REGULATORY AND SUPPLEMENTARY

DISCLOSURE

APNA MICROFINANCE BANK LIMITED

Page 2: APNA MICROFINANCE BANK LIMITED - Pakistan … Bank...The Pakistan Credit Rating Agency Limited MICROFINANCE APNA MICROFINANCE BANK (APNA BANK) April 2015  RATING ANALYSES

The Pakistan Credit Rating Agency Limited

MICROFINANCE

APNA MICROFINANCE BANK (APNA BANK)

April 2015 www.pacra.com

RATING ANALYSES

(APRIL 2015)

APNA MICROFINANCE BANK

LIMITED (APNA BANK)

Microfinance Industry: Pakistan Microfinance Industry (MFI) comprises 45

microfinance institutions including 10 microfinance banks (MFBs). MFI outreach hovers

around 3.2mln active borrowers, representing low penetration (estimated market

potential: 27mln clients). MFBs dominate the sector, representing 55% of total Gross

Loan Portfolio (PKR 66,761mln) and 38% of active borrowers at end-Dec14. Lately,

SBP has further incentivized [60% guarantee under MFCG] funds channelization

towards MFBs.

Performance: During CY14, earning assets of the bank witnessed a healthy growth

of ~34% YoY. Spread improved to 11.6% (CY13: 8.7%) on the back of high asset yield.

Consequently, Apna Bank’s net mark-up income increased. The bank’s other income rose

on account of (i) amortizing grants worth PKR 15mln received from SBP to improve the

technological infrastructure and innovate rural & agricultural finance, and (ii) increase in

fee & commission income (CY14: PKR 9.5mln; CY13: PKR 5.3mln) from higher loan

disbursements and ATM use. The expansion of branch network has lead to increase in

operational cost. With PKR 6mln reversal, the provisioning expense reduced (CY14:

PKR 20mln, CY13: PKR 30mln). The improved performance particularly in 2nd and 4th

quarter of CY14 enabled the bank to achieve breakeven in CY14. In line with the bank’s

nationwide expansion, the operational costs would rise. Hence, sustainability in

bottomline remains to be seen.

Business Strategy: The management intends to pursue aggressive growth strategy.

12 new branches are planned to be opened in the province of Sindh by end-Jun15. The

business volumes are expected to increase with expanding scale of operations. In this

regard, the key development is approval of right issue to achieve regulatory capital

requirement for obtaining national level license. SBP approval has been sought and the

process is expected to complete in 2QCY15. The bank intends to strengthen its lending

portfolio through provision of agri-based micro-enterprise loans. Planned penetration into

Punjab will open avenues for deposit mobilization. However, given the highly

competitive MFB’s market the bank remains prone to innate constraints of mobilizing

new deposits. At the same time, effective implementation of business strategy and

building a cohesive management team remains critical.

Asset Mix: During CY14, Apna Bank’s Gross Loan Portfolio increased by more than

two-fold (CY14: ~PKR 799mln). The growth emanated from penetration into provincial

markets and extension of micro-enterprise loans. Disbursement of micro-enterprise loans

also led to diversification in the product mix. Meanwhile, the proportion of secured loans

increased (end-Dec14: 36%; end-Dec13: 23%) during the year.

Asset Quality: Owing to hefty rise in loan portfolio, the bank’s infection ratio

reduced (end-Dec14: ~13%, end-Dec13: ~27%), though remained significantly higher

than the industry (1.3% at end-Dec14). The absolute NPLs increased from last year’s

level. The bank intends to improve it asset quality for which number of initiatives

including logical linking of repayments with borrowers’ cashflows is a key development.

Nevertheless, seasoning of new loans is yet to be seen.

Funding & Liquidity: During CY14, Apna Bank aggressively mobilized deposits as

evident by ~57% growth (end-Dec14: PKR 1,193mln; end-Dec13: PKR 762mln). A large

share of deposits was mobilized during last quarter, a factor of new branches addition.

Major growth was witnessed in time deposits. Consequently, CASA mix declined (end-

Dec14: 42%, end-Dec13: 50%). Top-50 depositors’ concentration improved to 26% at

end-Dec 14, as against 44% at end-Dec13. The liquidity profile remained healthy as

reflected by liquid-assets-to-deposits and borrowings ratio of 65% at end-Dec14.

Capital: The Bank’s CAR at end-Dec14 was reduced to 48% from 81% in

corresponding period. Fresh capital injection is under process. This is likely to strengthen

the risk absorption capacity of the bank.

Profile: Apna Microfinance Bank Limited, listed on Karachi Stock Exchange, was

established under the Microfinance Institution Ordinance 2001. It started operations in

2005. With its Head Office located in Karachi, the bank currently operates in Sindh. The

existing group of sponsors, acquiring control in early 2012, comprises entrepreneurs.

United Insurance Company (UIC) – part of United International Group (UIG) has ~31%

shareholding in the company. UIG is led by its Founder and Chairman; Mr. Mian M. A.

Shahid - the single largest shareholder.

Governance and Management: The overall control of the bank vests in a seven

member BoD. All board members are shareholders of the bank with two of them in

executive roles, including the CEO – Saleem Sheikh. Besides the CEO, Mr. Farooq – the

Executive Director with four decades of financial sector experience – spearheads the

bank’s operations. The management personnel, carries extensive experience in the

banking industry; though relatively new to the bank.

RATING RATIONALE

Apna Bank’s ratings reflect the

sponsors’ demonstrated commitment

in providing requisite support to

expand its operations. A right issue

(PKR 550mln) is in the process. This,

while supporting risk absorption

capacity, would enable Apna to

operate at National level. The

management is eyeing expansion in

Punjab – the core geography of the

sponsors – mainly to tap potential

agricultural borrowers. Successful

materialization of this strategy should

lead to improving bottom-line. Apna

has extended its outreach beyond

Karachi to interior Sindh in CY14;

bringing significant growth to the

bank’s lending portfolio. However,

achieving good asset quality –

portfolio at risk higher than sector

norm – is the key challenge. This

continues to restrain profitability.

With targeted growth in risk assets,

strengthening of related systems and

controls is important. Besides, high

turnover in management team needs

attention.

KEY RATING DRIVERS

The bank’s ratings are dependent on

(i) sustainable profitability to avert

pressure on risk absorption (ii)

building of cohesive management

team to achieve desired performance

output, (iii) bringing down infection

at par with industry, and (iv)

improvement in technological

infrastructure to bring operational

efficiency. At the same time,

regulatory compliance for better

governance is important.

Page 3: APNA MICROFINANCE BANK LIMITED - Pakistan … Bank...The Pakistan Credit Rating Agency Limited MICROFINANCE APNA MICROFINANCE BANK (APNA BANK) April 2015  RATING ANALYSES

The Pakistan Credit Rating Agency Limited

Apna Microfinance Bank Limited Financials [Summary]PKR mln

BALANCE SHEET 31-Dec-14 31-Dec-13 31-Dec-12

Earning Assets

Total Finances 737 310 189

Investments 152 231 76

Deposits with Banks 518 505 396

1,406 1,046 661

Non Earning Assets

Non-Earning Cash 78 63 46

Net Non-Performing Finances 69 69 11

Fixed Assets & Others 206 136 96

353 267 154

TOTAL ASSETS 1,759 1,313 815

Interest Bearning Liabilities

Deposits

CASA 500 379 354

Time Deposits 694 383 114

1,194 762 468

Non Interest Bearing Liabilities 23 34 37

TOTAL LIABILITIES 1,216 796 505

EQUITY (including revaluation surplus) 511 505 309

Deferred Grants 32 12 -

TOTAL LIABILITIES & EQUITY 1,759 1,313 815

INCOME STATEMENT 31-Dec-14 31-Dec-13 31-Dec-12

Annual Annual Annual

Interest / Mark up Earned 239 139 50

Interest / Mark up Expensed (79) (52) (17)

Net Interest / Markup revenue 160 87 33

Other Operating Income 10 6 2

Total Revenue 170 93 35

Other Income 24 9 1

Non-Interest / Non-Mark up Expensed (166) (125) (85)

Pre-provision operating profit 28 (23) (49)

Provisions (20) (30) (0)

Pre-tax profit 9 (52) (49)

Taxes (3) (1) (1)

NET INCOME 6 (53) (49)

Ratio Analysis 31-Dec-14 31-Dec-13 31-Dec-12

Performance

ROE 1.2% -13.1% -19.1%

Cost-to-Total Net Revenue 85.4% 122.1% 234.2%

Capital Adequacy

Equity/Total Assets 29.0% 38.6% 38.0%

Capital Adequacy Ratio as per SBP 48.0% 81.0% 90.0%

Loan Loss Coverage

Non-Performing Advances /Gross Advances 12.7% 26.8% 12.4%

Loan Loss Provisions / Non-Performing Advances 32.1% 24.9% 26.2%

Funding & Liquidity

Liquid Assets / Deposits and Borrowings 65.1% 109.9% 127.5%

Advances / Deposits 70.2% 52.7% 43.7%

CASA deposits / Total Customer Deposits 41.9% 50.0% 75.7%

Intermediation Efficiency

Asset Yield 19.8% 17.2% 11.6%

Cost of Funds 8.2% 8.5% 7.0%

Spread 11.6% 8.7% 4.6%

Outreach

Branches 17 11 11

Apna Microfinance Bank Limited

Apr-15

Financials [Summary]

www.pacra.com

Page 4: APNA MICROFINANCE BANK LIMITED - Pakistan … Bank...The Pakistan Credit Rating Agency Limited MICROFINANCE APNA MICROFINANCE BANK (APNA BANK) April 2015  RATING ANALYSES

The Pakistan Credit Rating Agency Limited

STANDARD RATING SCALE & DEFINITIONS

LONG TERM RATINGS SHORT TERM RATINGS

AAA Highest credit quality. Lowest expectation of credit risk. Indicate exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

A1+: The highest capacity for timely repayment.

A1:. A strong capacity for timely repayment.

A2: A satisfactory capacity for timely repayment. This may be susceptible to adverse changes in business, economic, or financial conditions.

A3: An adequate capacity for timely repayment. Such capacity is susceptible to adverse changes in business, economic, or financial conditions.

B: The capacity for timely repayment is more susceptible to adverse changes in business, economic, or financial conditions.

C: An inadequate capacity to ensure timely repayment.

AA+

AA

AA-

Very high credit quality. Very low expectation of credit risk. Indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

A+

A

A-

High credit quality. Low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be vulnerable to changes in circumstances or in economic conditions.

BBB+

BBB

BBB-

Good credit quality. Currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity.

BB+

BB

BB-

Speculative. Possibility of credit risk developing. There is a possibility of credit risk developing, particularly as a result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met.

B+

B

B-

Highly speculative. Significant credit risk. A limited margin of safety remains against credit risk. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.

CCC

CC

C

High default risk. Substantial credit risk “CCC” Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. “CC” Rating indicates that default of some kind appears probable. “C” Ratings signal imminent default.

D Obligations are currently in default.

Rating Watch Alerts to the possibility of a rating change subsequent to, or in anticipation of, a) some material identifiable event and/or b) deviation from expected trend. But it does not mean that a rating change is inevitable. Rating Watch may carry designation – Positive (rating may be raised, negative (lowered), or developing (direction is unclear). A watch should be resolved with in foreseeable future, but may continue if underlying circumstances are not settled.

Outlook (Stable, Positive, Negative, Developing) Indicates the potential and direction of a rating over the intermediate term in response to trends in economic and/or fundamental business/financial conditions. It is not necessarily a precursor to a rating change. ‘Stable’ outlook means a rating is not likely to change. ‘Positive’ means it may be raised. ‘Negative’ means it may be lowered. Where the trends have conflicting elements, the outlook may be described as ‘Developing’.

Suspension It is not possible to update an opinion due to lack of requisite information. Opinion should be resumed in foreseeable future. However, if this does not happen within six (6) months, the rating should be considered withdrawn.

Disclaimer: PACRA's ratings are an assessment of the credit standing of entities/issues in Pakistan. They do not take into account the potential transfer / convertibility risk that may exist for foreign currency creditors. PACRA's opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security’s market price or suitability for a particular investor.

Withdrawn A rating is withdrawn on a) termination of rating mandate, b) cessation of underlying entity, c) the debt instrument is redeemed, d) the rating remains suspended for six months, or e) the entity/issuer defaults.

Credit rating reflects forward-looking opinion on credit worthiness of underlying entity or instrument; more specifically it covers relative ability to honor financial obligations. The primary factor being captured on the rating scale is relative likelihood of default.

Page 5: APNA MICROFINANCE BANK LIMITED - Pakistan … Bank...The Pakistan Credit Rating Agency Limited MICROFINANCE APNA MICROFINANCE BANK (APNA BANK) April 2015  RATING ANALYSES

Rated Entity

Name of Rated Entity Apna Microfinance Bank Limited

Sector Microfinance

Type of Relationship Solicited

Purpose of the Rating Independent Risk Assessment

Rating History Notification Date Long Term Short Term Outlook Action

7-Apr-15 BBB+ A3 Stable Upgrade

12-May-14 BBB A3 Positive Maintained

15-May-13 BBB A3 Positive Maintained

30-Apr-12 BBB A3 Positive Maintained

23-May-11 BBB A3 RW Maintained

Methodology: Microfinance Institution

Rating Analysts Rehan Alam Saira Rizwan

[email protected] [email protected]

(92-42-35869504) (92-42-35869504)

Rating Team Statement

Disclaimer PACRA maintains principle of integrity in seeking rating business.

Conflict of Interest

Surveillance

Prohibition

Probability of Default (PD)

PACRA monitors all the outstanding ratings continuously and any potential change therein due to any event associated with the rated entity/ issuer, the security

arrangement, the industry etc, is disseminated to the market, in a timely and effective manner, after appropriate consultation with the entity/issuer.

Regulatory and Supplementary Disclosure  

Related Criteria and Research

Rating is an opinion on relative credit worthiness of an entity or debt instrument. It does not constitute recommendation to buy, hold or sell any security. The rating

team for this assignment does not have any beneficial interest, direct or indirect in the rated entity/instrument.

PACRA has used due care in preparation of this document. Our information has been obtained directly from the underlying entity and public sources we consider to

be reliable but its accuracy or completeness is not guaranteed. PACRA shall owe no liability whatsoever to any loss or damage caused by or resulting from any error

in such information.

PACRA, the analysts involved in the rating process, and members of its rating committee do not have any conflict of interest relating to the credit rating done by

them.

The analysts involved in the rating process do not have any interest in a credit rating or any of its family members has any such interest.

The analysts and members of the rating committees including the external member members have disclosed all the conflict of interest, including those of their family

members, if any, to the Compliance Office PACRA.

The analysts or any of its family members do not buy or sell or engage in any transaction in any security which falls in the analyst's area of primary analytical

responsibility. This is, however, not applicable on investment in securities through collective investment schemes. PACRA has established appropriate policies

governing investments and trading in securities by its employees

PACRA may provide consultancy/advisory services or other services to any of its clients or to any of its clients' associated companies and associated undertakings that

is being rated or has been rated by it. In such cases, PACRA has adequate mechanism in place ensuring that provision of such services does not lead to a conflict of

interest situation with its rating activities.

PACRA receives compensation from the entity being rated or any third party for the rating services it offers. The receipt of this compensation has no influence on

PACRA's opinions or other analytical processes. In all instances, PACRA is committed to preserving the objectivity, integrity and independence of its ratings. Our

relationship is governed by two distinct mandates i) rating mandate - signed with the entity being rated or issuer of the debt instrument, and ii) fee mandate - signed

with the payer, which can be different from the entity.

PACRA ensures that the credit rating assigned to an entity or instrument should not be affected by the existence of a business relationship between PACRA and the

entity or any other party, or the non-existence of such a relationship

Where feasible and appropriate, prior to issuing or revising a rating, PACRA informs the issuer of the critical information and principal considerations upon which a

rating will be based and provide the opportunity to clarify any likely factual misperception or other matter that PACRA would wish to be made aware of in order to

produce a fair rating. PACRA duly evaluates the response. Where in a particular circumstance PACRA has not informed the entity/issuer prior to issuing or revising a

rating, it informs the entity/issuer as soon as practical thereafter;

None of the information in this document may be copied or otherwise reproduced, stored or disseminated in whole or in part in any form or by any means whatsoever

by any person without PACRA’s written consent. PACRA reports and ratings constitute opinions, not recommendations to buy or to sell.

PACRA's Rating Scale reflects the expectation of credit risk. The highest rating has the lowest relative likelihood of default (i.e, probability). PACRA's transition

studies capture the historical performance behavior of a specific rating notch. Transition behavior of the assigned rating can be obtained from PACRA's Transition

Study available at our website. (www.pacra.com). However, actual transition of rating may not follow the pattern observed in the past.

www.pacra.com

PACRA reviews all the outstanding ratings on annual basis or as and when required by any stakeholder (including creditor) or upon the occurrence of such an event

which requires to do so.

PACRA initiates immediate review of the outstanding rating(s) upon becoming aware of any information that may be reasonable be expected to result in any change

(including downgrade) in the rating.

Reporting of Misconduct

PACRA has framed and implemented whistle-blower policy encouraging all employees to intimate the compliance officer any unethical practice or misconduct

relating to the credit rating by another employees of the company that came to his/her knowledge. The Compliance Officer reports to the BoD and SECP

Confidentiality

PACRA has framed a confidentiality policy to prevent; abuse of the non-public information by its employees and other persons involved in the rating process, sharing

and dissemination of the non-public information by such persons to outside parties