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Page 1: ASKARI BANK LIMITED - PACRA pack June15.… · The Pakistan Credit Rating Agency Limited BANKING R ASKARI BANK LIMITED (AKBL) June 2015

JUNE2015

The Pakistan Credit Rating Agency Limited

NEW [JUNE-15]

PREVIOUS [JUNE-14]

REPORT CONTENTS

1. RATING ANALYSES

Unlisted, Unsecured TFC (PKR 1,000mln)

AA- AA-

2. FINANCIAL INFORMATION

Outlook Stable Stable

3. RATING SCALE

4. REGULATORY AND SUPPLEMENTARY

DISCLOSURE

ASKARI BANK LIMITED

Page 2: ASKARI BANK LIMITED - PACRA pack June15.… · The Pakistan Credit Rating Agency Limited BANKING R ASKARI BANK LIMITED (AKBL) June 2015

The Pakistan Credit Rating Agency Limited

BANKING

ASKARI BANK LIMITED (AKBL)

June 2015 www.pacra.com

RATING ANALYSES

(JUNE 2015)

ASKARI BANK LIMITED (AKBL)

TFCS ISSUES: AKBL currently has two unsecured and subordinated TFCs in issue with

total outstanding amount of PKR 5,000mln at end-Mar-15. TFC-IV of PKR 1,000mln

and TFC-V of PKR 4,000mln were issued in Dec-11 and Sep-14, respectively. During

May15, AKBL redeemed its TFC III of PKR 3,000mln by exercising the call option.

TFC-IV: The tenor of TFC-IV is ten years, having maturity in Dec 2021. The profit

rate is based on 6M-K Plus 175bps p.a. payable semi-annually in arrears for first five

years; subsequently at 6M-K Plus 220bps. Major principal repayment (99.7%) would be

payable during Jan-20 to Dec-21. AKBL retains the call option which may be exercised

after Dec-16, subject to approval of the SBP.

THE BANK

Asset Composition: During CY14, AKBL’s earning assets increased notably (17%)

mainly driven by significant growth (32%) in investment book. The growth was mainly

financed by a healthy rise in deposits. The bank’s ADR decreased to 44% at end-CY14

(end-CY13: ~49%); slightly lower than industry average. Top 3 sector exposures

marginally reduced to 24% (CY13: 26%), with predominant contribution from Textile

sector (~13%). Top 20 private sector clients’ exposure stood at 26% at end-CY14.

Asset Quality: During CY14, the bank’s NPLs witnessed a decline of PKR 1.7bln

due to sizeable cash recoveries in loss category NPLs. Hence, overall infection ratio

slightly improved to ~16% at end-CY14. Infection in private exposures (CY14: 23%,

CY13: 26%) is considered relatively higher than peer banks. Nevertheless, significant

provisioning against bad loans reflected strong coverage, in turn lower drag on equity.

Investments: Government securities (98%) continued to dominate the investment

book, followed by limited exposure in equity market, and fixed income funds. Although

nominal, AKBL also maintains strategic investments – Askari General Insurance

Company Limited (27%) – and two wholly owned subsidiaries – Askari Investment

Management Limited and Askari Securities Limited. In line with group strategy, the

bank has decided to exit from insurance business. The related process is expected to

complete in CY15. At the same time, the group plans to consolidate its brokerage

business – acquisition of Foundation Securities Limited. Meanwhile, Askari Securities

Limited will be merged into Foundation Securities Limited, under the ownership of the

bank. During CY14, bank built its PIBs book (CY14: 48%, CY13: 21%); given lower

exposure to long-term fixed rate bonds, interest rate risk is manageable.

Funding and Liquidity: During CY14, AKBL added PKR 59bln to its customer

deposit base representing 18% growth YoY. Top-20 depositors’ concentration reduced

to 23% (CY13: 26%); still higher than AA category banks. Given increasing focus on

branch expansion, the bank is likely to gradually add granularity in overall deposit base.

Bank’s liquidity position strengthened YoY (CY14: 59%, end-CY13: 53%).

Capital Adequacy: AKBL’s CAR stood at 13% at end-CY14. Redemption of TFC

III has reduced the CAR. Nevertheless, the bank has plans to strengthen its

capitalization through internal generation overtime.

Performance: During CY14, AKBL witnessed significant increase in net interest

revenue (38%) mainly on the back of volumetric increase in earning assets coupled with

improvement in asset yield. Substantial increase (48%) in non-markup income, mainly

emanating from equity market gains, and income from dealing in foreign currencies

further augmented the revenue base. Despite branch expansion, the bank managed to

limit its operational costs; cost to total net revenue declined from 78% in CY13 to 65%

in CY14. With considerable reduction in provisioning expense, the bank posted a net

profit of PKR 4bln in CY14 (CY13: loss of PKR 5.5bln).

Strategy: Going forward, the management’s focus is to continue strengthening its

deposit base by extending its branch network across mid and south regions (CY15

target: 102 new branches). Growth is expected to be maintained with focus on selective

lending – mainly low risk public sector. Management’s focus on operational efficiencies

is likely to keep performance healthy.

Profile: Askari Bank Limited, listed on all three stock exchanges, commenced its

operations in 1992. The bank operates with a nationwide network of 321 branches (at

end-Mar15). Fauji Foundation group is the major sponsor (~72% stake) of the bank. The

group has widespread business interests across different sectors of the economy.

Governance & Management: Overall control of the bank vests in eleven-member

board of directors including the President. Five members, representing FF, are seasoned

professional, four are independent, while one is NIT nominee. Syed Majeedullah

Hussaini assumed the position of CEO in June13. He is supported by an experienced

management team.

RATING RATIONALE The TFCs rating of AKBL reflects

the bank's strong association with

Fauji Foundation Group (FF). Post-

acquisition, FF has demonstrated

full commitment and support,

injecting sizeable fresh capital;

helping the bank to restore - indeed

improve - its standalone profile. The

bank, while sustaining its risk

profile, registered sound bottom-line

performance. The management

follows a multi-pronged strategy to

keep fortifying its business profile;

mainstays are i) volumetric increase

in earning assets - mainly

government securities - to improve

earnings, ii) selective credit

expansion - low-risk public sector

lending would remain in focus, iii)

recoveries from infected portfolio,

and iv) geographical diversification

in operational network, adding

granularity to deposit base.

Meanwhile, organizational

restructuring would continue. This

is likely to bring further efficiencies

in overall operational framework.

Adequate level of CAR, and strong

liquidity provide comfort to

financial risk profile of the bank.

KEY RATING DRIVERS The bank, aiming to improve overall

system share, is expected to sustain

its growth trajectory. Meanwhile,

focus on cost rationalization is

likely to support profitability.

AKBL has sizeable NPLs; the

recovery of which would favor risk

absorption capacity.

Page 3: ASKARI BANK LIMITED - PACRA pack June15.… · The Pakistan Credit Rating Agency Limited BANKING R ASKARI BANK LIMITED (AKBL) June 2015

The Pakistan Credit Rating Agency Limited

Askari Bank Limited Financials [Summary]

PKR mln

BALANCE SHEET 31-Mar-15 31-Dec-14 31-Dec-13 31-Dec-12

Earning Assets

Advances (Net of NPL) 171,974 167,290 159,051 136,336

Debt Instruments 3,060 3,052 4,030 4,663

Total Finances 175,034 170,342 163,081 141,000

Investments 230,624 214,426 161,877 139,179

Others 19,818 14,914 15,582 17,684

425,476 399,681 340,540 297,862

Non Earning Assets

Non-Earning Cash 17,529 14,712 22,084 21,935

Deferred Tax 281 875 2,977 -

Net Non-Performing Finances 2,754 2,997 4,461 8,927

Fixed Assets & Others 25,525 28,817 24,765 24,302

46,088 47,401 54,287 55,163

TOTAL ASSETS 471,564 447,083 394,827 353,025

Interest Bearing Liabilities

Deposits 386,054 387,587 335,241 306,937

Borrowings 40,956 21,735 28,540 15,360

427,011 409,321 363,781 322,297

Non Interest Bearing Liabilities 19,769 14,054 12,317 11,158

TOTAL LIABILITIES 446,779 423,375 376,099 333,455

EQUITY (including revaluation surplus) 24,785 23,707 18,729 19,570

Total Liabilities & Equity 471,564 447,083 394,827 353,025

INCOME STATEMENT 31-Mar-15 31-Dec-14 31-Dec-13 31-Dec-12

Quarterly Annual Annual Annual

Interest / Mark up Earned 9,506 34,604 27,961 32,402

Interest / Mark up Expensed (5,981) (22,711) (19,363) (22,974)

Net Interest / Markup revenue 3,525 11,893 8,597 9,428

Other Income 1,588 5,317 3,598 4,117

Total Revenue 5,113 17,210 12,196 13,546

Non-Interest / Non-Mark up Expensed (2,886) (11,107) (9,533) (9,117)

Pre-provision operating profit 2,227 6,103 2,663 4,429

Provisions (327) (322) (11,103) (2,688)

Pre-tax profit 1,900 5,781 (8,441) 1,741

Taxes (640) (1,766) 2,961 (478)

Net Income 1,260 4,015 (5,480) 1,263

Ratio Analysis 31-Mar-15 31-Dec-14 31-Dec-13 31-Dec-12

Performance

ROE 26% 22% -32% 7%

Cost-to-Total Net Revenue 56% 65% 78% 67%

Provision Expense / Pre Provision Profit 15% 5% 417% 61%

Capital Adequacy

Equity/Total Assets 4% 4% 4% 5%

Capital Adequacy Ratio as per SBP 13% 13% 10% 12%

Funding & Liquidity

Liquid Assets / Deposits and Borrowings 60% 59% 53% 56%

Advances / Deposits 45% 44% 49% 47%

CASA deposits / Total Customer Deposits 80% 76% 75% 75%

Intermediation Efficiency

Asset Yield 9% 9% 9% 11%

Cost of Funds 6% 6% 6% 7%

Spread 4% 4% 3% 4%

Outreach

Branches 321 321 281 261

Askari Bank Limited

June 2015

Financials [Summary]

www.pacra.com

Page 4: ASKARI BANK LIMITED - PACRA pack June15.… · The Pakistan Credit Rating Agency Limited BANKING R ASKARI BANK LIMITED (AKBL) June 2015

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: ASKARI BANK LIMITED - PACRA pack June15.… · The Pakistan Credit Rating Agency Limited BANKING R ASKARI BANK LIMITED (AKBL) June 2015

Rated Entity

Name of Issuer Askari Bank Limited

Name of Issue Askari Bank Limited | TFC

Sector Banking

Type of Relationship Solicited

Purpose of the Rating Regulatory Requirement

Independent Risk Assessment

Rating History Dissemination Date TFC Rating Action

30-Jun-15 AA- Maintain

30-Jun-14 AA- Maintain

5-Jul-13 AA- Maintain

14-Jun-12 AA- Maintain

3-Jan-12 AA- Initial

Instrument Details Nature of Instrument Size of Issue Tenor Trustee Security

Amortization Schedule See Annexure A

Specific Methodology: Banks Methdology [2005]

Research: Banking Sector Review -2014

Rating Analysts Saira Rizwan Rana Muhammad Nadeem

[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)

Regulatory and Supplementary Disclosure  

Related Criteria and Research

Reporting of Misconduct

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.

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

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

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.

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

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

Rating is an opinion on relative creditwortiness of an entity or debt instrument. It does not contitute recommendation to buy, hold or sell any security. The rating team for this

assignment do not have any beneficial interest, direct or indirect in the rated entity/instrument.

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

TFC

(Sub-ordianted, Unlsited)PKR 1,000mln 10 years Unsecured

Pak Brunei

Investment

Company

Limited

www.pacra.com

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.

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 isser of the debt instrument, and ii) fee mandare - signed with the payer, which can be different

from the entity.

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 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 mechansim in place ensuring that provision of such services does not lead to a conflict of intrerest situation

with its rating activities.

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

PACRA's Rating Scale reflects the expectation of credit risk. The highest rating have 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.

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 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

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;

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

Page 6: ASKARI BANK LIMITED - PACRA pack June15.… · The Pakistan Credit Rating Agency Limited BANKING R ASKARI BANK LIMITED (AKBL) June 2015

1,000,000,000

10 years

6MK + 1.75% (Dec11-16)

6MK + 2.20% (Dec19-21)

PKR mln

Installment Due Date Principal Mark Up Total Installment Outstanding

Dec-11 1,000

1 Jun-12 3.2 68 72 997

2 Dec-12 3.2 55 59 994

3 Jun-13 3.2 53 57 990

4 Dec-13 3.2 53 56 987

5 Jun-14 3.2 59 62 984

6 Dec-14 3.2 58 61 981

7 Jun-15 3.2 42 45 978

8 Dec-15 3.2 42 45 974

9 Jun-16 3.2 42 45 971

10 Dec-16 3.2 42 45 968

11 Jun-17 3.2 44 47 965

12 Dec-17 3.2 44 47 962

13 Jun-18 3.2 44 47 958

14 Dec-18 3.2 43 47 955

15 Jun-19 3.2 43 46 952

16 Dec-19 3.2 43 46 949

17 Jun-20 237.2 43 280 712

18 Dec-20 237.2 32 269 474

19 Jun-21 237.2 21 259 237

20 Dec-21 237.2 11 248 0

Call option exercisable

Regulatory and Supplementary Disclosure   Annexure A