JUNE 2015

The Pakistan Credit Rating Agency Limited

NEW [JUNE-15]

PREVIOUS [JUNE-14]

REPORT CONTENTS

Entity

1. RATING ANALYSES

Long Term AA- AA-

2. FINANCIAL INFORMATION

Short Term A1+ A1+

3. RATING SCALE

Outlook

Stable

Stable

4. REGULATORY AND SUPPLEMENTARY

DISCLOSURE

NIB BANK LIMITED

The Pakistan Credit Rating Agency Limited

BANKING

NIB BANK LIMITED (NIB)

June 2015 www.pacra.com

RATING ANALYSES

(JUNE 2015)

NIB BANK LIMITED (NIB)

Asset Composition: NIB’s total assets registered a reasonable growth of 9% during

CY14 predominantly fueled by borrowings as deposits remained stagnant. Overall drag

of Net Non-Earning Assets rationalized to 8% at end-CY14, (end-CY13: ~10%), as

earning assets grew mainly on the back of advances (up ~13% YoY). The bank’s

advances to deposit ratio (ADR) reached 89% (ADR net of export refinance: 77%) at

end-CY14; although came down to 82% at end-Mar15, it remained substantially higher

than industry average. Top-3 sectors’ concentration rationalized to 58% at end-CY14

(end-CY13: 62%) with highest exposure in Textile (31%), followed by Food &

Beverages (18%), and Engineering (9%) sectors. Top-20 private sector clients’

concentration remained largely intact at 22%.

Asset Quality: NIB continued to focus on recoveries from NPLs (net recovery of

PKR 888mln during CY14). The bank improved its loan loss coverage to 83% (end-

CY13: 75%). This has reduced the drag of un-provided NPL to equity to 35% at end-

CY14 (end-CY13: 49%); though still higher among AA category banks.

Funding: In funding mix (deposits: 61%, borrowings: 39%), though deposits

continued to dominate, contribution of borrowings increased representing 30% rise

YoY during CY14. Deposits were largely stagnant as against industry growth of ~11%

for the year. However, the bank managed to improve its customer deposits mix in favor

of CASA, albeit slightly (end-CY14: 74%, end-CY13: 71%). Top-20 depositors’

concentration increased to 22% (end-CY13: 18%).

Liquidity & Investments: Maintaining aggressive stance towards lending, the

bank’s liquidity position remained stretched as reflected in liquid assets as %age of total

deposits and borrowing (end-CY14: 27%, end-CY13: 31%). Although improvement

was seen at end-Mar15 and it reaches to 33%, however, liquidity ratio remained lower

than industry average. Government securities (90%) continued to dominate the

investment book, while the mix significantly tilted in favor of PIBs (end-CY14: 72%,

end-CY13: 56%) exposing the bank to interest rate risk. However, given declining

interest rate scenario and managed maturity profile, the risk is considered relatively

low. The bank held a strategic investment portfolio (4.5% of total investments at end-

CY14) mainly comprising PICIC Asset Management Company Limited, which is in

process of divesture.

Capital Adequacy: The bank’s CAR of 12.2% (end-Mar15) is at adequate level.

This would benefit further from sale of NIB’s subsidiary. Nevertheless, the cushion

being provided by CAR would depend on the bank’s growth and profitability.

Performance: During CY14, NIB posted a growth of 16% in net interest margin on

account of improvement in spreads – a factor of higher asset yield. Notable support

from non-markup income (up 36% YoY), emanating from fee & commission and

dividend from strategic investment, augmented the revenue base. Despite rise in

operating expenses, the bank’s pre-provisioning profits increased. However,

considerably high provisioning expense dented the bottom-line. Hence, the bank

reported a net loss. The performance trend continued, as in 1QCY15 the bank posted a

net profit of PKR 290mln (up ~2% YoY) on the back of enhanced revenue.

Strategy: Going forward, NIB aims to expand its loan portfolio, strengthening its

penetration in high quality corporate clientele. Consequently, the bank would continue

to have high ADR. Related risks - mainly liquidity management - need close

monitoring. Meanwhile, NIB remained focused on transactional banking and cross-sell.

Key challenges include (i) improvement in asset quality, (ii) reduction of operational

cost, and (iii) mobilization of low cost deposits. Profile: NIB Bank is the largest foreign owned commercial bank in Pakistan in

terms of branch network - 171 at end-Mar15. The Bank, incorporated in 2003 after a

series of mergers, holds 1% share in the total banking deposits as at end-CY14.

Temasek Holdings through its subsidiaries owns majority stake (88%) in NIB.

Governance & Management: The eight-member BoD includes the President, one

non-executive director but not independent, one non-executive director representing

FFH (majority shareholder), and five non-executive independent directors. Mr. Atif

Bokhari, the CEO, after being appointed in Jan15 has made a number of changes in the

senior management team.

RATING RATIONALE

The ratings reflect NIB's

association with Temasek

Holdings - the investment arm of

Government of Singapore,

internationally rated AAA. The

ratings draw material comfort

from historically demonstrated

commitment of Temasek towards

NIB. On a standalone basis, the

bank has been gradually

improving its performance.

Although this has helped to avert

pressure on equity, a lot is to be

done to achieve size and

sustainability. The improvement is

mainly an outcome of the

management's return optimization

strategy. However, this has led to

a higher advances to deposit ratio

(ADR), leaving lower cushion;

hence, liquidity management

requires close attention. The

management expects to maintain

solid asset quality in the fresh loan

portfolio. At the same time,

improving operational efficiency

mainly through cost

rationalization should enhance

bottom-line. Recently announced

disposal of the bank's subsidiary -

PICIC Asset Management

Company – will relieve pressure

from Tier-1 capital. Nevertheless,

the cushion being provided by

CAR would depend on the bank’s

growth and profitability.

KEY RATING DRIVERS

The ratings are primarily

dependent on continued support

from the sponsor. The

management's success in

improving core performance on a

sustainable basis with sound

control over associated risks is

critical. Meanwhile, preventing

deterioration of asset quality in

new loan book is important.

The Pakistan Credit Rating Agency Limited

NIB 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) 80,354 88,627 74,654 61,937

Debt Instruments 1,394 1,458 2,756 2,325

Total Finances 81,748 90,085 77,410 64,262

Investments 62,657 58,486 58,303 82,951

Others 9,767 8,770 3,259 4,373

154,172 157,341 138,971 151,586

Non Earning Assets

Non-Earning Cash 8,697 7,581 7,567 7,701

Deferred Tax 9,569 10,139 11,250 10,881

Net Non-Performing Finances 4,982 5,037 7,347 9,738

Fixed Assets & Others 11,822 13,470 12,189 10,703

35,070 36,227 38,353 39,024

TOTAL ASSETS 189,241 193,568 177,325 190,609

Interest Bearning Liabilities

Deposits 104,095 105,110 104,896 91,291

Borrowings 62,836 66,948 51,507 80,172

166,930 172,058 156,403 171,463

Non Interest Bearing Liabilities 5,516 5,855 6,446 5,118

TOTAL LIABILITIES 172,446 177,913 162,848 176,581

EQUITY (including revaluation surplus) 16,795 15,655 14,476 14,029

Total Liabilities & Equity 189,241 193,568 177,325 190,609

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

Quarterly Annual Annual Annual

Interest / Mark up Earned 3,790 15,071 13,170 13,989

Interest / Mark up Expensed (2,618) (11,255) (9,883) (11,133)

Net Interest / Markup revenue 1,171 3,817 3,286 2,856

Other Income 923 3,929 2,906 2,422

Total Revenue 2,094 7,745 6,192 5,278

Non-Interest / Non-Mark up Expensed (1,533) (6,303) (5,419) (5,233)

Pre-provision operating profit 561 1,443 774 45

Provisions (114) (1,527) 852 100

Pre-tax profit 447 (84) 1,625 145

Taxes (156) (423) (384) (107)

Net Income 290 (508) 1,241 38

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

Quarterly Annual Annual Annual

Performance

ROE 8% -3% 9% 0%

Cost-to-Total Net Revenue 73% 82% 88% 99%

Provision Expense / Pre Provision Profit 20% 106% -110% -220%

Capital Adequacy

Equity/Total Assets 8% 7% 8% 7%

Capital Adequacy Ratio as per SBP 12% 11% 11% 13%

Funding & Liquidity

Liquid Assets / Deposits and Borrowings 33% 27% 31% 27%

Advances / Deposits 82% 89% 78% 78%

CASA deposits / Total Customer Deposits 76% 74% 71% 71%

Intermediation Efficiency

Asset Yield 10% 10% 9% 11%

Cost of Funds 6% 7% 6% 7%

Spread 4% 4% 3% 4%

Outreach

Branches 171 171 179 179

NIB Bank Limited

June 2015

Financials [Summary]

www.pacra.com

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.

Name of Issuer NIB BANK LIMITED (NIB)

Sector Banking

Type of Relationship Solicited

Purpose of the Rating Independent Risk Assessment

Regulatory Requirement

Rating History

26-Jun-15 AA- A1+ Stable Maintain

26-Jun-14 AA- A1+ Stable Maintain

28-Jun-13 AA- A1+ Stable Maintain

14-Jun-12 AA- A1+ Stable Maintain

29-Jun-11 AA- A1+ Stable Maintain

Related Criteria and Research

Rating Methodology Bank Rating Methodology

Sector Research Banking Sector - Viewpoint | Mar-15

Rating Analysts Miqdad Haider Rida Zahoor

miqdad.haider@pacra.com rida.zahoor@pacra.com

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

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Probability of Default (PD)

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ActionLong Term Short Term Outlook