Karachi, November 29, 2016: JCR-VIS Credit Rating Company Ltd. has reaffirmed the entity ratings of Arif Habib Limited (AHL) at ‘AA-/A-1’ (Double A Minus/A-One). Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on June 24, 2015.
The assigned ratings are underpinned by the sponsors’ profile, with majority shareholding vested with Arif Habib Corporation Limited, the holding company. The sponsor owns significant interests in fertilizers, securities & commodities brokerage, corporate advisory, asset management, cement, steel, wind power and real estate development sectors.
Board of Directors includes members with experience in the financial services sector. Senior management comprises seasoned professionals. During period under review, turnover was witnessed at key positions; all vacancies were timely filled.
Profitability of the company depicted decline during FY16 largely due to absence of a sizeable capital gain on sale of investments vis-à-vis last two years. Competitive pricing of commission rates, on local and foreign trades, led to a reduction in equity brokerage income, although value and volumes were higher in the latter. This was followed by a subsequent reduction in commission expense paid to agents. As a result, net recurring income showcased substantial growth. Going forward, the company seeks to enhance its top line through expansion of high net worth individuals segment.
Proprietary book of AHL more than doubled during FY16. In view of sizeable equity investments, AHL is exposed to market risk. Investments have been financed mainly by debt with some contribution from equity; however, additional investments have been undertaken in associates. Thus, liquid assets to total liabilities have declined on timeline basis. This may constrain underwriting capacity of the company, going forward. Ratings draw support from the understanding given to us that to support liquidity, as and when required, AHL has firm commitment from its sponsoring company to buy back strategic investment from the short term investment portfolio.
In order to manage balance sheet risk, there are limits in place for leverage, underwriting and proprietary equity investments. The company needs to have a more robust internal control framework to detect and withhold benchmark breaches. Going forward, ratings would be dependent upon such functional framework being present.
For further information on this rating announcement, please contact the undersigned (Ext: 201) or Mr. Mohammed Khalid Ali (Ext: 208) at (021)35311861-71 or fax to (021)35311872-3.
Applicable Rating Criteria: Methodology - Securities Firms Rating (May 2015)
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