Press Release

JCR-VIS Reaffirms Ratings of Zarai Taraqiati Bank Limited

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Karachi, June 20, 2017: JCR-VIS Credit Rating Company Limited (JCR-VIS) has reaffirmed the entity ratings of Zarai Taraqiati Bank Limited (ZTBL) at ‘AAA/A-1+’ (Triple A/A-One Plus). JCR-VIS has also reaffirmed ratings of ‘AAA/A-1+’ (Triple A/A-One Plus) assigned to Government Guaranteed Obligations of ZTBL. Outlook on the ratings is ‘Stable’. The previous rating action was announced on June 16, 2016.

The ratings assigned to ZTBL take into account the implicit support of its sovereign sponsor; Government of Pakistan (GoP), the primary shareholder of the bank. The ratings also recognize the importance of ZTBL in the overall ecosystem of the country as the bank remains the premier agriculture sector development financial institution which is used as a financing arm by the GoP.

As mutually agreed between ZTBL and State Bank of Pakistan (SBP), SBP debt-principal and subordinated loan have been recently converted into redeemable preference shares; principal of the preference shares and return thereon is guaranteed by the GoP. As per SBP directive, preference shares are being considered as borrowings in books. Meanwhile, markup on SBP debt accrued upto Dec 31, 2015 has been converted into ordinary shares.

Gross loan portfolio of the bank augmented on a timeline basis. Asset quality indicators deteriorated on account of increase in NPLs at end-FY16; with net recoveries, the same improved to a certain extent by end-1QFY17. Controlled incidence of fresh infection would remain essential in sustaining stand-alone risk profile of the bank. Credit risk profile of the investment portfolio is considered minimal on account of high proportion of government securities in the portfolio.

Liquidity profile of the institution mainly emanates from the sizeable investment in government securities carried on balance sheet. Total deposit base of the bank increased by around 67%; the growth was manifested in term deposits. Deposit trends have yet to achieve maturity reflected by its high concentration levels. In view of this, the institution may need to maintain a sizeable liquidity cushion. Deposits mobilized by the bank are guaranteed by the GoP under the Bank’s (Nationalization) Act, 1974.

While revenue from lending portfolio posted reasonable growth on the back of higher advances portfolio, core earning of the bank declined on account of higher provision expense during FY16. Going forward, markup expense would primarily include interest pertaining to preference shares, in addition to deposit cost. With downward revision in mark-up rates at end-June’16, yield on mark-up bearing assets is likely to decline, leading to pressure on spreads, going forward. In the backdrop of forecasted mid-term economic scenario, policy rate regime and low lending rates due to excess liquidity, spreads and profitability growth of the financial sector are expected to remain under pressure during 2017.

For further information on this rating announcement, please contact the undersigned (Ext: 501) at 021-35311861-70 (10 lines) or Mr. Maimoon Rasheed at 042-35723411-13 or fax to 021-35311873.

Javed Callea

JCR-VIS Entity Rating Criteria: Government Supported Entities (July 2016):

Information herein was obtained from sources believed to be accurate and reliable; however, JCR-VIS Credit Rating Company Limited (JCR-VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. JCR-VIS, the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report. JCR-VIS is not an NRSRO and its credit ratings are not NRSRO credit ratings. JCR-VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2017 JCR-VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to JCR-VIS.

JCR-VIS Credit Rating Company Limited