Press Release

JCR-VIS Reaffirms Entity Ratings of The Bank of Khyber

Karachi, June 29, 2018: JCR-VIS Credit Rating Company Limited (JCR-VIS) has reaffirmed the entity ratings of The Bank of Khyber (BoK) at ‘A/A-1’ (Single A/A-One). Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on June 29, 2017.

The ratings assigned to BoK take into account its shareholding structure with the bank being majority owned by Government of KPK. The ratings also take into account improved asset quality, adequate capitalization and sound profitability of the bank.

The bank’s gross advances increased significantly by end-1QFY18 mainly on the back of disbursement regarding commodity and corporate lending to the public sector; resultantly, the proportion of these segments combined increased considerably. Going forward, gross advances are projected to grow further with primary focus towards corporate lending. In absolute terms, non-performing loans has declined on a timeline basis, thereby resulting in considerable improvement in asset quality indicators by end-1QFY18.

Investments of the bank primarily comprised government securities. Credit risk arising from the same is considered to be minimal in the local context; however, the same is exposed to interest rate risk, this is accentuated given relatively high proportion of long-term government securities in the investment mix. During FY17, the bank made further investment in PIBs; keeping in view the increasing interest scenario, deficit on revaluation of available-for-sale securities has increased further by end-1QFY18.

During FY17, spreads of the bank declined mainly as a result of lending to public sector at a lower rate and relatively recent addition of PIBs in the investment portfolio that have lower rate vis-à-vis previous ones. However, despite decline in spreads, net mark-up income increased on the back of higher business volumes. Administrative expenses increased as a result of higher staff salaries, while non-mark-up income stood lower due to decline in net gain on sale of securities in FY17; as a result, profitability stood lower. During 1QFY18, profitability improved mainly on the back of higher net mark-up income vis-à-vis corresponding period last year.

Liquidity profile of the bank weakened on a timeline basis underpinned by decrease in liquid assets as a proportion of total deposits & borrowings (adjusted for collateral). Liquid assets (adjusted for collateral) declined as investments were liquidated to fund growth in advances, while fresh investments were financed mainly through repo borrowings. The deposit concentration decreased, though still remained high, however, comfort can be drawn by the fact that most of these are related to the government of KPK. Based on contractual maturity, there is a cumulative Assets & Liability mismatch up to 5-year period. However, comfort can be drawn on the back of considerable liquid government securities available with the bank.

The bank continues to maintain a high payout ratio; resultantly, pace of internal capital generation has remained low. Despite significant increase in advances portfolio, Capital Adequacy Ratio (CAR) decreased slightly to 20% by end-FY17 as disbursements were primarily related to the public sector. However, with disbursement to private sector, CAR declined to 16.5% by end-1QFY18. Although the bank retains ample room for growth, profit retention may be enhanced to support future growth while maintaining CAR at an adequate level.

For further information on this rating announcement, please contact the undersigned at 021-35311861-70 or Mr. Maimoon Rasheed at 042-35723411-13.

Javed Callea

Applicable rating criterion: Commercial Banks Methodology - March, 2018

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited 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.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.VIS is not an NRSRO and its credit ratings are not NRSRO credit ratings.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 2018 VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to VIS.

JCR-VIS Credit Rating Company Limited