Press Release

VIS Reaffirms Ratings of Khushhali Microfinance Bank Limited

Karachi, April 30, 2019: VIS Credit Rating Company Limited (VIS) has reaffirmed entity ratings assigned to Khushhali Microfinance Bank Limited (KMBL) at ‘A+/A-1’ (Single A Plus/A-One). The medium to long-term rating of ‘A+’ denotes good credit quality coupled with adequate protection factors. Moreover, risk factors may vary with possible changes in the economy. The short-term rating of ‘A-1’ denotes high certainty of timely payment, liquidity factors are excellent and supported by good fundamental protection factors. VIS has also reaffirmed rating of ‘A’ (Single A) assigned to the Tier-II debt instrument of KMBL. Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on April 26, 2018.

KMBL is the leading provider of microcredit services in the microfinance sector in Pakistan, having 23.1% market share in loan portfolio and 23.5% in retail deposits amongst microfinance banks with a net profit of around Rs. 2.5b. The assigned ratings take into account adequate capitalization, sound liquidity, and positive earnings trajectory despite slight weakness in asset quality in a challenging operating environment. The ratings are further supported by KMBL’s expanding geographic presence, sustained growth in the microcredit portfolio, enhanced focus on digitalization of core functions, and strengthening control environment.

During FY18, KMBL posted strong growth in its microcredit portfolio and introduced three new products in a bid to further improve market penetration and customer base. The sector-wise concentration remained largely stable, though KMBL plans to enhance share of enterprise lending with increased focus on individual and MSME products. Asset quality came under some pressure during FY18 mainly on account of crop related issues with farmers and some slowdown in economy. With the increase in non-performing loans, the bank’s gross and net infections were recorded slightly higher. The attrition rate among loan officers (LOs), though still on the higher side, improved during FY18 that helped to keep portfolio quality in check.

KMBL registered a healthy growth in customer deposits. The concentration risk on the liability side improved. Liquid assets in relation to deposits and borrowings are considered adequate at end-FY18. The bank’s Capital Adequacy Ratio (CAR) remained largely stable on the back of organic growth in retained earnings and Tier-II issue of Rs 1.0b despite considerable growth in loan book. The bank plans to raise another Tier-II capital which along with the profitability will suffice capital adequacy requirements for the next year.

The deployment of core banking software - Temenos T-24 - was completed on March 19, 2019 along with the integration of allied applications across all branches. KMBL also executed several initiatives to strengthen its risk management and controls environment, including formation of compliance risk policy to monitor and mitigate risk, implementation of risk nucleus systems, automation of name screening and transaction monitoring, and a comprehensive penetration risk testing by a third-party.

For further information on this rating announcement, please contact the undersigned at 021-35311861-71 or Mr. Maimoon Rasheed at 042-35723411-13.

Javed Callea

Applicable rating criterion: Microfinance Banks (May 2016)

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 2019 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .

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