Press Release

VIS Assigns Rating to the Proposed Tier II Instrument of Khushhali Microfinance Bank Limited

Karachi, December 11, 2019: VIS Credit Rating Company Limited (VIS) has assigned preliminary rating of single ‘A’ (Single A) to the proposed unsecured, subordinated, privately placed tier-II term finance certificates (PPTFC-2) of Khushhali Microfinance Bank Limited (KMBL). 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. Outlook on the assigned ratings is ‘Stable’. Rating will be finalized upon review of signed legal documents.

KMBL is the leading provider of microcredit services in the microfinance sector in Pakistan. The rating also incorporate strong sponsor support. The rating is supported by KMBL’s expanding geographic presence, sustained growth in the microcredit portfolio along with increasing spreads, and enhanced focus on digitalization of core functions. However, the bank has recently witnessed pressure on asset quality indicators leading to decline in profitability. Moreover, liquidity and capitalization levels have also decreased on a timeline basis.

The bank was able to increase its market share, both in terms of loan and deposit portfolio, during 9MFY19. Growth in microcredit portfolio was mainly an outcome of higher average loan size during the period. Asset quality remained under pressure during the period, mainly on account of overall slowdown in economic activity, low crops yields due to unpredictable weather conditions along with pest attack. Moreover, the elevated indebtedness of borrowers by increasing geographic concentration and aggressive portfolio growth policies of the industry players also contributed towards overall weakness in asset quality of the sector. The management is taking various initiatives to address the issue while expediting recovery function. Liquid assets in relation to deposits and borrowings decreased as the bank used some liquid investment/placements to underpin growth in loan portfolio. Decline in the capital adequacy ratio (CAR) was also noted owing to increase in the risk weighted assets during the period.

KMBL is in the process of issuing a rated, unsecured, subordinated and privately placed Tier-II term finance certificates (PPTFC-2)/subordinated term loan facility of up to Rs. 1.5b, including of green shoe option of Rs. 500m. The proceeds from the issue will contribute towards the bank’s Tier-II capital and will be utilized to support growth in lending operations of the bank. The tenor will be up to eight years from issue date, inclusive of five years of grace period. The principal shall be redeemed in twelve equal quarterly installments.

The assigned rating portrays the relative risk of the tier-II instrument wherein the profit or principal cannot be paid if it results in a shortfall in the MCR or CAR or if it increases any existing shortfall in MCR or CAR and conversion/write off feature in the event of pre-specified trigger events, lock-in clause and point of non-viability in terms of regulatory requirements. VIS believes, given the financial indicators, that chances of non-performance risk are low.

We already have outstanding entity ratings of KMBL at ‘A+/A-1’ (Single A Plus/A-One) and Tier-II TFC-1 rating of at ‘A’ (Single A). The last ratings assessment was made on April 30, 2019.

For further information on this rating announcement, please contact Syed Fahim Haider at 042-35723411-13 (Ext: 8006) or the undersigned at 021-35311861-70 (201) or email at .

Javed Callea

Applicable rating criterion: Micro-Finance Banks (June 2019)
Applicable rating criterion: Notching The Issues (June 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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