Press Release

VIS Reaffirms Entity Ratings of Faysal Bank Limited

Karachi, June 29, 2020: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Faysal Bank Limited (FBL) at ‘AA/A-1+’ (Double A/A-One Plus). Long term rating of ‘AA’ indicates high credit quality; protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. Short term rating of ‘A-1+’ indicates highest certainty of timely payments; short term liquidity, including internal operating factors and/or access to alternative source of funds, is outstanding and safety is just below risk free Government of Pakistan’s short term obligations. Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on June 27, 2019.

FBL is a mid-sized bank engaged in provision of conventional and Islamic Corporate, Commercial and Consumer banking services. The bank was able to maintain its market share of 4.1% (2018: 4.1%) and 3.1% (2018: 3.1%) in domestic advances and domestic deposits, respectively, in 2019. The bank is in the process of transformation of the business model from a Conventional bank offering Islamic banking services to a full-fledged Islamic bank. An asset led conversion model has been adopted by the management in this regard. The ongoing pandemic and economic slowdown is likely to delay the ongoing conversion process; the management however feels that it would not significantly impact the financial profile to the bank.

The assigned ratings incorporate sound capitalization indicators, satisfactory profitability and adequate liquidity profile. Depositor concentration, however, depicts room for improvement. Overall liquidity profile of the bank is considered adequately aligned with the assigned ratings in view of sizeable liquid assets in relation to deposits and borrowings. Credit and market risk emanating from the investment is considered low as majority of the investment portfolio comprises government securities. In 2019, the increase in quantum of NPLs and lower provisions coverage compared to previous year placed the infection levels and the net NPL to Tier -1 capital ratio of the bank at a disadvantage to the rating peer group. Regulatory relief measures undertaken by SBP to promote financial stability, ensure continued credit supply to the economy and maintain confidence in the banking system have been received positively and are expected to delay the impact of prevailing headwinds on portfolio asset quality indicators. However, exposure of banking sector to credit risk is elevated due to significant impact of Covid-19 on already weak macroeconomic indicators. Our credit impairment expectations are conservative, albeit there is a probability of deviation from expectations; downside risk is elevated, amidst an uncertain economic environment. VIS will continue to closely monitor the bank’s performance metrics on quarterly basis where compliance with communicated rating benchmarks for net infection, Net NPLs to Tier 1 equity and CAR buffers is important.

Increasing interest rate scenario and volumetric growth in advances contributed to improvement in profitability profile during the period under review. Going forward, while the banks may earn capital gains on investments in higher rate government securities, the impact of COVID-19 crisis on the economy and the financial sector would make the operating dynamics of the banks in general challenging. Regulatory relaxations announced by SBP are expected to provide certain respite to the financial sector. However, it is expected that the impact of curtailment of economic activity for a certain period of time, higher business risk in the borrower portfolio and lower lending rate scenario may cause NIM compression; hence, the profitability of the bank is likely to be impacted in the medium term rating horizon. Conservative lending strategy to maintain asset quality and cost efficiencies would be important rating drivers going forward.

For further information on this rating announcement, please contact the undersigned (Ext: 306) or Mr. Narendar Shankar Lal (Ext: 203) at 021-35311861-71 or fax to 021-35311872-3.

Faryal Ahmad Faheem
Deputy CEO

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 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 2020 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .

VIS Credit Rating Company Limited