Press Release

JCR-VIS Reaffirms Entity Rating of Silk Bank Limited

Karachi, July 02, 2015: JCR-VIS Credit Rating Company Limited has reaffirmed the entity ratings of Silk Bank Limited (Silk) at ‘A-/A-2’ (Single A Minus/A-One). Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on December 17, 2014.

During the outgoing year, Silk received Rs. 2b as advance against shares subscription. However, the bank continues to be short of Minimum Capital Requirement (MCR) and Capital Adequacy Ratio (CAR) regulatory requirements. In order to meet regulatory capital requirements sponsors are in the process of issuing rights shares to the tune of Rs. 10b (including advance against rights shares of Rs. 2b). Of the amount of Rs. 8b, underwriting agreement has been signed for Rs. 6b while commitment to Securities and Exchange Commission of Pakistan has been given for subscription of the remaining amount. Besides meeting capital requirements, enhancing capital buffers will support the bank in the backdrop of increased capital requirements under Basel 3, deduction of Deferred Tax Asset from Common Equity Tier-1, higher risk charge on unrated exposures and the quality of assets. Subsequent to equity injection, shareholding of the bank is expected to change. Shift in business strategy, if any, will be tracked by JCR-VIS.

Given the strong focus on recoveries, there has been a sizeable reduction in reported NPLs over the last five years. However, given that assets acquired in satisfaction of claims have increased by a greater amount over the same period, there has been a net addition in non-earning assets (NEAs); NEAs in relation to total assets have declined over this period. The management expects capital gains from sale of these properties to be generated over time. Progress against the same will be tracked by JCR-VIS. Aggregate non-earning assets (including deferred tax asset and operating fixed assets) continue to remain sizeable in relation to the bank’s own equity, creating a significant drag on the bank’s earnings profile

Liquidity profile of the bank requires further strengthening. Silk’s liquid assets coverage of deposits and borrowings (adjusted for repo) is considered low, given the high advances to deposit ratio being maintained by the bank, while deposit concentration continues to be on the higher side. Cost of funds of the bank is the on the higher side in relation to peer banks. With growth in deposit base and equity injection, liquidity profile of the bank is expected to showcase some improvement, although liquid assets coverage of deposits & borrowings will continue to remain below peer group median.

Growth in financing portfolio has been witnessed in the consumer segment in the outgoing year with aggressive growth targets also planned for the ongoing year. Infection in the consumer portfolio has been recorded well below industry norms. Corporate portfolio continues to be the largest financing segment for the bank. Given the reduction in NPLs, reported asset quality indicators have depicted improvement but remain weak in comparison to peers. Median gross impairment ratio for the peer group is about 10.0% vis-à-vis 12.8% for Silk. Moreover, risk profile of watchlist clients needs to be closely monitored to avoid fresh accretion in NPLs from performing portfolio.

During 4Q14 and 1Q15, reported operating profits have reversed with the bank incurring an operating loss. This can be attributable to higher cost of funds and non-accrual of income on Musharkah transactions executed on non-banking assets. Going forward, spreads may come under pressure in the backdrop of decline in interest rates. Moreover, provisioning expense will continue to be a drag on the bottom line as additional FSV benefit expires. Management believes that diversification into consumer assets alongwith re-pricing of deposits will help mitigate pressure on spreads. Additionally, focus on recoveries of NPLs and sale of non-banking assets is planned to enhance profitability in the ongoing year.

For further information on this rating announcement, please contact the undersigned (Ext: 508) or Ms. Sobia Maqbool, CFA (Ext: 604) at (+92-21) 35311861-70 or fax to (+92-21) 35311872-3.

Mohammed Khalid Ali

Applicable rating criterion: PRIMER - Commercial Banks (December 2001)

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 2015 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