Karachi, June 30, 2016: JCR-VIS Credit Rating Company Limited has reaffirmed the entity ratings of Silk Bank Limited (Silk) at ‘A-/A-2’ (Single A Minus/A-Two). Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on July 02, 2015.
Following the receipt of Rs. 8b against rights shares transaction during 2015, Silk has achieved compliance with minimum capital requirement of Rs. 10b stipulated by the State Bank of Pakistan in addition to achieving Capital Adequacy Ratio above 10.25%. In the backdrop of increasing capital requirements, the Bank intends to manage growth in risk weighted assets through consolidation of the corporate portfolio and has projected internal profitability to be sufficient to meet increasing capital requirements.
Financing strategy of the Bank envisages cautious growth with corporate advances product mix targeted to shift towards trade loans/self-liquidating credit lines. Consumer portfolio depicted healthy growth across all products during 2015 and now represents around one-fifth of the financing portfolio. Net infection levels have been maintained at manageable levels of 1.2%. The segment has contributed significantly to the bank’s profitability and will remain the bank’s key focus area, going forward. Asset quality indicators have room for improvement. Management is projecting significant improvement in asset quality indicators on the back of recoveries. In case material progress is achieved in the same, ratings may be reviewed earlier. Moreover, risk profile of watchlist clients needs to be closely monitored to avoid fresh accretion in non-performing loans (NPLs) from performing portfolio. Fresh accretion in NPLs could negatively impact ratings. Over the last few years, management has pursued a strategy of settling NPLs through acquisition of non-banking assets (NBAs); resultantly, NBAs represented over 100% of the bank’s own equity. Around 30% of the NBAs have already been deployed in earning avenues in the ongoing year while significant further reduction is targeted. Ratings may be reviewed in case material progress is achieved in this regard.
Deposit mobilization has picked pace during 2015 and in the ongoing year; proportion of CASA has remained around prior year level of 54%. However, deposit concentration has increased on a timeline basis and continues to be on the higher side. Aggressive branch expansion is planned over the next two years to improve deposit mix and granularity. Surplus employees from existing pool are planned to be deployed in new branches with limited increase in administrative expenses projected on account of branch expansion. Liquid assets carried on the balance sheet are also expected to improve with sale of NBAs in the ongoing year. Improvement in depositor profile and liquid assets carried on the balance sheet will be a positive rating driver for the Bank.
Operating loss of the Bank witnessed a sizeable jump during 2015 due to reversal of income booked on musharaka transaction, decline in spreads and increase in administrative expenses mainly due to one off expense for capital raising. Trend in operating losses has reversed during 1Q16. Continuity of the same is considered important.
Shareholding pattern of the Bank has witnessed change with Arif Habib Corporation Limited being the largest sponsor with 32.87% shareholding of Silk. Mr. Zulqarnain Nawaz Chattha and Zubair Nawaz Chattha, representatives of Gourmet Group and Mr. Shaukat Tarin, Advisor to the Chairman, are the other primary sponsors of the Bank.
For further information on this rating announcement, please contact the undersigned (Ext: 501) or Mr. Mohammed Khalid Ali (Ext: 508) at (+92-21) 35311861-70 or fax to (+92-21) 35311872-3.
Applicable rating criterion: Commercial Banks Methodology - November 2015
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