VIS Maintains Entity Ratings of Silk Bank Limited; Outlook revised to ‘Stable’

Karachi, June 27, 2019 (PPI-OT): VIS Credit Rating Company Limited has maintained the entity ratings of Silk Bank Limited (Silk) at ‘A-/A-2’ (Single A Minus/A-Two). Outlook has been revised from ‘Positive’ to ‘Stable’. The previous rating action was announced on June 29, 2018.

The ratings take into account increase in profitability supported by higher topline and controlled growth in operating expense. Despite accretion of fresh non-performing loans (NPLs), asset quality indicators were maintained around prior year levels on account of relatively higher growth in advances. However, with declining liquid assets in relation to deposits and borrowings and high deposit concentration, liquidity profile of the bank has weakened. Moreover, capitalization indicators are below regulatory requirements.

Accordingly, outlook on the assigned ratings has been revised from ‘Positive’ to ‘Stable’. The management has initiated work on issuance of Additional Tier 1 instrument and optimization and reduction in risk weighted assets (RWAs) which is projected to result in buffer over regulatory liquidity and capitalization requirements. Ratings will remain under pressure over the short-term in case liquidity and capitalization indicators remain below regulatory requirements.

Gross advances of Silk increased by 14.9% to reach Rs. 103.6b (2017: Rs. 90.1b) at end-2018. Counterparty and group portfolio concentration (client and sector) remains on the higher side. Select corporate clients may result in asset quality pressures while restructured clients may also require close monitoring. Consumer financing continued to depict double digit growth across all three products while infection levels in the segment remained well below industry norms.

While consumer assets are expected to continue to grow in 2019, the bank plans to reduce overall advances by shedding corporate exposure against large customers while focusing on increasing non-fund based business. Maintaining asset quality indicators in the advances portfolio in general and consumer portfolio in particular in the backdrop of weakening macro-economic dynamics will be an important rating consideration given the sizeable contribution of the segment to Bank’s overall profitability.

While declining on a timeline basis, non-earning assets remain sizeable in relation to total assets and bank’s own equity. Capital Adequacy Ratio (CAR) of the bank was 10.79% as at March 31, 2019, against the minimum requirement of 11.90% for December 31, 2018. The bank has applied for exemption from SBP, for meeting the Tier-1 and overall CAR requirements till September 30, 2019 along with capital improvement plan. Timely achievement of planned reduction in RWAs, disposals of non-banking assets, quantum of future profits and quality of exposures will be important determinants for achieving projected capitalization indicators.

Silk has issued a Basel 3 Compliant Tier-2 capital instrument to the tune of Rs. 2billion. The instrument carries a guarantee by a AA- (Double A Minus) rated Commercial Bank to the tune of Rs. 200million (covering upcoming interest payment) which expires in September’2019. As per regulatory Basel 3 guidelines, the instrument is subject to lock-in-clause (interest payment cannot be made due to CAR non-compliance) in case the Bank is non-compliant with CAR requirements. Given that the Bank is non-compliant with CAR requirements, there is a risk that the Bank will not be allowed to make the mark-up payment due on August 10, 2019. However, presence of the guarantee will allow timely payment to investors.

For more information, contact:
Director Compliance and Rating Analytics,
VIS Credit Rating Company Limited
VIS House, 128/C, 25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi, Pakistan
Tel: +92-21-35311861-72
Fax: +92-21-35311873
Email: bilal@jcrvis.com.pk
Website: http://jcrvis.com.pk/