Lahore, August 20, 2021 (PPI-OT):The ratings reflect association of U Microfinance Bank Limited (U Bank) with Pakistan Telecommunication Company Limited (PTCL), the country’s leading Information and Communication Technology Service Provider. This affiliation supports the Bank in terms of building a strategic congruence alongside establishing robust systems and controls. U Bank is a fast growing player in the Microfinance Sector (End-Dec’20: 9.3% market share in total Gross Loan Portfolio). The Bank’s ambitious growth strategy encompasses multi-faceted targets focused towards achieving growth in the retail banking segment, developing digital banking platform.
A sizeable book of GoP securities (end-Mar21: PKR 11,428mln) in the investment portfolio helped in maintaining adequate liquidity. Expansion on the conventional front is pillared on geographical penetration by way of increasing the Bank’s branch network; though, this uplifts the operating costs of the Bank, it is also paving its way to the top five microfinance banks of the country in terms of GLP. On the contrary, the Bank’s digital segment is yet to progress a long way to mark its presence in the competitive landscape; the mix is currently small.
The Bank’s funding needs are primarily fostered through a growing deposit base, coupled with sizable borrowings. The ratings are constrained by high concentration in deposit base; increased on account of gaining. The recent conversion of PKR 1,000mln into preference shares along with the conversion of Tier-II Subordinated Debt of PKR 800mln into common equity, augmented the capital structure. As of Mar’21, overall CAR of the Bank was reported at 20.9%.
The Bank’s credit quality remains aligned to the Industry, which has deteriorated on account of pressured macro-economic indicators, particularly on account of COVID-19 outbreak and its rippling impact on various economic sectors. The Bank’s product mix mainly comprises livestock and agriculture lending, consisting of “bullet repayments” depicting concentration risk. Almost half of the Bank’s portfolio is gold backed as on Mar’21. Moreover, the Bank has recognized a sizable subjective provision in order to add a further cushion for absorption of expected loan losses. This provides a strong mitigant against potential credit risk.
Under the current scenario, continuity of COVID-19 pandemic (penetration of third wave in Pakistan) will poise challenge to business and asset quality. Though SBP’s Relief Packages have come handy to the sector in protecting the credit quality of the players during the first wave, the out-turn of the situation, and its relative impact on the risk profiles of industry players, including U Bank, is yet to unfold in the days to come.
The ratings are dependent upon the Bank’s ability to aptly combat the emerging risks under the current scenario in order to keep its business and financial risk profile intact. Meanwhile, the ratings are also placed under “Watch” to reflect the need for overseeing the risk profile of the Bank against unavoidable challenges.
For more information, contact:
Analyst,
The Pakistan Credit Rating Agency Limited (PACRA)
Awami Complex, FB1, Usman Block New Garden Town,
Lahore, Pakistan
Tel: +92-42-5869504-6
Fax: +92-42-5830425
Email: hammad.rashid@pacra.com
Website: www.pacra.com