The Pakistan Credit Rating Agency Limited
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Muhammad Atif Chaudhry

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PACRA maintains the rating of U Microfinance Bank Limited | TFC

Rating Type Debt Instrument
(18-Aug-22 )
(18-Aug-21 )
Action Maintain Initial
Long Term AA- AA-
Short Term - -
Outlook Stable Stable
Rating Watch - -

The ratings reflect the 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-Sep21: 12.9% market share in total Gross Loan Portfolio). The Bank's product mix mainly comprises livestock and agriculture lending. Going forward, the envisaged strategy encompass diversification at segmental, geographical, and product level. A sizeable book of GoP securities (end-June22: PKR 27.7bln) in the investment portfolio assisted in maintaining liquidity. Almost half of the Bank’s portfolio is gold-backed. Asset quality was impaired, as deferred book to total GLP was significant. To build a cushion, the Bank has recognized a sizable subjective provision to add a further cushion for absorption of expected loan losses. SBP’s recent circular about further relaxation in recording provisioning expense of NPLs is expected to bring reversal. 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 issuance of Tier- I Capital Term Finance Certificates of PKR 1bln provided a cushion to the equity base where all other parameters remained largely the same.
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.

About the Entity
In 2012, PTCL acquired 100% shareholding of Rozgar Microfinance Bank Ltd, which was established in 2003, as a district-wide microfinance bank. Henceforth, its name was changed to U Microfinance Bank Limited. PTCL itself is co-owned by the Government of Pakistan (62%) and Etisalat International Pakistan (LLC) (26%) (Etisalat), a state-owned Telecom Corporation of UAE. Management control of PTCL rests with Etisalat. The Board of Directors of the Bank consists of eight directors, comprising representatives of PTCL, along with two independent directors. Mr.Burak Sevilengul, the Chairman of the Board, has over 24 years of experience. Mr. Kabeer Naqvi, the President, and CEO has been with the bank, since Sep’15.

About the Instrument
U Microfinance Bank Limited issued privately placed and secured Term Finance Certificates (TFC) up to PKR 3,500mln. The 50% of the issue amount is secured by a first pari-passu charge on the issuer’s book debts, advances, and receivables with a minimum 25% margin. The remaining 50% of the issue amount is secured by Charge/lien on government securities of a similar tenor. The profit is being paid semiannually in arrears at the rate of 6MK+1.5% p.a. The redemption shall be commenced from the second year on Dec 23rd, 2022. The basic purpose of the respective issue is to enhance the advances book which will be fueled by the additional liquidity raised through the TFC.

The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.