PACRA Maintains Rating of JS Bank | TFC Tier 1

The ratings reflect relative position of JS Bank in the country's competitive banking landscape. This stems from system share in deposit which largely remained the same and depleted advances. The bank's funding base enhanced attributable to slight increase in deposit base, however borrowings from financial institutions decreased. The increased liquidity inched up to ~33.4% since Dec18 mainly due to less borrowings from financial institutions. Hence, ADR significantly reduced to 74.3%. NPLs have emerged in the recent period, which is a concern. Going forward, higher provisioning expense may pose a challenge to profitability of the bank which is already diluted by currently high markup on deposits and mark to market losses, these are expected and diluted as reaching maturity. The strategy of the bank is i) to foster penetration of existing network beyond 345 branches over the near-term; ii) consolidate advances book and replace it with liquid collateralized advances to maintain CAR, iii) build non-fund based income; and iv) hold strength in treasury operations. The challenge to profitability is dried return of capital gains. The bank expects the profits to be boosted from growing direct and ancillary business. The bank is facing a challenge on its CAR; Total CAR stood at 12.1% (Tier-I at 9.5% as at Sep19). The management has represented that, with their concerted efforts, it would stand compliant as on end- Dec2019. This along with other performance indicator would be reviewed upon finalization of the annual financial statement for 2019.
Ratings are dependent on JS Bank's ability to sustain its profitability to support internal generation of capital. Meanwhile, upholding asset quality, maintaining system share in terms of advances and deposits, adding diversity to income stream, sound CAR and strong governance framework are critical.

About the Entity
JS Bank Limited (JSBL), incorporated in March 2006, commenced its banking operations on December 30, 2006. JSBL is a subsidiary (~75%) of Jahangir Siddiqui & Company Limited (JSCL). Whereas the rest is widely spread. The overall control of the bank vests in the Board of Directors (BoD) including the CEO. Mr. Sohail Aman has been appointed as Independent Director, w.e.f October 24, 2019. He himself accompanied with diversified experience. Mr. Basir Shamsie joined as CEO in July, 2018. He possesses work experience of more than 25 years, primarily in the banking sector.

About the Instrument
The bank has issued two TFC s which are unsecured, subordinated, privately placed to support Tier-II capital. The first TFC was issued in Dec-16 of amount PKR 3bln and other was issued on Dec-17 of amount PKR 2bln. The tenor is 7 years each based on 6M-KIBOR Plus 140bps p.a. payable semi-annually in arrears. Major Principal Repayment (99.76%) would be in two equal semiannual instalments of (49.88%) each, in the seventh year. JSBL retains the call option on profit payment date, which may be exercised, on or after five years of issue, subject to SBP’s approval. The Bank is planning to issue its third TFC which would be Privately Placed / Listed, Unsecured, Subordinated, Perpetual and Non-Cumulative Debt Instruments in the nature of Additional Tier 1 Capital, TFCs of PKR 2.5bln (including green shoe option of PKR 500 million). Profit rate would be 6M-KIBOR+ 225bps points. Profit (if declared) will be payable semi-annually in arrears on the outstanding Issue Amount. First such profit payment will fall due six months from the Issue Date and subject to SBP’s approval. Tier I TFC is differentiated from Tier II in two key aspects: (i) perpetual & (ii) non-cumulative. Furthermore, upon reaching a pre-defined trigger point or point of non-viability (PONV), the Tier I TFC may be partially or fully converted into equity/written off as per the discretion/instructions of SBP.