The Pakistan Credit Rating Agency Limited
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Wajeeha Asghar

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PACRA Assigns Initial Rating of The Bank of Punjab | Tier 2 | TFC-III | Apr-23

Rating Type Debt Instrument
(26-Jun-23 )
Action Initial
Long Term AA
Short Term -
Outlook Stable
Rating Watch -

The Bank of Punjab has built a franchise around its name, which itself is a reflection of strong parentage. The bank enjoys a respectable position in its peer universe, also reflected by its system
share. The Bank grew its deposit base by 22% to stand at PKR 1,227bln - higher than the industry's growth where deposits remained tilted towards saving. The system share of the Bank has taken a positive contribution from the growth, which would lead the bank towards being classified as a large bank. However, the expensive funding avenues pose a challenge which is an area of focus for the current management of the bank. During CY22, the Bank maintained its PBT equal to CY21, taking benefit form the reversals. However, PAT declined by 13% to stand at PKR 10.8bln on account of the difference in taxation rate (CY21: PKR 12.4bln). Coverage of non-performing loans has declined YoY, attributed to the benefit of collateral. At end-Mar23, the equity base is affected by a deficit in the investments. The mark-to-market losses of the investment book have caused a decrease in the equity base of the bank. Consequently, the capital adequacy ratio of the bank weakened to 11.7% (12.91% including advance subscription money for Tier-II Capital), which is expected to improve by end-Jun23 by a 2% to 3% margin, as projected by the management. For this, the prudent management of CAR remains essential. The risk absorption capacity of the bank is being augmented by a successive issuance of ADT-I and Tier-II bonds.
The ratings are dependent on the financial risk profile of the bank, mainly emanating from volumetric increases in core operations. Any weakening in asset quality will in turn put pressure on the bank's profitability and risk absorption capacity. Going forward, ample management of the CAR above the regulatory threshold remains necessary.

About the Entity
The Bank of Punjab, established under the BOP Act 1989, is listed on Pakistan Stock Exchange (PSX). The bank operates a vast network of 780 branches as of the end-Mar23, mainly concentrated in Punjab. The Government of Punjab (GoPb) holds a majority stake in BOP (57%), whereas the rest is widely dispersed. Mr. Zafar Masud is the President & CEO of the bank. The senior management consists of seasoned bankers. The current team has played a pivotal role in the bank's revival; their continuity and cohesiveness are critical for the successful execution of the envisaged business plan.

About the Instrument
The Bank of Punjab issued its third rated, privately placed, unsecured and subordinated TFC of the amount PKR 7bln on Apr-23. The amount raised contributed towards BOP’s Tier II Capital in accordance with SBP guidelines on capital adequacy. The tenor of the instrument is 10 years. The profit is based on 6MK+ 1.25% and is paid semi-annually in arrears on the outstanding principal amount. Neither profit nor principal will be payable in respect of TFC, if such payment will result in a shortfall in the bank’s MCR or CAR. The bank may call the TFCs, with prior approval of SBP, after five years from the date of issue. The TFCs shall, if directed by the SBP, be fully and permanently converted into ordinary shares and/or have them immediately written off (partially or in full) upon the PONV Trigger Event.

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.