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 | PKR 3.5bln | Jun21

Rating Type Debt Instrument
(18-Aug-23 )
(18-Aug-22 )
Action Maintain Maintain
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. The Bank's ambitious growth strategy encompasses multi-faceted targets focused on achieving growth in the retail banking segment, and developing a digital banking platform. 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. 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 in order to add a further cushion for the absorption of expected loan losses. This provides a strong mitigate against potential credit risk. The investment income stream has helped the bank to bolster its profitability through this avenue. Sizable enhanced markup and non-markup income provide comfort. 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 industry's few parameters are deteriorating on account of pressured macroeconomic indicators, attributable to the aftermath of the COVID-19 and current prevailing economic situation in the country. In order to meet the enhancement of advances portfolio the Bank issued TFC amounting to PKR 5bln on 23-Jun-21 and in the process of issuing second TFC amounting PKR 5bln. However, due to delays in certain approvals and unstable economic situations, the issuance of the TFC gets delayed.
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. Stable outlook denotes comfort on business risk and financial risk profile of the bank.

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. Mr. Kabeer Naqvi, the President and CEO, has over 20 years of professional experience to his name and 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. Principal repayment is being paid in 6 semiannual installments amounting PKR 583mln till the maturity of the instrument on Jun'25.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.