PACRA Maintains Entity Ratings of Alfalah CLSA Securities (Pvt.) Limited | Rating Watch Assigned

ACLSA Securities (Pvt) Limited is the venture of Asia’s leading brokerage and investment group “CLSA” and Bank Alfalah Limited. ACLSA is primarily engaged in the provision of equity brokerage alongside offering services of investment banking and research. During FY22 and FY23, brokers struggled due to low investor engagement amid high-interest rates and inflation. However, 2QFY24 saw a surge in investor interest, leading to record highs in the KSE-100 index. Market stability is expected for FY24, though political sentiments and support from IMF are crucial. A material equity injection of ~PKR 1.2bln by the primary sponsor shall mitigate the financial effect of the provisions of ~PKR 1.1bln created by the Company during Dec'23. This provision indicates a significant risk regarding the likelihood of collecting outstanding debts owed to the Company. This concerns a need for the creation of the provision vis-a-vis the control environment of the business, hence Rating Watch.To address these concerns, ACLSA has taken steps to enhance its internal controls framework. During 9MCY23, the market exhibited a significant improvement, with market volumes surging by ~31%. Consequently, ACLSA experienced an uptick of ~34% in revenue from equity brokerage during the same period. The equity brokerage business has experienced a substantial increase in performance from retail clients during 9MCY23, ~PKR 274mln (SPLY: ~PKR 163mln). During 9MCY23, ACLSA earned ~PKR 72mln from money market brokerage and ~PKR 5mln from forex brokerage. ACLSA reported a net loss of ~ PKR 10mln during 9MCY23 (SPLY: a net loss of ~PKR 7mln). The reasons behind the loss are twofold: first, there has been an increase of ~57% in finance costs. Second, administrative expenses witnessed a notable increase of ~37%. ACLSA has an adequate equity base of ~PKR 331mln at end-Sep’23 (SPLY: ~PKR 341mln). The Company provides adequate research services to its customers while online trading is also available. A separate internal audit function is in place, whereas the absence of a dedicated risk management department indicates a potential area for improvement within the system. ACLSA has a well-developed organizational structure with an experienced management to oversee the business operations. Mr. Atif Muhammad Khan has been replaced by Mr. Syed Akbar Ali as the CEO of the Company. The assigned rating takes into account the sound business acumen and support of the sponsoring group. The governance framework may be enhanced further with the induction of certified independent directors. The improvement of the technological platform by integrating with the Bank Alfalah app and geographical diversification is also under consideration.
Going forward, enhancing the rating perspective hinges on improving core income, retaining market share, and diversifying revenue in brokerage. Upholding sound internal controls, retaining key personnel, and diligent risk monitoring are also vital.

About the Entity
ACLSA is a TREC holder of the Pakistan Stock Exchange and has been operational since 2004 as a Private Limited Company. ACLSA is registered with SECP under Securities Brokers Regulations 2016. ACLSA is primarily owned by Bank Alfalah Limited with a stake of ~62% while ~25% shares are vested with CLSA Limited. The Company's board has six members, including the CEO - four representing Bank Alfalah Limited and one, Mr. Edward Park, representing CLSA.