The Pakistan Credit Rating Agency Limited
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Wajeeha Asghar

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PACRA Maintains Entity Ratings of U Microfinance Bank Limited

Rating Type Entity
(15-Sep-23 )
(16-Sep-22 )
Action Maintain Upgrade
Long Term A+ A+
Short Term A1 A1
Outlook Stable Stable
Rating Watch - -

Amid Covid-19 and floods during CY22, the MFB's coverage against NPLs has declined signaling a potential drag on the sector's equity. Meanwhile, write-offs of the sector also increased. Another factor contributing to the surge in bad loans is the unavoidable rise in the lending rates amidst an exceptionally high-interest rate environment, weakening the repayment capacity of the sector borrowers. On the other side, the funding base of the sector has also been stretched during these distressed times. In this environment, the U Bank has a market share (GLP) of ~13% as at 31st Mar'23. 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. A sizeable book of GOP securities as of June'23: PKR 67.8bln (SPLY: PKR 27.6bln, Dec'22: 111.6bln) in the investment portfolio assisted in maintaining liquidity. 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. More than half of the Bank’s portfolio is gold-backed. To build a cushion, the Bank has recognized a sizable subjective provision in order to add a further cushion for absorption of expected loan losses. This provides a strong mitigant against potential credit risk. The non-performing finance stood at PKR 2.17bln as at Jun'23 (Jun'22: PKR 1.04bln, Dec'22: PKR 1.72bln). The net advances increased by ~51.7% to PKR 77.3bln as at Jun'23 from PKR 50.9bln as at Jun'22 (Dec'22: 60.9bln). The markup earned as of Jun'23 stood at PKR 21.1bln (SPLY: PKR 8.4bln) and non-markup income as of Jun'23 stood at PKR 1.4bln (SPLY: PKR 0.8bln). However the net profit of the bank stood at PKR 880mln during 6MCY23 (SPLY: PKR 688mln). 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. The equity of the bank stood at PKR 7.4bln at the end 6MCY23 (SPLY: PKR 7.5bln)
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. 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 over 20 years of professional experience to his name and has been with the bank, since Sep’15

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.