VIS Credit Rating Company Limited has reaffirmed the entity ratings of Meezan Bank Limited (‘MEBL’ or ‘the Bank’) at ‘AAA/A-1+’ (Triple A/ A-One Plus). The medium to long-term rating of ‘AAA’ denotes highest credit quality, with negligible risk factors, being only slightly more than for risk-free debt of Government of Pakistan (GoP). The short-term rating of ‘A-1+’ denotes highest certainty of timely payment; short-term liquidity, including internal operating factors and/or access to alternative sources of funds, is outstanding and safety is just below risk-free short-term obligations of GoP. VIS has also reaffirmed ratings of the outstanding Basel 3 Compliant Tier 1 and Tier 2 Sukuk of MEBL at ‘AA+’ (Double A Plus) and ‘AAA’ (Triple A) respectively. Outlook on the assigned ratings is ‘Stable’. The previous rating action on the entity was announced on June 30, 2021.
The assigned rating incorporates strong market positioning of MEBL, being the 3rd and 4th largest Bank in the country, by end-2021, in terms of domestic financing and deposits respectively. The rating also incorporates MEBL’s strong liquidity and profitability indicators and adequate capital buffers in place to support the Bank’s robust growth trajectory. In recognition of MEBL’s significance to the country’s financial sector, in 2021 the State Bank of Pakistan (SBP) classified MEBL as a Domestic-Systemically Important Bank (D-SIB).
During 2021, MEBL posted strong growth in financing portfolio, as a result of which its market share in the same increased from 6.3% to 7.7%. The Bank remains well placed in terms of its (gross) Financing to Deposits Ratio (FDR) and Liquid Assets to Deposits & Borrowings. MEBL’s asset quality indicators depicted improvement on a YoY basis and as of Dec’21 its gross infection was second lowest among the ‘Large Banks’. MEBL’s credit quality is characterized by its strong control on NPLs and prudent provisioning, wherein (inclusive of general provisions), provisioning coverage was very strong at 137% as of Mar’22. Overall segment-wise impairment remains on the lower side. Going forward, given the 400 bpts cumulative increase in SBP Policy rates in April – May 2022, credit risk headwinds are emerging for the banking industry. However, MEBL is relatively better placed than peers to withstand the higher credit risk environment.
MEBL’s liquidity profile is considered strong, as reflected by the Bank’s ability to post strong growth in deposits along with an improvement in deposit composition whilst maintaining the lowest cost of funding amongst peers. As per management, pursuant to resumption of regular sukuk auction by the Government of Pakistan, the Bank channeled liquidity away from lending to Financial Institutions and towards sovereign securities; as a result, the investment portfolio has grown notably on a timeline. In line with the industry trend, wherein average benchmark rate prevailing during 2021 was lower than 2020, MEBL’s spread depicted contraction. Nevertheless, given strong growth in assets deployed along with an increase in FDR, the Bank’s bottom line was up by 28% and 51% in 2021 and Q1’22 respectively. MEBL’s RoAA was the highest amongst ‘Large Banks’. Unlike its conventional counterparts, MEBL is well placed in terms of exposure to market risk, as a result of which the Bank is not expected to face sizable MTM losses on the investment portfolio.
MEBL’s capitalization buffers remained strong as of Mar’22. Net equity depicted notable improvement, given sizable growth in profitability and lower payout ratio. MEBL’s CAR is expected to remain comfortable through the rating horizon. The comfort, in terms of stability in CAR, is premised on credit quality indicators of financings portfolio, provisioning coverage of 1.4x and lower exposure to market risk vis-à-vis peers.
For further information on this rating announcement, please contact Mr. Arsal Ayub, CFA (Ext: 216) at 92-21-35311861 or fax to 92-21-35311873.