VIS Credit Rating Company Limited (Formerly JCR-VIS Credit Rating Company Limited) Reaffirms Entity Ratings of Meezan Bank Limited at AA+/A-1+

July 1st, 2019

Karachi, Jun 28, 2019: VIS Credit Rating Company Limited has reaffirmed the entity ratings of Meezan Bank at ‘AA+/A-1+’ (Double A Plus/ A-One Plus). VIS has also reaffirmed ratings of the outstanding Basel 3 Compliant Tier 1 and Tier 2 Sukuk of Meezan Bank at ‘AA-’ (Double A Minus) and ‘AA’ (Double A) respectively. Outlook on the assigned ratings is ‘Stable’. The previous rating action on the entity was announced on May 30, 2018.

The assigned ratings incorporate Meezan Bank ’s dominant market positioning, particularly in the Islamic banking market, and strong franchise value. Furthermore, the ratings also incorporate the strength and stability of the senior management team spearheaded by the founding President & Chief Executive Officer. In 2018, Meezan Bank outgrew the domestic private banks and the industry at large, wherein Meezan Bank’s market share – in terms of assets and as of year-end 2018 – stood at 6.3% (Dec’17: 5.6%) and 4.8% (Dec’17: 4.3%) respectively. The asset growth arose from the strong performance in the deposit market.

In comparison to peers, Meezan Bank’s profit strategy focuses on financing; accordingly, the ADR of Meezan Bank is higher vis-à-vis peers. Even though corporate financing remains the mainstay of the bank’s financing operations, constituting two-thirds of the financing portfolio, healthy growth has been witnessed in CBSME (Commercial Banking & Small & Medium Enterprises) and Consumer Financing portfolios.

Despite a rising credit risk environment – prevalent in the latter half of 2018 and continuing into the ongoing year – Meezan Bank has been able to maintain its asset quality. As of Dec’18, Meezan Bank ’s gross infection stood at 1.3%, with coverage ratio against NPLs to the tune of 1.39x. However, given the strong focus on corporate clientele, the portfolio does depict counterparty concentration. Albeit, some comfort can be derived from fact that much of these exposures are government guaranteed, whilst the remaining are outstanding against a corporate blue-chip clientele. Given the heightened credit risk environment, some credit impairment is expected over the short to medium term horizon, which will test Meezan Bank ’s underwriting quality. So far, as of Mar’19, the gross NPLs were almost at the same level as year-end 2018.

On the profitability front, Meezan Bank ’s net profit increased by 42% to Rs. 9.0b (2017: Rs. 6.3b). The growth in profitability mainly arose from the volumetric growth in financing portfolio, along with a ~50bpts increase in spread and a healthy growth in fee & commission based income; the latter mainly attributable to Meezan Bank’s superior performance in trade financing operations. The Bank’s trade finance volume crossed the trillion rupee mark in 2018. On the backdrop of ongoing branch expansion, Meezan Bank’s expense base increased by 16%. Despite the increase in expense base, Meezan Bank was able to reduce the efficiency ratio to 55%, which is well placed within the peer group. Meezan Bank ’s branch network is now spread across 676 branches. Consequently, the bank is positioned as the seventh largest bank in Pakistan.

Meezan Bank’s CAR stands comfortably above the regulatory requirement and complies with our criteria for ‘AA+’ rated banks. Further reinforcement of capital buffers is on the anvil, given plans to issue another Basel 3 compliant Tier 2 Sukuk instrument within the ongoing year. The ratings are dependent upon continued maintenance of the control environment, asset quality and sound capital buffers.