The Pakistan Credit Rating Agency Limited
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Muneeb Rashid

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PACRA Upgrades Entity and TFCs Ratings of Bank Alfalah Limited

Rating Type Debt Instrument
Action Upgrade Maintain
Long Term AA AA-
Short Term - -
Outlook Stable Positive
Rating Watch - -

The ratings reflect relative positioning of the bank among large banks of the country. The bank has a stronger position in advances - sustained by fresh deployments. The deposit system share has witnessed dilution as the bank embarked upon a strategy to sustainably rationalize its cost of funding with enduring focus on low cost deposits. Resultantly, BAFL's cost of fund is comparable to some of the large banks. The bank enjoys extended outreach across the country which has augmented its deposit base. Operating cost structure, though still higher than peers, has improved on YoY basis on account of cost rationalization. The asset quality of the bank has sustained over the past three years on account of prudent risk management. Going forward, the management is focused to grow prudently; this implies consolidating its position on the competitive banking landscape as against merely focusing on system share. Key initiatives include: (i) introducing technology led products - mobile banking - mainly to tap current account, (ii) focus on SME & transactional banking, and (iii) shift from conventional to digital banking model; setting up of 'smart branches' is on cards, aiming to improve cost structure. Declining asset yield is being offset by cost efficiency hence, enabling spreads to be maintained at current levels. Despite consistent improvement in the bank's profitability, capital augmentation remained limited. Cognizant of the fact, the management intends to improve its Tier-I capital through multiple options, whereas, enhancing Tier-II capital through issue of a new instrument is also being considered, thereby creating cushion to regulatory capital. The ratings recognize demonstrated support of Abu Dhabi group (ADG) as a key factor.

The ratings are dependent on the management's ability to uphold its business profile; effective implementation of strategy is important. Sustaining spreads at current levels is a challenge, which needs to be effectively managed. Strengthening of the bank's capitalization and adding granularity to its advances and deposits book are critical for ratings improvement.

About the Entity
Bank Alfalah Limited (BAFL) has a network of 640 branches, at end-Mar17, including 153 Islamic banking branches - the biggest network by any conventional bank. Abu Dhabi Group (ADG), comprising some of the prominent members of UAE's ruling family, leading businessmen of UAE, continues to own majority stake (52% at end-Mar17) in the bank.

The eight-member BoD comprises President & CEO and seven NEDs, four of whom are representatives of ADG, one represents IFC, while two are independent. Mr. Atif Bajwa has submitted his resignation as a director and CEO of the bank, which the BoD has accepted, subject to the approval of SBP. The BoD has further resolved to coopt Mr. Nauman Ansari as a director of the bank in place of Mr. Bajwa for the remainder of the term and appointed him as CEO of the bank, subject to SBP approval.

About the Instrument
BAFL has two unsecured and subordinated TFCs in issue. TFC IV and V of PKR 5bln each, were issued in Dec09 and Feb-13, respectively. With 8yrs of tenure each, principal repayment of TFC-IV would be in three equal installments commencing from Dec16 while TFC-V would be repaid in bullet form at the time of maturity (Feb21).

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.