The Pakistan Credit Rating Agency Limited
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Usama Zubair

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PACRA Assigns Preliminary Rating to BankIslami Pakistan Limited | Modaraba Sukuk

Rating Type Debt Instrument
Action Initial Maintain
Long Term A- A-
Short Term - -
Outlook Stable Stable
Rating Watch - -

The ratings reflect BankIslami's sustained risk profile. The bank’s profitability enhanced owing to asset yield driven by peaked policy rates and volumetric increase in financing and instruments. Higher increase in asset yield than cost of funds - resulting in increase in spreads. The bank was able to achieve good operating profits; trend should continue. The management is emphatically pursuing for recovery of NPLs, leading to improvement in impairment ratio. Covid-19 has posed challenges to all segments of the economy, worldwide and domestically, most sectors are getting negatively impacted. The ramifications would continue to unfold, warranting vigilance and timely actions where needed. The central bank has taken well-tailored and comprehensive actions including reduction in key policy rates (625bps down since Jan-20) and deferment of repayment obligations. While reduction in interest rates would determine the bank’s profitability, these measures have cushioned the allied risks surrounding the credit exposures. The bank’s deposit base recorded significant addition tilted towards term deposits leading to decline in CASA (end-Dec19: 58.5%, end-Dec18: 68.8%) with focus to increase stability and liquidity. Increased term deposits may effect cost of funds in CY20. Key positions are headed by experienced individuals. The bank’s management is positive about performance and achieving cost efficiency, pursuing the new business plan under leadership of the CEO. The focus is on risk management, IT infrastructure, workforce strengthening and customer facilitation which will help bank to achieve operational efficiency. The bank has taken steps to strengthen its fortress against cyber risks; provision needed was created in CY19. Going forward, primary focus is to consolidate CAR as the relaxations given by central bank will be withdrawn in CY21. The management is current on the planned steps to enhance capital of the bank which will assist in inching up CAR.
The bank's ability to raise its capital base in order to pursue its growth plan is important. In this regard, BIPL made a right issue of PKR 1bln along with the issuance ADT-1 Sukuk of Rs. 2 billion.

About the Entity
BIPL, a scheduled Islamic bank, commenced operations in Apr-06 and is listed on PSX. BIPL has 340 branches. The four business groups hold a cumulative 72.9% stake namely Jahangir Siddiqui & Company Limited (JSCL) (21.3%), Mr. Ali Hussain along with SAJ Capital Management Limited (24.4%), Randeree Family (~14.3%), and Dubai Bank PJSC (13.0%). BIPL’s eight-member board of directors (BoD) including CEO constitutes representatives of sponsoring groups and independent directors. Mr. Syed Amir Ali joined bank as Deputy CEO in Apr-18. He took up the position of 'President & CEO' in Oct-18. He is a Chartered Accountant and CFA Charter holder, carrying more than one-decade of Islamic Banking experience mainly of Meezan Bank.

About the Instrument
The Bank issued fully paid up, rated, listed, perpetual, unsecured, subordinated, non-cumulative and contingent convertible debt instruments in the nature of sukuks under Section 66 of the Companies Act, 2017 which qualify as Additional Tier I (ADT-1) Capital as outlined by State Bank of Pakistan (SBP) under BPRD Circular No. 6 dated August 15, 2013. The total size of ADT-1 sukuk is Rs. 2,000 million. Profit rate would be 3M-KIBOR+ 275bps points. The profit shall be payable monthly in arrears, on a non cumulative basis.

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.