The Pakistan Credit Rating Agency Limited
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Jibran Cheema

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PACRA Assigns Initial Entity Ratings to U Microfinance Bank Limited | Rating Watch

Rating Type Entity
Action Initial
Long Term A
Short Term A1
Outlook Stable
Rating Watch Yes

The ratings reflect association of U Microfinance Bank (herein referred to as “U Bank” or “the 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. U Bank is a mid-tier yet fast growing player in the Microfinance Sector (End-Dec'19: 7.2% market share in total Gross Loan Portfolio (GLP) and 8.7% share in total microfinance deposits). The bank's ambitious growth strategy encompasses multi-faceted targets focused towards achieving growth in the retail banking segment, developing digital banking platform and building a wholesome treasury book. Expansion on the conventional front is pillared on geographical penetration by way of increasing the bank's branch network; though, this uplifts the operating costs of the bank, it is also paving its way to the top five Microfinance Banks of the country in terms of GLP. On the contrary, 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. The bank's funding needs are primarily fostered through a growing deposit base, coupled with sizable borrowings. Sponsor support is reflected by way of subordinated debt intended to be convertible to Tier-I capital, in order to keep capital adequacy in check. The bank's credit quality remains aligned to the Industry, which has recently deteriorated on account of pressured macro-economic indicators, particularly on account of COVID-19 outbreak and its rippling impact on various economic sectors. Asset impairment ratio rose to 4.1% at End-Dec’19 (End-Dec'18: 1.3%), which necessitates cautious management approach. Profitability concerns may plague the bank in the short term owing to its designed business model. Average loan size of the bank is on the higher side in relation to its peers, which needs to be in check amidst rising industry infection ratio. The bank's product mix mainly comprises livestock (61%) and agriculture lending (26%), consisting of "bullet repayments" depicting concentration risk. As the nationwide lockdown has triggered risks of reduced recovery and disbursements in the sector, the bank is developing proactive strategies to shield its business profile from unforeseen challenges, including secured lending. While the SBP's Relief Scheme has alleviated short term credit quality concerns, the out-turn of the situation, and its relative impact on the industry players, including U MFB, is yet to unfold in the short horizon.
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. Meanwhile, the Ratings are also placed under “Watch” to reflect the need for overseeing the risk profile of the bank against unavoidable challenges.

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. Mohammad Nadeem Khan, the acting Chairman of the Board, has over 25 years of experience in the industry. Mr. Kabeer Naqvi, the President and CEO, has 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.