The Pakistan Credit Rating Agency Limited
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Maryam Ijaz

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PACRA Maintains Entity Ratings of U Microfinance Bank Limited

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

The ratings reflect association of U Microfinance Bank Limited (U 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 fast growing player in the Microfinance Sector (End-Dec'20: 9.3% market share in total Gross Loan Portfolio). The Bank's ambitious growth strategy encompasses multi-faceted targets focused towards achieving growth in the retail banking segment, developing digital banking platform. A sizeable book of GoP securities (end-Mar21: PKR 11,428mln) in the investment portfolio helped in maintaining adequate liquidity. 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. The ratings are constrained by high concentration in deposit base; increased on account of gaining. The recent conversion of PKR 1,000mln into preference shares along with the conversion of Tier-II Subordinated Debt of PKR 800mln into common equity, augmented the capital structure. As of Mar’21, overall CAR of the Bank was reported at 20.9%. The Bank's credit quality remains aligned to the Industry, which has deteriorated on account of pressured macro-economic indicators, particularly on account of COVID-19 outbreak and its rippling impact on various economic sectors. The Bank's product mix mainly comprises livestock and agriculture lending, consisting of "bullet repayments" depicting concentration risk. Almost half of the Bank’s portfolio is gold backed as on Mar'21. Moreover, the Bank has recognized a sizable subjective provision in order to add a further cushion for absorption of expected loan losses. This provides a strong mitigant against potential credit risk.
Under the current scenario, continuity of COVID-19 pandemic (penetration of third wave in Pakistan) will poise challenge to business and asset quality. Though SBP’s Relief Packages have come handy to the sector in protecting the credit quality of the players during the first wave, the out-turn of the situation, and its relative impact on the risk profiles of industry players, including U Bank, is yet to unfold in the days to come.
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. Burak Sevilengul, the Chairman of the Board, has over 24 years of experience. Mr. Kabeer Naqvi, the President and CEO, has over 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.