PACRA Maintains the Rating of HBL Microfinance Bank Limited

The assigned rating of HBL Microfinance Bank Limited ("HBL MfB" or the "Bank") reflects an adequate financial profile, strengthened by substantial support from its sponsors. Being a subsidiary of the AAA-rated HBL Bank positively supports the assigned rating. HBL MfB stands out as a leading Microfinance Bank, holding one of the largest share of deposit and loan portfolios in the industry. The Bank managed significant challenges during the year. A credit crunch in South Punjab, coupled with an intense wheat price crash, adversely impacted the lending portfolio. Additionally, the adoption of IFRS-9 further strained the Bank's profitability. On the other end, the high-for-long interest rates had escalated the cost of funds leading to spread compression. Delinquencies in the South's agri and livestock portfolio coupled with accelerated provisions due to IFRS-9 added to the pressures. In response, management is taking proactive measures, including capital injection of PKR 6bln in May 2024 and managing the risk-weighted assets by limiting growth in lending. Furthermore, the strategy of reducing the bullet portfolio (from ~50% in CY19 to ~23% in CY24) has now been significantly accelerated, reducing to below 10% within the next 3 years. Sustained and enhanced focus on recovery will be key, through increasing the specialized recovery team. However, to support the CAR going forward, the Bank plans to augment capital further by issue of Additional Tier I and Tier II capital, enhancing its risk absorption capacity and creating room to expand the lending portfolio, while maximizing available capital utilization. The declining interest rate environment is expected to widen the gross spreads and expected recoveries from the delinquent portfolio would further add to the profitability of the Bank.
On financial profile side, at end-Sep24, the Bank's gross advances reported at PKR 94.7bln (end-Dec23: PKR 100.9bln). Non-performing loans rose to PKR 9.5bln (end-Dec23: PKR 2.7bln) concentrated mainly in the agri and livestock bullet portfolio. Consequently, the Bank's overall infection ratio inclined to 10% (end-Dec23: 3%). EMI loans including microenterprise portfolio and housing portfolio is performing satisfactorily. The funding is fueled by deposits, where high contributions arise from savings and term deposits. At end-Sep24, the deposit base of the Bank reported at PKR 118.5bln (end-Dec23: PKR 128.2bln). During 9MCY24, the Net Interest Margin (NIMR) declined to PKR 5.5bln (9MCY23: PKR 7.6bln). Due to high-cost deposits, increased provisioning charges, and slow recoveries in the South Punjab Region, the Bank reported a loss after tax of PKR 4bln (9MCY23: Profit PKR 782mln). At end-Sep24, the Capital Adequacy Ratio (CAR) inclined to 16.1% (end-Dec23: 15.3%) owing to a substantial investment of PKR 6bln by its parent.
The ratings rely on the Bank’s ability to effectively address emerging risks in the current stressed environment while maintaining its business and financial stability. The management’s strategic response to these challenges remains crucial.

About the Entity
HBL Microfinance Bank Limited was incorporated in 2001 as a nationwide microfinance institution and obtained the Microfinance banking license from the State Bank of Pakistan in 2002. The Bank is predominantly owned by HBL with 89.38%, followed by the Aga Khan Agency for Microfinance (AKAM) at 6.37%, the Aga Khan Rural Support Programme (AKRSP) at 2.36%, and the Japan International Cooperation Agency (JICA) at 1.89%. HBL, AKAM, and AKRSP operate under the umbrella of the Aga Khan Development Network (AKDN).