PACRA Maintains the Ratings of HBL Microfinance Bank Limited | Tier 2 Capital TFC | PKR 1.5bln | Mar-24

HBL Microfinance Bank Limited ("HBL MfB" or the "Bank") is primarily owned by Habib Bank Limited (HBL), Pakistan's largest commercial bank, which is owned by the Aga Khan Fund for Economic Development, a prominent agency of Aga Khan Development Network, a global organization that aims to enhance the quality of life in marginalized communities. The ratings of the Bank reflect a strong financial profile, strengthened by substantial support from its sponsors. HBL MfB stands out as a leading microfinance bank, holding the largest share of the loan portfolio in the industry. At end-Dec24, the Bank's gross advances reported at PKR 90.3bln (end Dec23: PKR 98.9bln). Non-Performing Loans (NPLs) rose to PKR 7.2bln (end-Dec23: PKR 2.7bln) mainly due to a credit crunch in South Punjab amid the wheat crisis and the initial adoption of IFRS-9, which significantly increased provisioning requirements for the advances portfolio. Consequently, the Bank's infection ratio rose to 8% (end-Dec23: 3%). The management is proactively addressing this concern. The funding is fueled by deposits, where high contributions arise from savings and term deposits. At end-Dec24, the deposit base of the Bank was reported at PKR 122.6bln (end-Dec23: PKR 128.2bln). During CY24, the Net Interest Margin (NIMR) declined to PKR 9.1bln (CY23: PKR 10.5bln). Due to high funding cost amid high policy rate environment, agriculture portfolio delinquencies stemming mainly from industry level issues, 2024 wheat crises, increased provisioning expenses amid the initial implementation of IFRS-9, and slow recoveries in the South Region, the Bank reported a loss after tax of PKR 3.7bln (CY23: profit after tax PKR 405mln). At end-Dec 24, the Capital Adequacy Ratio (CAR) inclined to 17.1% (end-Dec 23: 15.3%) owing to a substantial equity injection of PKR 6bln by its parent, HBL. To strengthen risk resilience amid rising NPLs, the Bank has adopted a cautious lending approach by scaling down its bullet portfolio, shifting to large ticket size loans and expects lower funding costs due to the policy rate decline.
The ratings are dependent upon the Bank’s ability to aptly combat the emerging risks under the current economic scenario to keep its business and financial risk profile intact.

About the Entity
HBL MfB was incorporated in November 2001 as a nationwide Microfinance Bank and started business in February 2002 after receiving the license from the State Bank of Pakistan. The Bank is predominantly owned by HBL with a shareholding of 89.38% as at end-Dec24, 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).

About the Instrument
In March 2024, the Bank issued privately placed, unsecured, subordinated, rated Tier 2 Capital Term Finance Certificates (TFCs) of PKR 1,500mln with a 10-year tenor. Profit is paid semi-annually at 6MK + 200 bps on the outstanding principal, which is repayable at maturity. Payments rank below all liabilities, including deposits, but pari passu with other Tier II and senior to additional Tier I instruments. Early redemption needs SBP approval, and no payments are allowed if they breach the Bank’s MCR or CAR.