Press Release

VIS Reaffirms Entity Ratings of Khushhali Microfinance Bank Limited

Karachi, May 30, 2024: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Khushhali Microfinance Bank Limited (‘KMBL’ or the ‘Bank’), at ‘A-/A-2’ (Single A minus/A-Two). The medium to long-term rating of ‘A-’ denotes good credit quality; protection factors are adequate. Risk factors may vary with possible changes in the economy. The short-term rating of ‘A-2’. denotes good certainty of timely payment. Liquidity factors and company fundamentals are sound. The assigned ratings remains on ‘Rating Watch – Negative’. The previous rating action was announced on April 28, 2023.

Rating assigned to TFC-I (Tier-II debt instrument) and TFC-II (Tier-II debt instrument) is ‘B’ (Single B). The long-term instrument rating of ‘B’ denotes that payments are not being made as per original schedule. Future performance is less likely. ‘Rating Watch – Negative’ has been removed and a ‘Negative’ outlook has been assigned on the rating.

Khushhali Microfinance Bank Limited was incorporated in 2000 with proclamation of Khushhali Bank Ordinance by Government of Pakistan. Subsequently, it was transformed into a public limited company in 2008. KMBL is licensed to provide microcredit services to underserved and unbanked segment nationwide with an overall objective of mitigating poverty and promoting social welfare.

VIS has taken note of the challenging operating environment faced by the microfinance sector. High asset losses have been booked by the Bank over the past few years. Despite the consequent erosion of risk buffers, resulting in negative equity, KMBL has devised a plan towards recovery, with cautious growth in the secured lending segment and concerted efforts towards network consolidation. Some progress against operational strategy has also been noted. Despite decline in liquid assets to deposits and borrowings ratio, funding profile has improved with increased diversification, mitigating the risk of large calls on liquidity.

A notable increase in net markup income in CY23 was largely offset by elevated operating expenses. Provisions booked through profit and loss statement, though reduced from prior year, remained high, resulting in a lower net loss for the year. Further asset losses were reflected as transition impact of IFRS 9 adoption. Focus on asset repricing to become better aligned with market dynamics, may support earnings profile, going forward, as would lower asset charge-offs, given that losses in the current portfolio now stand largely recognized.

Capitalization remains a key concern, with negative equity reported and capital adequacy ratio (CAR) breaching regulatory thresholds. The approval of a long-term strategic and restructuring plan signals a commitment towards addressing capital shortfalls and revitalizing the Bank's financial position; successful implementation of the said plan is pivotal for reinstatement of loss buffers, sustainable growth and recovery in profitability. VIS will monitor developments on the operational and capitalization fronts; any shortfall against planned improvements may result in the revision of ratings assigned.

For further information on this ratings announcement, please contact at 021-35311861-64 or email at info@vis.com.pk.


Applicable Rating Criteria:

Micro-Finance Banks
https://docs.vis.com.pk/docs/MicroFinance-Oct-2023.pdf

VIS Issue/Issuer Rating Scale
https://docs.vis.com.pk/docs/VISRatingScales.pdf

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited (VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.VIS , the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report.VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2024 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .