Press Release

VIS Reaffirms Entity Ratings of U Microfinance Bank Limited

Karachi, June 10, 2024: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of U Microfinance Bank Limited (‘UMBL’ or the ‘Bank’), at ‘A+/A-1’ (Single A Plus/A-One). 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-1’ denotes high certainty of timely payment; Liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor. Outlook on the assigned ratings is ‘Stable.’ Rating assigned to TFC-I (Tier-II debt instrument) and TFC-II (Tier-I debt instrument) is ‘A’ (Single A) and ‘A-’ (Single A Minus) respectively. The long-term instrument rating of ‘A’ and ‘A-‘ denote good credit quality; protection factors are adequate. Risk factors may vary with possible changes in the economy. The previous rating action was announced on April 28, 2023.

U Microfinance Bank Limited (UMBL) was incorporated in Pakistan on October 29, 2003, as a public limited company and commenced nationwide microfinance banking operations, following a license from the State Bank of Pakistan (SBP). UMBL launched its Branchless Banking Services (BBS) commercially, after receiving SBP approval. Originally established as Rozgar Microfinance Bank Limited, the Bank was rebranded following its acquisition by Pakistan Telecommunication Company Limited (PTCL) on December 07, 2012.

The ratings assigned to UMBL reflect a strong sponsor profile and consistent demonstrated support from PTCL, which has been assigned an entity rating of ‘AAA/A-1+’ (Triple A/A-One Plus) by VIS and is co-owned by the Government of Pakistan and Etisalat International Pakistan (LLC). Sponsor support was evident in an equity injection of Rs. 1.6 bn provided as an advance for the issuance of ordinary shares during the outgoing year, and a further equity injection of Rs. 1.2 bn in cash in the ongoing year.

Moreover, the Bank had previously voluntarily adopted IFRS-9, and subsequently restated its financial statements for the year 2022, most significantly enhancing provision requirements as per the direction of SBP to the Board of the bank, to align matters relating to implementation of IFRS 9. The Bank has since been recapitalized, keeping in view the macroeconomic factors in the country, including inflation, stress on income levels of its customer base and challenges faced by the sector, to ensure compliance with regulatory requirement for Capital Adequacy Ratio (CAR). CAR was below regulatory requirements at the end of Dec’23 and Mar’24, but with equity injections and conversions of subordinated debt to equity in early 2024, the restated CAR as of Dec-23 & Mar’24 would have been higher than the regulatory requirement. The conversion of a tier-II capital instrument to equity also increases room to issue further tier-II debt to reinforce capital adequacy if needed.

Profitability indicators are reflective of asset quality strains on both markup income generated as well as ECL charges. The cost of funds has risen further in line with the record level of discount rate in 2023. Operating cost has also increased due to rising inflationary pressures and also due to ongoing branch expansion plan, making UMBL the largest microfinance provider in the country. Going forward, the Bank’s operating results are expected to post a turnaround in the current year with improvement anticipated in terms of pre-tax earnings.

There has been significant growth in the Bank's Gross Loan Portfolio (GLP). A major driver of this expansion was the agriculture segment; significant growth was witnessed in gold backed secured portfolio which remain above the industry average. To mitigate inherent credit risks in unsecured lending, the Bank's strategy includes gradually increasing the proportion of secured loans. Additionally, the Bank's policy of limited group lending of the total loan portfolio reduces credit risk. In terms of repayment structure, bullet loans are predominant, however the Bank is now focusing on EMI loans in line with the evolving sector norms towards EMI structures, given the higher risk associated with bullet structures.

Liquidity remains sufficient. The asset-liability maturity analysis as of Dec’23 indicates short-term borrowings funding longer-term commitments. Going forward, asset quality indicators and profitability trends will be monitored in terms of their effect on retaining and expanding the capital buffer over the regulatory capital requirement.

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

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