Press Release

VIS Reaffirms Entity Ratings of The Bank of Khyber

Karachi, June 26, 2019: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of The Bank of Khyber (BoK) at ‘A/A-1’ (Single A/A-One). The medium to long-term rating of ‘A’ denotes good credit quality, with adequate protection factors. Moreover, 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. Outlook on the assigned rating is ‘Stable’. The previous rating action was announced on June 29, 2018.

The ratings assigned to the BoK reflect its majority shareholding held by the Government of KPK. The ratings are supported by growth, though relatively slow, in advances portfolio, largely stable asset quality and adequate liquidity position. In the interest rate volatility scenario, to mitigate the interest rate risk, the bank incurred a considerable loss on sale and remeasurement of government securities. This reduced the net earnings and the capitalization level, bringing the CAR close to the minimum regulatory benchmark. The ratings take into account the management’s initiatives to strengthen the CAR to provide growth space to the bank.

Growth in advances was witnessed in conventional loans while Islamic loan portfolio declined by end-FY18. BoK has segregated conventional commercial & retail banking operations from corporate banking in order to enhance efficiencies. The bank exhibited slight improvement in asset quality indicators on account of recoveries against classified portfolio during FY18.

Investment portfolio of the bank stood lower mainly due to divesture and remeasurement deficit in available-for-sale government securities. The credit risk arising from the investment portfolio is considered minimal, however, the same is exposed to interest rate risk. The bank intends to re-profile its investment portfolio to support its CAR. The liquidity profile of the bank remained largely stable despite slight decline in adjusted liquid assets. Advances-to-Deposit (ADR) increased slightly, though still remained relatively low at end-FY18. The deposit concentration is considered high, though, comfort can be drawn by the fact that most of these deposits are related to the government of KPK. Total borrowings stood lower at end-FY18, however, the bank intends to increase borrowings to finance fresh investments during FY19.

BoK registered higher net markup income on the back of volume expansion and slight improvement in spreads during FY18. The bank reported a healthy growth in fee, commission, & brokerage and foreign exchange income, however, loss on securities along with higher operating expenses resulted in lower net profit and CAR for the FY18. The phase-wise rollout of core banking is planned for 2HFY20 that is expected to be completed in two years. The bank also plans to initiate digital and internet banking services with a big bang approach at the start of FY20. Ratings are dependent upon support of main sponsor in strengthening of capitalization level and an enhancement in the corporate governance practices along with up gradation of the IT environment.

For further information on this rating announcement, please contact undersigned or Mr. Maimoon Rasheed at 021-35311861-70/ 042-35723411 or fax to 021-35311872-3.

Javed Callea

Applicable rating criterion: Commercial Banks Methodology - March, 2018

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 2019 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .