Press Release

Ratings of Zarai Taraqiati Bank Limited

Karachi, June 26, 2019: VIS Credit Rating Company Limited (VIS) has reaffirmed entity ratings of ZTBL at ‘AAA/A-1+’ (Triple A/A-One Plus). VIS has also reaffirmed ratings of ‘AAA/A-1+’ (Triple A/A-One Plus) assigned to Government Guaranteed Obligations, primarily Preference Shares of ZTBL. The medium to long-term rating of ‘AAA’ denotes highest credit quality, with negligible risk factors, being only slightly more than for risk-free debt of Government of Pakistan. The short-term rating of ‘A-1+’ denotes highest certainty of timely payment, liquidity factors are outstanding and safety is just below risk free short-term obligations of Government of Pakistan. Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on June 28, 2018.

The assigned ratings take into account the implicit support of Government of Pakistan (GoP) being provided to ZTBL. ZTBL plays a pivotal role in the development of agriculture sector of the country since it is the principal financial institution of GoP for the mobilization of agricultural credit. However, the financial risk profile of the bank has been affected by deterioration in asset quality coupled with decline in liquidity indicators. Moreover, decline in investment portfolio was witnessed along with a slight decrease in gross advances portfolio due to lower disbursements in order to ensure quality advances, and some erosion in equity base. The profitability has also weakened mainly on account of downward pressure on markup spreads, increase in administration expenses, and higher provision charge against non-performing loans.

Gross advances portfolio of the bank decreased slightly on account of lower credit disbursement during FY18 following management’s vision to ensure quality disbursement. Assets quality indicators deteriorated during FY18, partially due to increase in NPLs related to sugarcane and potato crops, as depicted by notably higher gross and net infection. Likewise, net NPLs equated to half of the bank’s tier-1 equity at end-FY18. Going forward, the management plans to adopt corrective recovery mechanism; encouraging clients to clear their dues; failure to do so will lead to auction of their properties secured as collateral with the bank and/or encashment of post-dated cheques taken as collateral.

ZTBL registered reduction in investment portfolio on account of divesture in government securities during FY18. The investment portfolio mainly consisted of government securities, and hence the overall credit risk emanating from the same is considered minimal. Despite some increase in exposure to PIBs, the interest rate risk arising from PIBs portfolio is still considered manageable as it represents less than 4% of total assets. The weakness in liquidity profile was due to notable decrease in collateral adjusted liquid assets in relation to adjusted deposits and borrowings by end-FY18. According to the management, the bank shed high cost deposit to curtail increasing cost of funds. The concentration of deposits among top 10 customers decreased slightly by end-FY18, though is still considered on the higher side.

The bank earned a lower markup spread on account of decline in yield on markup bearing assets and higher cost of funds during FY18. Non-markup based income also decreased mainly owing to lower credit related fee income, an outcome of lower disbursements. The bank recorded a higher net provision and write-offs against loans & advances. Equity base of the bank decreased on account of a net loss during FY18. The Capital Adequacy Ratio (CAR) of the bank was recorded lower, though still considerably higher than the minimum regulatory requirement. The ratings factor in weak corporate governance as the BoD at ZTBL is not fully functional since June’17 in the absence of approval of three nominated directors out of seven on the Board.

Sheikh AmanUllah, took the charge of acting President in October, 2018. He has embarked upon a number of initiatives including change in business model. The bank commenced Islamic banking operations and expanded its digital platform by installing ATMs. Moreover, the bank is in the process of enhancing focus on value added crops while diversification of its loan portfolio, joint venture schemes with provincial governments for agricultural credit expansion and enhancement of insurance coverage to mitigate potential losses is also on the anvil. Stability in senior management is considered important in attaining long-term strategic goals of the bank. The acquisition of Core Banking System (CBS) along with the IT security software & hardware infrastructure is expected in 4QFY19. The implementation of CBS is expected to be completed within 2 years subsequent to acquisition.

The entity ratings would continue to be dependent upon the implicit support of GoP in capitalization along with management focus on improving the asset quality, corporate governance framework, and concentration levels in deposits. With advent of depositor protection scheme, management expects sovereign guarantee on their deposits to continue; the latter is a key rating driver.

For further information on this rating announcement, please contact the undersigned at 021-35311861-70 or Mr. Maimoon Rasheed at 042-35723411-13.


Javed Callea
Advisor

Applicable rating criterion: Government Supported Entities (June 2016);
http://www.vis.com.pk/kc-meth.aspx

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 .