Press Release

JCR-VIS assigns Positive Outlook to House Building Finance Company Limited

Karachi, June 30, 2015: JCR-VIS Credit Rating Company Limited has assigned Positive Outlook to the entity ratings of House Building Finance Company Limited (HBFCL) of ‘A/A-2’ (Single A/A-Two). Previously, ratings were placed under ‘Rating Watch-Developing’ status. The previous rating action was announced on June 12, 2014.

Following the restructuring exercise approved for HBFCL, entailing conversion of all outstanding debt to the tune of Rs. 11.2b and mark-up to the extent of Rs. 2.4b, payable to the State Bank of Pakistan (SBP), into equity, the stand-alone risk profile of the institution will stand enhanced. Management has communicated that the conversion will be finalized on June30, 2015. The transaction reinforces the support of Government of Pakistan (GoP) built into the previously assigned ratings. Following the conversion, SBP’s stake in the company will stand enhanced at 89%.This transaction will bridge the shortfall in equity, which amounted to Rs. 2b at year-end FY14, while equity stood at Rs. 4.1b. Currently, net NPLs to tier-1 equity ratio is significantly high at 57.5%; this is expected to dilute to below 15%, post conversion. Moreover, the demand on liquidity is also expected to be eliminated to a large extent.

After a substantial time gap, the Board of Directors was reconstituted in May 2014; Mr. Pervez Said has been appointed as CEO. However, significant gaps remain at the senior management level. The Board has yet to approve the company’s financial statements; last approved financial statements are for the year ended December 2011.

For the first time in six years, gross advances registered a marginal increase in FY14. Bottom-line improved during 2014 on the back of lower interest expense. Following the approval of restructuring plan, the company has stopped accruing mark-up expense on SBP debt. With planned growth in lending activities, income from this source is projected to rise. Barring the long term government paper held by the company, return on advances and investments is expected to decline in line with the decline in interest rates. With salary increments sanctioned in the recent past and hiring underway for key management positions which have been vacant, employee related costs are expected to rise. Future direction of earnings will be a function of asset mix and quality.

With significant unmet housing demand in Pakistan and improved financial risk profile, the new team, once in place, is expected to have the necessary platform to pursue growth under a functional Board of Directors. Development of a coherent business strategy and its implementation mechanism and ensuring the adoption of sound underwriting guidelines are considered important for the future risk profile of the institution. Moreover, the control infrastructure, including support required from IT, will also need to be strengthened to manage risks in line with the institution’s loss absorption capacity. Ratings will be reviewed upon the approval of all outstanding financial statements by the Board. Progress in terms of hiring of top management positions in the near to medium term is also anticipated by the company, which will be vital for development and implementation of business plan.

For further information on this rating announcement, please contact Mr. Javed Callea (Ext: 501) or Ms. Sobia Maqbool, CFA (Ext: 506) at 35311861-70 or fax to 35311872-3.



Javed Callea
Advisor

JCR-VIS Entity Rating Criteria: Government Supported Entities (July 2002)
http://jcrvis.com.pk/images/gse.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 2015 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .