Karachi, June 29, 2020 (PPI-OT): VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of National Bank of Pakistan (NBP) at ‘AAA/A-1+’ (Triple A/A-One Plus). The long-term rating of ‘AAA’ signifies highest credit quality; risk factors are negligible being only slightly more than for risk-free Government of Pakistan’s debt. The short-term rating of ‘A-1+’ signifies highest certainty of timely payment; short-term liquidity, including internal operating factors and/ or access to alternative sources of funds, is outstanding and safety is just below risk-free Government of Pakistan’s short-term obligations. Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on June 28, 2019.
Assigned ratings take into account the sovereign sponsorship of NBP and its role in handling treasury transactions for the GoP as an agent to the State Bank of Pakistan (SBP). The rating also reflects the bank’s positioning as one of the largest banks in the country having market share of 14.4% (2018: 15.0%) in domestic deposits.
Current ratings also incorporate healthy capitalization indicators and adequate liquidity profile. Overall liquidity profile of the bank is considered adequately aligned with the assigned ratings in view of sizeable liquid assets in relation to deposits and borrowings. Credit and market risk emanating from the investment portfolio is considered low as majority comprises government securities. During 2019, the increase in quantum of NPLs, resulted in higher infection levels reported at 12.9% (2018: 12.6%) and 1.4% (2018: 0.8%) on gross and net basis respectively; net NPL to Tier -1 capital ratio of the bank compared less favourably to peers.
Regulatory relief measures undertaken by SBP during this ongoing pandemic period to promote financial stability, ensure continued credit supply to the economy and maintain confidence in the banking system have been received positively and are expected to delay the impact of prevailing headwinds on portfolio asset quality indicators. However, exposure of banking sector to credit risk is elevated due to significant impact of COVID-19 on already weak macroeconomic indicators. Our credit impairment expectations are conservative, albeit there is a probability of deviation from expectations; downside risk is elevated, amidst an uncertain economic environment.
Growth in domestic advances outpaced the industry growth resulting in a market share in terms of domestic advances increased to 12.9% (2018: 12.3%), at end-December 2019. NBP’s lending portfolio grew largely on account of higher lending to the private sector during the outgoing year. Going forward, management will focus on increasing its loan book in tandem with managing credit risk at adequate levels. Conservative lending strategy to maintain asset quality and cost efficiencies would be important rating drivers going forward.
Despite an increasing interest rate scenario and volumetric growth in advances, the bank’s operating profitability was adversely impacted on account of higher compensation expenses and devaluation of investments, during 2019. Going forward, while the banks may earn capital gains on investments in higher rate government securities, the impact of continued lockdown on the economy and the financial sector would make the operating dynamics of the banks in general challenging.
While regulatory relaxations are expected to provide certain respite to the financial sector, it is expected that the impact of curtailment of economic activity for a certain period of time, higher business risk in the borrower portfolio and lower lending rate scenario may cause NIM compression; hence, the profitability of the bank is likely to be impacted in the medium term rating horizon. Due to the difficulty in forecasting the economic uncertainty prevalent under current circumstances, the assigned ratings may, if considered necessary, be reviewed at shorter intervals as and when stable/volatile signs in economic and business cycles emerge.
For more information, contact:
Director Compliance and Rating Analytics,
VIS Credit Rating Company Limited
VIS House, 128/C, 25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi, Pakistan