November 07, 2024 (MLN): Pakistan Credit Rating Agency Limited (PACRA) has assigned an initial long-term rating of 'AAA' and a short-term rating of 'A1+' to the Export-Import Bank of Pakistan (EXIM), according to the latest press release issued by PACRA.
EXIM Bank was established in February 2023 by the Government of Pakistan (GoP) through the Export-Import Bank of Pakistan Act, 2022.
The ratings reflect a high propensity of state support for EXIM when required, due to the Bank’s strategic importance to the State, as outlined in Chapter VI, Clause 25, of the Export-Import Bank of Pakistan Act, 2022, in conjunction with Clause 43.
Empirical evidence is available around the globe, where banks with similar objectives are able to replenish equity through state support, when necessary, which forms the basis for the assigned ratings.
The ratings further take comfort from its sovereign ownership and strategic importance to GoP as a key policy institution.
EXIM’s strategic objectives include increasing the country's share in global exports while diversifying across sectors and regions.
To achieve these goals, EXIM has initially introduced short-term “Trade Credit Insurance” products for exporters and commercial banks, utilizing available equity beyond its core equity of PKR 10 billion.
These insurance policies enable Pakistani exporters and their banks to offer open terms to international buyers and their banks, enhancing the overall export competitiveness in the global market.
Through these policies, exporters and their banks can insure against non-payments of receivables covered under the policies, with EXIM covering the losses up to the policy limits. To scale up its business and mitigate risk, EXIM is also seeking reinsurance arrangements.
Until these arrangements are in place, EXIM is focused on capital preservation by (a) ensuring to maintain a minimum capital requirement of PKR 10bln net of losses as per the Bank's strategic plan. (b) maintaining the Capital Adequacy Ratio (CAR) with a high amount of cushion therein, required by the State Bank of Pakistan (SBP), and (c) avoiding liquidity risks.
During the initial phase of operations, without reinsurance arrangements, underwriting concentration risk will be the highest due to the limited number of buyers.
To counter liquidity risk that might arise due to claims in the early stage of operations, EXIM implements risk mitigation measures, including (i) non-aggressive credit underwriting, (ii) low leverage of capital at risk, and (iii) setting low transactional limits. EXIM began its commercial operations in December 2023.
As of June 2024, EXIM's equity stands at PKR 18.141bn (Tier-1 entirely). Capitalization metrics remain strong and are anticipated to absorb any incremental asset quality-related shocks to support growth requirements.
As EXIM expands its policy business, it will face potential incremental risk from its portfolio. The Bank's ability to minimize significant slippages from this segment will remain a crucial area for the ratings.
Furthermore, the bank has agreed to having a robust risk management framework and adherence to the framework remains imperative for the ratings.
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Posted on: 2024-11-07T09:56:29+05:00
