October 14, 2020 (MLN): VIS Credit Rating Company Limited has maintained the entity ratings of Silk Bank Limited (Silk) at ‘A-/A-2’ (Single A Minus/A-Two).
Rating of the outstanding Tier-2 TFC has also been maintained at BBB+ (Triple B Plus) in line with VIS’s standard notching criteria for rating Basel 3 Compliant Tier 2 instrument.
Ratings have been placed on Rating Watch-Negative Status given weakening in asset quality and capitalization indicators, said the rating agency.
As per the VIS, revision in rating outlook reflects weakening in capitalization indicators of the Bank. Capital Adequacy Ratio (CAR) of the bank was reported at 8.36% as at end-June 2020, against minimum requirement of 11.5%. Non-compliance was on account of sizeable losses incurred during 2019 and 1Q20 on account of regulatory provisioning against delinquent loans which depleted equity of the Bank.
However, sizeable capital gains on investment portfolio (amounting to Rs. 4.6b during 2Q20) resulted in some improvement in CAR as at end-June 2020. In order to achieve compliance with regulatory CAR requirements, the Bank is in the process of injecting capital in the range of Rs. 7billion to Rs. 10billion while restructuring of NPL exposure from a single group is also awaiting regulatory approval.
Timely achievement of compliance with regulatory CAR requirements along with necessary buffer for growth is considered important from a ratings perspective. Upon completion of the rights share issuance process within communicated timeline, ratings will be reviewed.
Gross financing portfolio increased by 8.4% in 2019 with growth manifested in corporate (including Islamic financing) and consumer advances. Corporate portfolio features significant concentration with sizeable lending to real estate-based counterparties.
Asset quality indicators of the bank witnessed significant weakening during 2019 and 1Q20 on account of sizeable increase in NPL portfolio. Most of the fresh increase in NPLs pertained to Islamic portfolio with clients comprising sole proprietors/partnerships. Consumer financing continued to depict double digit growth across all three products (personal installment loan, ready line and credit cards).
Gross infection in the consumer portfolio increased slightly but remains below industry norms. Maintaining sound asset quality indicators in the consumer portfolio is important given the sizeable contribution of the segment to Bank’s overall profitability. Asset quality pressures may emanate from concentration of large-ticket exposures. Accordingly, close monitoring of exposures of existing clientele and speedy recovery from NPLs is warranted from a ratings perspective.
Profitability profile of the bank weakened during 2019 on account of decline in spreads (sizeable suspended markup income from non-performing portfolio), higher provisioning charges and increase in expense base. For 2020, sizeable capital gains and targeted provision reversal are expected to support profitability indicators.
Deposit base witnessed growth in 2019 and in the ongoing year. However, deposit mix and concentration have room for improvement. Liquidity buffer on balance sheet has increased on a timeline basis while the Bank has achieved compliance with liquidity coverage ratio at end-June 2020.