The Pakistan Credit Rating Agency Limited / Banking

Ratings (June 2013)

NIB Bank Limited (NIB)

Ratings / New / Previous
Entity
Long Term / AA- / AA-
Short Term / A1+ / A1+
Instrument (TFCs)
(Listed, Unsecured, Subordinated)
PKR 4,000mln / A+ / A+

LT Entity Rating - History

FinancialData PKR (mln)

Mar13* / Dec12 / Dec11
Total Assets / 179,725 / 190,609 / 154,794
Equity / 14,137 / 13.622 / 13,584
Finances / 64,790 / 64,262 / 53,067
Deposits / 84,637 / 91,291 / 85,488
Net income / 514 / 38 / (2,044)
ROE % / 14.8 / 0.3 / n.m
Equity/Asset % / 7.9 / 7.1 / 8.8
CAR% / 12.4 / 13.0 / 14.1

* Based on unaudited results for 3 Months ended March13

Analysts

Humza Hussain

+92 42 35869504

Samiya Mukhtar
+92 42 35869504

Profile

  • NIB Bank Limited, incorporated in 2003, after a series of mergers, operates a network of 179 branches with ~ 1% share in total banking deposits (end-Dec12). Bugis Investment (Mauritius) Pte. Limited, a wholly owned subsidiary of Fullerton Financial Holdings (FFH), which in turn is fully owned by Temasek Holdings, owns majority stake in NIB (88.6%).
  • The eight-member BoD includes the President and seven non-executive directors, three of whom are representatives of Temasek and four are independent. The bank has experienced changes in key management positions in the recent past. Mr. Badar Kazmi, the CEO since January 2012, is a seasoned banker with extensive local and international experience. The management team, though new to the bank, comprises of experienced individuals.

Rating Rationale and Key Rating Drivers

  • The ratings reflect NIB's association with Temasek Holdings - the investment arm of Government of Singapore, internationally rated AAA. The ratings draw material comfort from historically demonstrated commitment of Temasek towards NIB. On a standalone basis, though the bank has witnessed recovery in its financial profile, it still faces various challenges including, (i) sizeable non-earning assets, (ii) significant potential drag of un-provided non-performing loans, and (iii) relatively tight liquidity particularly compared to peers. An aggressive recovery drive is being pursued; the ensuing reversals are likely to support otherwise subdued core performance. The new management, is re-aligning its business strategy to prevailing market dynamics, wherein channelizing branch network for deposit expansion and cautious build up of advances, along with non-fund revenue are imperative.
  • The ratings are primarily dependent on continued support of the sponsors. However, on a standalone basis, it is critical to elevate the bank’s profile to a level that commensurate to its ratings in the peer universe.Hence, the management's success in improving profitability on a sustainable basis with prudent control over associated risks is critical.Meanwhile insulating the bank from further material deterioration in asset quality, would remain important.

Assessment

  • During CY12, NIB bank continued to focus on consolidating and recovering its non-performing portfolio. Nevertheless, while being cautious, the bank’s new exposures were mainly in commodity financing (increase in gross advances:11%). The growth was mainly financed through deposits. NIB’s net ADR remained higher than the industry (CY12: 78%; CY11:71%).Meanwhile, the top twenty exposure concentration, excluding commodity financing, has increased to 27% (CY11: 24%). The highest exposure contributes around 17% to total loan book. However, comfort is drawn since it relates to direct/indirect loans to GoP (Trading Corporation Pakistan, PASSCO, Sindh Food Department, etc.). To gradually build a good quality loan book, the bank is focusing on creditworthy corporate. Corporate sector dominates the mix (CY12: 80%; CY11: 48%) with key exposure in textile (30%), food & beverage (20%) and energy sector (8%).
  • NIB’s infection rate is significantly higher than peers (NPLs to Gross Advances: 1QCY13: 34%; CY12: 35%; CY11: 41%) these are mainly from NIB’s program lending in addition to legacy portfolio. Top twenty NPLs are sizeable (30% of total NPLs) with top two groups being Dewan Group & Azgard Nine. Although the bank’s lending book experienced further increase in NPLs as reflected in 14% of total NPLs residing in substandard and doubtful category, NPLs to gross advances ratio decreased from 41% in CY11 to 34% in 1QCY13. This was on account of efforts for reversals of NPLs, mainly in textile sector which constitutes ~42% of the bad portfolio. The bank’s watch list accounts largely pertain to the textile sector. Provisioning coverage of the bank remains in line with the industry (1QCY13: 72%; CY12: 71%; CY11: 69%).
  • During CY12 the bank’s asset yield fell, this can be mainly attributed to the 250bps average fall in interest rates during CY12. The bank cognizant of its falling yield shed high cost deposits rationalizing its cost of fund. Overall spreads fell (1QCY13: 3.6%;CY12: 2.5%; CY11: 4.1%). After two years of significant losses, NIB achieved pre-provisioning profitability, though nominal. This can be attributed to growth in (i) earning asset base, and (ii) improvement in non-markup income. Operating expenses increased slightly owing to new hiring (staff: CY12: 2,768; CY11: 2,671). The bank through its ongoing recovery efforts booked provisioning reversal of PKR 100mln (CY11: provisioning charge: PKR 2,766mln). During 1QCY13, NIB booked a net reversal of PKR 419mln. This was the major contributor towards 1QCY13 profitability which improved to PAT of PKR 514mln (CY12: PAT of PKR 38mln; CY11: LAT of 2,044mln).
  • Going forward, the bank intends to improve its balance sheet structure through recoveries from bad debts. The bank plans to broaden its business focus through (i) cross-selling strategy, (ii) entering into the Islamic banking market and (iii) emphasis on transactional banking.The bank is expected to continue to rationalize its cost structure by targeting lower cost deposits and reducing administrative and other operating expenses. Furthermore, the bank aims to strengthen existing relationships and improve its service quality.
  • NIB’s investment portfolio net of repo borrowing and as a percentage of total assets is small (end Mar-13: 3%; end CY12: 9%; end CY11:6%). The investments have remained largely concentrated in government securities (T-bills and PIBs, mainly funded from money market borrowings). The remaining portfolio comprises strategic investments (PICIC Asset Management Company Limited), its associated funds, PICIC Insurance Limited and a small portfolio of equity securities including mutual funds. Currently NIB is in the process of divesting its stake in PICIC Insurance Limited.
  • The bank’s deposit base grew marginally (~8%). The bank shed its high cost deposits, thus, the constitution of Current and Saving Account (CASA) deposits in the deposit mix have increased (1QCY13: 78%; CY12: 71%; CY11: 61%). Moreover, the deposit concentration of the bank has remained relatively low as the top twenty depositors constituted 18% of the total deposits at end Dec-12.
  • NIB’s treasury operations include participation in money market activities. Currently the bank is net borrower in the money market. Meanwhile, the liquidity of the bank is lower relative to the industry average (Liquid Assets/Deposits and Borrowing: 1QCY13: 22%; CY12: 26%; CY11: 30%).The bank has borrowing limits from FI’s of PKR 10bln at end-Mar13.
  • The bank has sound capitalization with CAR of 12.4% which is at par with its peers. Continuing trend of profitability is critical to strengthen bank’s risk absorption capacity.

TFC Issue

  • NIB issued listed unsecured, subordinated, 6-months KIBOR plus 115bps TFCs of PKR 4,000mln, for a tenor of 8 years, in Mar08 with semiannual profit payments. The instrument is structured to redeem 0.20% of the issue amount in the first 60 months, and the remaining in six (6) equal semi-annual installments, which started from 66th month (i.e. Aug 2013). The TFCs have a call option, in whole or in part, subject to the approval of SBP, exercisable on any profit payment date after 60 months i.e. from Mar-13. Benefit of this TFC towards tier-2 CAR has started to diminish. To replenish this, NIB has lately announced issuance of another TFC (PKR 6,000mln) while exercising call option on existing TFC.

PACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is not guaranteed. PACRA shall owe no liability whatsoever to any loss or damage caused by or resulting from any error in such information. None of the information in this document may be copied or otherwise reproduced, stored or disseminated in whole or in part in any form or by any means whatsoever by any person without PACRA’s written consent. Our reports and ratings constitute opinions, not recommendations to buy or to sell.

Tel: 92 (42) 35869504 Fax: 92 (042) 35830425