Karachi,June 23, 2020: VIS Credit Rating Company Limited (VIS) has reaffirmed entity ratings of Samba Bank Limited (SBL) at ‘AA/A-1’ (Double A/A-One). Outlook on the assigned ratings is ‘Stable’. The long term rating of ‘AA’ signifies high credit quality; protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. The short term rating of ‘A-1’ signifies high certainty of timely payment; liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor. Previous rating action was announced on June 24,2019.
The assigned ratings incorporate sound profile of its sponsor, Samba Financial Group (SFG). SFG is one of the largest banking groups in Kingdom of Saudi Arabia (KSA). In July 2019, an international rating agency reaffirmed the long term credit rating of SFG at ‘A-’ with a stable outlook. Assigned ratings also incorporate standalone financial risk profile of SBL as depicted by sound capitalization indicators, growth in lending portfolio and improvement in operating profitability during the outgoing year.
Gross financing portfolio of SBL witnessed moderate growth of 14.6% to increase to Rs. 64.0b (2018: Rs. 55.9b) atend-2019. Despite considerable growth in lending portfolio, market share of the bank in terms of advances remains on the lower sidevis-à-vis peers (2019: 0.8%; 2018: 0.7%). Concentration is witnessed in lending portfolio due to prudent lending practices and limited size of the bank. Asset quality indicators depicted improvement in2019 vis-à-vis the preceding year. In the emerging weak economic situation due to the pandemic, maintaining asset quality indicators is important from ratings perspective.
Overall liquidity profile of the bank depicts room for improvement in view of higher advances to deposits ratio and lower deposit granularity vis-à-vispeers. Limited branch network contributes to concentration in deposit base. Improvement in liquidity profile in view of projected weak economic outlook is important driver for ratings. Capitalization indicators of the bank remain sound and are expected to remain healthy over the ratings horizon.
Net Interest Income improved on back of growth in advances coupled with higher returns on financing. Recurring income of the bank improved due to higher net interest income (NII) and non-markup income. Operating profitability was reported higher due to greater increase in recurring incomevis-à-vis expenses. However, growth in net profitability was limited due to provisions booked during the year. Going forward, while the banks would earn capital gains on investments in higher rate government securities, the Covid-19 crisis and its impact on the economy and the financial sector would make the operating dynamics of the banks in general challenging. SBP has announced regulatory relaxations to manage the asset quality of the banks’ portfolio which along with the relief package provided by the Federal Government are expected to provide certain respite to the financial sector. However, 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 banking sector is likely to be impacted in the medium term rating horizon. Conservative lending strategy to maintain asset quality and cost efficiencies would be important rating drivers going forward. As the duration ofbusiness and economic uncertainty prevalent due to ongoing pandemicis difficult to forecast, the assigned ratings may, if considered necessary, be reviewed at shorter intervals as and when stable/volatile signs in economic and business cycles emerge.