JCR-VIS assigns rating to Pakistan’s First Basel 3 Tier 1 instrument by Bank Alfalah

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JCR-VIS Credit Rating Company Limited (JCR-VIS) has assigned preliminary rating of ‘AA-‘ (Double A Minus) to Bank Alfalah Limited’s proposed Basel 3 Tier-1 debt instrument. Outlook on the assigned rating is ‘Stable’. Rating will be finalized upon review of signed legal documents.

Bank Alfalah is in the process of issuing a listed, perpetual, unsecured, subordinated, non-cumulative and contingent convertible debt instruments amounting up to Rs. 7.0b (inclusive of Green Shoe Option of Rs. 2.0b). The issue proceeds will contribute towards the bank’s additional Tier-1 capital and will be utilized towards enhancement of the bank’s business operations. Bank Alfalah’s tier-1 instrument will rank ahead of claims of ordinary shareholders but below the bank’s senior creditors, including depositors and holders of Tier 2 TFC.

The assigned instrument rating draws comfort from the sound risk profile of Bank Alfalah. JCR-VIS has assigned entity ratings of AA+/A-1+ (Double A Plus/A-One Plus) to Bank Alfalah indicating high credit quality and adequate protection factors. The assigned ratings reflect the Bank’s diversified operations, healthy financial risk profile, strong sponsors and existing market presence. Bank Alfalah has exhibited sustained improvement across key performance areas including asset quality, liquidity, capitalization and profitability. At the end of September 2017, Bank Alfalah had an asset base of Rs. 969.8 billion. Tier-1 and overall CAR on a consolidated basis stood at 11.11% and 13.5%, respectively at end-September’2017.  

The assigned rating portrays the relative risk of the Tier-1 instrument wherein the issuer has full discretion on coupon payments, interest servicing from only profits for the year and conversion feature in the event of pre-specified trigger events, lock-in clause and point of non-viability in terms of regulatory requirements. While the regulatory framework may not consider a missed coupon payment as a default; the credit rating methodology employed by JCR-VIS would treat such missed payments as an event of default. In normal course of business, JCR-VIS believes that chances of non-performance risk are considered remote.

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