VIS Credit Rating Company Limited has reaffirmed the entity ratings of Meezan Bank Limited (‘MEBL’ or ‘the Bank’) at ‘AAA/A-1+’ (Triple A/ A-One Plus). The medium to long-term rating of ‘AAA’ denotes highest credit quality, with negligible risk factors, being only slightly more than for risk-free debt of Government of Pakistan (GoP). The short-term rating of ‘A-1+’ denotes highest certainty of timely payment; short-term liquidity, including internal operating factors and/or access to alternative sources of funds, is outstanding and safety is just below risk-free short-term obligations of GoP. VIS has also reaffirmed ratings of the outstanding Basel 3 Compliant Tier 1 and Tier 2 Sukuk (sukuk 3 and sukuk 4) of MEBL at ‘AA+’ (Double A Plus) and ‘AAA’ (Triple A) respectively. Outlook on the assigned ratings is ‘Stable’. The previous rating action on the entity was announced on June 29, 2022.
The assigned rating incorporates the strong market positioning and franchise of MEBL. Meezan Bank Limited (MEBL) is the first and largest Islamic commercial bank in Pakistan. As of Mar’23, MEBL has strengthened its position, becoming the 4th largest bank in terms of deposits and the 3rd largest in terms of financings, with market share of 7.60% and 8.87% respectively. With a network of 972 branches operating in 324 cities across Pakistan, MEBL has significantly expanded its operations in the past decade. The Bank’s major shareholders include Noor Financial Investment Company (NFIC), Pakistan Kuwait Investment Company (Pvt.) Ltd (PKICL), and Islamic Development Bank, Jeddah (IDB).
Additionally, MEBL has experienced notable changes in asset allocation and deposit composition, demonstrating strong growth in business assets and deposits while maintaining a robust liquidity profile. The financing and investment portfolio has become the dominant asset class, accounting for 85.2% (Dec’21: 72.4%) of total assets as of Mar’23. The Bank’s financing-to-deposit ratio (FDR) has increased, reflecting its strong position in utilizing deposits for financing activities. MEBL’s liquidity profile remains strong, with Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) were comfortably high.
Furthermore, MEBL has shown improved asset quality compared to its peers, with effective non-performing loan (NPL) management and high provisioning coverage. The Bank’s gross infection rate of 1.47% as of Mar’23 is the lowest among large banks in Pakistan. With the recent increase in the State Bank of Pakistan’s policy rate, MEBL is well-positioned to navigate emerging credit risk concerns due to its exposure to blue-chip clients and substantial provisioning coverage.
MEBL’s financial performance in 2022 was commendable, driven by wider spreads and improved return on average assets (RoAA), despite prudent provisioning. The Bank achieved significant growth in spread income, supported by higher deployed assets and low-cost deposits. Profitability was further enhanced by fee and commission income. MEBL’s RoAA was the highest amongst ‘Large Banks’. MEBL’s strong asset quality indicators and high provisioning coverage are expected to limit additional provisioning costs, leading to further earnings growth in 2023.
Finally, MEBL maintains a strong capital adequacy position, well above the minimum requirement set by the State Bank of Pakistan (SBP) and meeting the benchmark for ‘AAA’ rating. The Bank’s capitalization buffers are supported by strong profitability and lower payout ratio. MEBL’s capital adequacy ratio (CAR) is expected to remain comfortable, underpinned by robust internal capital generation, strong credit quality, and lower exposure to market risk compared to its peers.