Final PR
The Pakistan Credit Rating Agency Limited

Rai Umar Zafar

Saliha Sajid

Applicable Criteria

  • Rating Modifiers | Outlook and Rating Watch (Jun 16) [View]

Related Research

  • Sector Study | Commercial Bank (Jun 16) [View]
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PACRA places Entity ratings of SME Bank Limited on Rating Watch
 Rating Type Entity
 Action Maintain
 Long Term B
 Short Term B
 Outlook Developing
 Rating Watch RatingWatch -

In a recent development, at least 10 parties have submitted their applications, containing expressions of interest and statement of qualifications, for acquiring up to 93.88 percent shareholding of the SME Bank. This is an outcome of Government of Pakistan's endeavors to make SME Bank a vibrant institution by divesting GOP’s equity stake in bank along with the management control to a strategic investor. The Privatization commission has appointed Financial Advisory Consortium (FAC). Expressions of interest have been submitted. The government targets to complete the process before June 30, 2017. SBP has incentivised the transaction to provide support to the potential sponsors. The key highlight is the reduction in minimum paid up capital to PKR 6bln. This capital would be build in a staggered manner with initial injection of PKR 2bln and PKR 1bln each year for the next 4 years.

On a standalone basis, SME Bank Limited has a stressed profile. Due to subdued performance of the bank, the equity base has been almost eroded (PKR 21mln at end December 2016). Deposits are pre-dominantly from government linked entities; hence, relatively stable. Notably, more than half of this is deployed in the form of investments, providing adequate liquidity. However, rest of the assets has significant quantum of non-earning assets. Given continuous operational losses and limited equity base, timely completion of privatization process is critical.

PACRA has placed the entity ratings of SME Bank on rating watch. PACRA would monitor the related developments. Rating would be reviewed once the clarity as to the new ownership structure and pursuant strategy is achieved.
About the Entity
SME Bank Limited, incorporated in January 2002, commenced commercial banking operations in 2005. It operates a network of 13 branches and is ~94% owned by Federal Government through Ministry of Finance. Overall control of the bank lies with government nominated seven member Board of Directors. The CEO, Mr. Ihsan ul Haq Khan, assumed the role in Jun-14 and has prior experience in banking and finance.
The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.