Lahore, June 27, 2019 (PPI-OT): Development Financial institutions (DFIs) largely operate on turf common to commercial banks. Limited depth in participation towards development of long gestation projects, low funding base, and high competition become their key challenges. Joint Venture Financial Institutions are DFIs jointly established by the two sovereigns with primary objective of identifying and nurturing multiple development initiatives. Their ratings are mainly characterized by sovereign ownership, adequate standards of governance, and relatively conservative risk appetite.
The ratings of Pak Libya reflects sustained performance of the company since last many years. Benefiting from the increasing credit off take in the country in last few years, lending side of Pak Libya picked up pace along with sustaining the asset quality. Treasury operations continue to strengthen the financial position of the company. Investment in government securities increased; the company suffered sizable loss on its investment book; management has shrinked its PIB portfolio to minimize future losses. The company needs to beef up and elaborate its investment policy.
Funding base majorly comprises borrowings from money market. During CY18, with significant surge in cost structure – interest and provisioning expense – company booked pre-provisioning operating loss. Going forward, given current economic scenario vigilant monitoring of existing loan book is required while keeping operating costs in check. The management continues to cautiously expand its existing loan book through corporate finance activities and further penetrating in SME segments.
Last year, a Special Purpose Vehicle named Kamoke Powergen (Pvt.) Limited (KPL) was incorporated, to apply for power generation license from NEPRA so as to increase viability of KEL – Pak Libya’s largest non-performing exposure – a strategic investment on the books. However, the exposure was completely provided for.
Although the management is trying to pursue it, owing to non-viability of RFO plants in a current energy industry dynamics, the sale of plant seems challenging. Company’s sovereign parentage have not translated fully in meeting its regulatory capital requirement deficiency as of date. Lately, Ministry of Finance has injected PKR 200mln and given confirmation of remaining PKR 800mln to be injected by CY19. The approval for further extension in compliance with capital requirement has been extended by State Bank of Pakistan till June 30th, 2019.
The ratings have a “negative outlook”, signifying the need to comply with regulatory minimum capital requirement (shortfall of PKR 1.6bln as at end-Dec’18). Consistent efforts by the management to stabilize revenue stream and add further diversity to operations would remain critical. Meanwhile, sustaining asset quality would help maintain the ratings. Timely sell-off of KEL is important for the ratings.
For more information, contact:
Analyst
The Pakistan Credit Rating Agency Limited (PACRA)
Awami Complex, FB1, Usman Block New Garden Town,
Lahore – Pakistan
Tel: +9242 586 9504 -6
Fax: +9242 583 0425
Email: hammad.rashid@pacra.com
Web: www.pacra.com