PACRA Upgrades MCB Islamic Bank’s Long-Term Rating to A+

In a major milestone for MCB Islamic Bank, the Pakistan Credit Rating Agency Limited (PACRA) has elevated the bank’s long-term entity rating from “A” to “A+”, with a stable outlook. This significant upgrade underscores MCB Islamic Bank’s exceptional financial performance and strategic initiatives designed to drive growth and ensure stability. With robust support from its parent company, MCB Bank, and a focus on expanding its Islamic banking operations, MCB Islamic Bank is well-positioned to enhance its market presence and deliver sustained profitability.

Overview of MCB Bank and Its Subsidiary

MCB Islamic Bank Limited (MCB Islamic) is a wholly owned subsidiary of MCB Bank Limited (MCB), one of Pakistan’s leading financial institutions. MCB holds an “AAA” rating, underscoring its strong market position, established brand equity, and sound financial profile. The subsidiary, MCB Islamic, has shown a notable improvement in its customer deposits, witnessing a 28.7% increase during CY23.

Strategic Initiatives and Growth

MCB Islamic has been focusing on deposit mobilization with substantial support from its parent company. This includes converting 39 conventional MCB Bank branches into Islamic branches and providing Islamic banking customers access to MCB Bank’s extensive network of services, including counters, cash management services, POS machines, and e-payment facilities.

The bank’s emphasis on low-cost deposits has led to a healthy mix of current and savings accounts (CASA). In CY23, the bank’s Advances to Deposit Ratio (ADR) aligned with peers, showing significant improvement in the first quarter of CY24. The financing portfolio saw a slight decline in CY23 but increased by 21% in 1QCY24, enhancing its market share.

Sectoral Focus and Financial Health

MCB Islamic’s financing portfolio predominantly comprises mid-tier private sector clients, with concentrations in sectors such as transportation, textiles, food and beverages, and services. Despite the challenges, the bank’s asset quality indicators remain above the peer average, showcasing resilience.

The bank’s equity base experienced significant growth, bolstered by a Rs4 billion capital injection, raising its equity to Rs22 billion by the end of Dec’23. The Capital Adequacy Ratio (CAR) also saw a substantial increase, standing at 23.8% at the end of Dec’23, well above the required 11.5%. Profitability in CY23 increased by 2.32 times, driven by a notable rise in net markup income due to a high-interest rate environment and lower deposit costs.

Future Outlook and Challenges

The management’s strategy focuses on long-term sustainable profitability by accumulating no and low-cost deposits, acquiring high-earning assets, and controlling operating costs. However, maintaining asset quality remains crucial. The rating upgrade by PACRA reflects the strong support from the parent company, growing and sustainable profitability, improved cost structure, better net interest margins (NIM), and enhanced market risk management.

The ratings are contingent on the bank’s ability to maintain its risk profile while sustaining its market position in the banking industry. Any decline in asset quality could pressure the bank’s profitability and risk absorption capacity.

MCB Islamic Bank’s upgraded rating by PACRA highlights its strong financial health and strategic growth initiatives, positioning it well for future success. This development is a testament to the bank’s robust performance and commitment to excellence in the banking sector.