National Bank of Pakistan

Transcription

1 Ratings Long Term : BB1 Short Term : ST-3 Outlook : Stable Rating Report (Surveillance) 2016 Previous Ratings Date of Rating Long Term Short Term Outlook 03 September 2015 BB2 ST-4 Negative 15 July 2014 BB2 ST-4 Negative Date of Rating: 29 September 2016 Validity: 30 June 2017 Rating Based on: un audited financial statement of 30 June 2016 and Audited financial statement up to 31 December 2015 and other relevant quantitative as well as qualitative information up to the date of rating declaration Methodology: CRAB s Bank Rating Methodology ( Analysts: Tahmina Islam Shahtaj Noor tahmina.islam@crab.com.bd shahtaj.noor@crab.com.bd CORPORATE PROFILE (NBP) is the largest commercial bank operating in Pakistan. NBP also acts as trustee of public funds and as the agent to the State Bank of Pakistan, central bank of the country (in places where SBP does not have a presence). has built an extensive branch network of 1,400+ branches in Pakistan and operates in major business centre abroad. The domestic branch network has been automated and is online. The Bank has representative offices in Beijing, Tashkent, Chicago and Toronto. It has agency arrangements with more than 3,000 correspondent banks worldwide. -Bangladesh Operation -Bangladesh Operation hereinafter referred as NBP-BD or the Bank commenced banking operation in Dhaka, Bangladesh in Presently the Bank is operating in Bangladesh with four (4) branches. Total capital of the Bank s Bangladesh operation reached BDT 4, million. RATIONALE Credit Rating Agency of Bangladesh Limited (CRAB) has upgraded the long term rating of National Bank of Pakistan (NBP) Bangladesh operation to BB1 (pronounced Double B One) and retained the short term rating at ST-3. CRAB performed the rating based on un audited financial statement on 30 June 2016 and audited financial statements up to 31 December 2015 and other relevant information. The ratings reflect the Bank s strength in parent support. CRAB also considers strong capital base as well as half yearly operating profit during 2016.The rating however is constrained by high nonperforming loan and almost stagnant business of the Bank. The Bank has strength in strong parent support which is reflected in BDT 1, million capital infusions from its Head office in The Bank s total capital (tier I + tier II) was BDT 4, million Page 1 of 14

2 at the end of 2015 against regulatory requirement of BDT 4, million. The risk weighted capital adequacy ratio of the Bank was 20.42% under Basel III during Shareholders equity to total deposit & borrowing of the Bank was 37.77% at the end of The loan portfolio of the Bank decreased marginally (by 1.73%) to BDT 15, million in Gross NPL (in absolute amount) soared to BDT 10, million from BDT 7, million resulted from increased fresh NPL of BDT 4, million. The gross NPL ratio increased to 68.76% at the end of Due to pending decision from the NBP head office (Karachi, Pakistan) there weren t any loan reschedule or write off classified loan. In the same period, BDT million classified loan was recovered. The Bank experienced operating loss since 2012 but due to some constructive steps by the management operating loss of the Bank decreased to BDT (428.00) million in Within half yearly duration of 2016 the bank has able to reach operating profit of BDT million due to support of investment income. Investment yield of the Bank increased 1.75 percentage points in During 2015, the Bank s total asset was funded through customer deposits (46.99% of total asset), internal capital generation (19.60% of total asset) and borrowings (4.91% of total). Total deposit of the Bank enhanced by 2.86% in 2015 and reached BDT 16, million. Of the total deposit, 63.22% consisted of current deposits followed by fixed deposits (33.85%). There was higher contribution of CASA deposit still the Bank s cost of deposit was 10%. The Bank s liquid asset to deposit and borrowings ratio was 84.15% in The Bank has adopted Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) for liquidity risk management as per the requirement of BASEL III At the end of 2015, Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) of the Bank was 16.50% and 20.31% respectively. MACROECONOMIC SCENARIO 1 Bangladesh economy experienced severe disruption in production, transport and service delivery during the third quarter of FY15 due to prolonged political turmoil. However, the fourth quarter was remarkably stable as were the first two. GDP growth of Bangladesh increased to 6.5 percent in FY15, from 6.1 percent in FY14. GDP growth in last six years was on average 6.2 percent. This was better than average growth in Pakistan (3.9), Indonesia (5.6) and Vietnam (5.9) but well behind average growth in India (7.3) and Sri Lanka (7.1). GDP growth was driven by rise in industrial growth from 8.2 percent in FY14 to 9.6 percent in FY15. Although export growth (in US$) declined to 3.4 percent, but remittance growth recovered to 7.7 percent. Industrial growth was mainly driven by manufacturing which achieved a significantly higher growth of 10.3 percent in FY15 despite the severe disruption of the supply chain during the political turmoil. On the expenditure side, the private investment rate (as percent of GDP) has stagnated since FY12. Overall consumer inflation decreased to 6.4 percent in FY15 from 7.3 percent the previous year, driven by decrease in food inflation. Non-food inflation increased due to supply disruptions caused by the political unrest in the first quarter of The gap between rural and urban food inflation narrowed. Prudent aggregate demand management helped limit inflation volatility while declining international commodity prices contributed to reducing inflation. According to the Export Promotion Bureau (EPB), export earnings (f.o.b.) increased by 3.3 percent to USD billion in FY15 compared to USD billion in FY14. Apparels (woven garments and knitwear products) continued to occupy an overwhelming share of the export basket in FY15 followed by jute goods and frozen fish. Overall export of woven garments (5.0 percent), knitwear products (3.1 percent), jute goods (8.4 percent) increased in FY15 compared to FY14; while export of raw jute (-11.7 percent), leather (-21.4 percent), and frozen shrimp and fish (-7.7 percent) decreased. Import payments (according to customs data) increased by 11.3 percent to USD billion in FY15 from USD billion in FY14. Disbursement of industrial term loans during FY15 increased by percent to BDT billion (FY14: BDT billion). Large scale industries received major portion of disbursement (76.65% of Total). However disbursement of small scale and cottage industries experienced percent growth and reached BDT billion. On the Other hand, recovery of industrial term loans recorded percent growth. 1 Source: Please see annexure. Page 2 of 14

3 MONETARY & FINANCIAL DEVELOPMENT 1 Bangladesh Bank succeeded in keeping the FY15 broad money (M2) and reserve money growth in line with the target rates. Broad money growth slowed to 12.4while reserve money growth slowed to 14.3 percent over its stock at end-june Policy rates were not changed during 2015 despite pressures from stakeholders. However, recently Bangladesh Bank has lowered both repo and reverse repo rates by 50 basis points to reach 6.75 percent and 4.75 percent respectively. In light of persisting significant liquidity in the banking system that led to T-bills were in high demand, which resulted in declining interest rates on instruments of all maturities as well as bank deposits and advance. Advance-deposit ratio (ADR) in the banking sector remained far below the approved ceiling as well as its average value for the last eight years. AD ratio was 71.0% at the end of December Monthly weighted average call money rate dropped to 3.69 percent in December 2015 from 8.57 percent in January 2015 reflected ample liquidity in the banking system. The exchange rate remained stable between BDT 77 and BDT 78 per US dollar in recent months. The difference between the unofficial market rate and the inter-bank rate has remained very small, indicating a very stable foreign exchange market. The Bangladesh Bank (BB) remained active on the buying side of the foreign exchange market to prevent any significant nominal exchange rate appreciation. BB interventions perpetuated foreign exchange reserve build up, exceeding $27.49 billion by end-december 2015, which is equivalent to over six months of imports. Total deposit liabilities of the scheduled banks increased by 12.56% during 2015 and reached BDT billion at the end of December More than 70% of the total deposit shared by private sector banks (PCB) followed by state owned banks (SCB) and foreign banks (FCB). Total credits of the scheduled banks experienced a moderate growth of 12.66% at the end of December Economic purposes classifications of private sector credit show that major portion of bank advances belonged to trade financing at the end of 2015 followed by advances to industry sector and working capital financing. The interest rate spread of the banking system dropped to 4.81% in December 2015 from 5.06% in January The weighted average lending rate dropped to 11.18% at the end of December 2015 from 12.32% at the end of January The weighted average deposit rate also declined to 6.34%, from 7.26% in the same period. Gross non-performing loan (NPL) ratio remained almost stable to 8.79 percent at the end of December 2015 (Dec 2014: 9.69). Gross NPL of the banking sector remained high mainly because of asset quality deterioration of Specialized Banks(SB) as well as State Owned Commercial Banks(SCB). Gross NPL ratio of SCBs reduced marginally to 21.46% at the end of December 2015 from % in December Gross NPL ratio of private commercial banks (PCBs) also witnessed a marginal reduction to 4.86% at the end of December 2015 (Dec 2014: 4.98%). Foreign commercial banks (FCB) asset quality deteriorated marginally as gross NPL ratio increased to 7.77% at the end of December 2015 (Dec 2014: 7.3%). However, net NPL ratio of the Banking Industry was 2.26% at the end of December The risk weighted capital adequacy ratio (RWCAR) for all banks decreased to percent at the end of December 2015 from percent at the end of December 2014 due partly to increase in NPLs. However at the end of December 2015, RWCAR of PCBs was 12.38%, FCBs was 25.6% and SCBs was 6.35%. Provision maintenance ratio at the end of December 2015 for PCBs was %, FCBs was % and SCBs was 67.45%. Sluggish profitability in the banking sector also continued in 2015 due to lower income from investment as well as increase in non-performing loans. At the end of 2015, return on assets (ROA) of the FCBs was 3.05% (2014: 3.38%) and PCBs was 0.89% (2014: 0.99%). Corporate lending culture is mostly collateral-driven in Bangladesh. Hence, declining property prices are not helping. Non-performing loan situation is unlikely to improve much if general business conditions do not improve particularly in sectors like commodity trading, ship breaking and building etc. CRAB ICRAB Ratings on Bank Credit Digest I September, 2016 Page 3 of 14

4 INDUSTRY OUTLOOK 2 The near term political outlook is stable as is the outlook for international commodity prices. Growth in FY16 is projected to be sustained at 6.5 percent, driven by stronger consumption and export growth. Prolonged slower growth in advanced and emerging markets may have an adverse impact on garment exports, thus widening the trade deficit. However, the relatively low-income elasticity of demand for garment exports and Bangladesh s significant cost competitiveness would act as mitigating factors. Bangladesh is not at significant risk from contagion related to recent turmoil in international financial markets or slower growth in China. The monetary stance in the second half of FY16 will focus on stabilizing inflation at moderate level. Inflation is expected to land in 6.07 percent in June 2016 from 6.20 percent in December Private sector credit is projected to grow at 14.8 percent in June 2016 from 13.8 percent in December Public sector credit is expected to grow at 18.7 percent from a negative number of 1.7 percent in December References: 1. Bangladesh Bank Publications. 3. Bangladesh Economic Update by World Bank- October CORPORATE PROFILE (NBP) is the largest commercial bank operating in Pakistan. NBP also acts as trustee of public funds and as the agent to the State Bank of Pakistan, central bank of the country (in places where SBP does not have a presence. has branch network with over 1,400 branches in Pakistan and 31 Overseas Branches/Offices in 18 countries. It has agency arrangements with more than 3,000 correspondent banks worldwide. -Bangladesh Operation -Bangladesh Operation hereinafter referred as NBP-BD or the Bank commenced banking operation in Dhaka, Bangladesh in Presently the Bank is operating in Bangladesh with four (4) branches. Paid up capital of the Bank s Bangladesh operation reached BDT 12, million in OPERATIONAL PERFORMANCE (All data disclosed below relate specifically to the Bank excluding the Offshore Banking Unit and all the comparison are based on 2014 unless specifically mentioned.) Earnings and Volatility Table 1 Income Segregation of the Bank --Year ended December 31-- (Mil. BDT) Amount % Growth (%) Amount % Growth (%) Net Interest Income (1,655.66) n.a (1,353.07) n.a Investment Income 1, n.a n.a Commission/Fees Income n.a n.a Other Operating Income 3.20 n.a (65.47) 9.28 n.a 7.58 Total Operating Income (276.11) n.a (64.14) (770.06) n.a (3,285.57) As net interest income of the Bank was negative for the last couple of years, investment income shared the major portion of the revenue stream. Interest income of the Bank decreased by 73.54% in 2015 mainly resulted from the high growth of non-performing loans for the last 4 years. However, the Bank managed to reduce its interest expense by 2.56% on the back of reduction in deposit rate in the banking sector as well as from insignificant growth of deposit portfolio. As a result, the net interest loss of BDT 1, million was incurred in Source: Please see annexure Page 4 of 14

5 The Bank s investment income grew by % and reached BDT 1, million in 2015 which was driven by income from treasury bills/bonds. Commission/fees, exchange income were BDT million in The Bank s other operating income was BDT 3.20 million in 2015 which included different charges and other operating activities. Table 2 Key Performance Indicator of the Bank --Year ended December 31-- (Mil. BDT) Amount Growth (%) Amount Growth (%) Amount Growth (%) Interest Income (73.54) (78.61) 2, Interest Expense 1, (2.56) 1, (29.92) 2, Net Interest Income (1,655.66) (1,353.07) (387.99) (12.33) Investment Income 1, , Commission/Exchange & (96.02) Brokerage Income Other Operating Income 3.20 (65.47) Total Operating Income (276.11) (64.14) (770.06) (3,285.57) (110.31) Personnel expense (0.23) (5.48) Overhead expense (5.50) (32.95) Total Operating Expense (3.89) (8.51) Pre Provision Profit (494.05) (50.44) (996.81) (105.71) (71.92) Provision (81.91) 4, , Profit Before Taxes (1,323.94) (76.29) (5,585.06) (1,168.66) (14.67) Provision for tax (895.94) (63.54) (2,457.30) 44, (5.53) 1, Profit After Tax (428.00) (86.32) (3,127.76) (1,163.13) (15.05) The Bank experienced operating loss since 2012 and the spread between its income and expense enhanced; thereby the operating loss has remained in Provision expense was kept accordingly to Bangladesh Bank requirement resulted from increased NPL. As an overall effect, net loss of the Bank reduced from 2014 and reached BDT million in Asset Evaluation Table 3 Asset Composition of the Bank --Year ended December 31-- (Mil. BDT) Amount % Growth (%) Amount % Growth (%) Money at Call Cash in hand and with 1, (79.45) 6, BB Balance with other Bank (98.13) & FI's Investment 13, , Loans and advances 15, (1.73) 15, Fixed Assets (11.67) Other Assets 4, , Total 34, , The Bank s total asset grew by 8.38% and reached BDT 34, million in 2015 from BDT 31, million in 2014.Balance with other bank & FIs grew due to increased current deposit with foreign Banks outside Bangladesh. In 2015, total asset composition was mainly dominated by loans and advances (44.00% of total) followed by investment (39.44% of total) and other assets (12.27% of total).however, the Bank is getting interest from its foreign CRAB ICRAB Ratings on Bank Credit Digest I September, 2016 Page 5 of 14

6 currency balance with Bangladesh Bank. Other asset of the Bank grew 37.73% in 2015, major portion of which was resulted from deferred tax benefit. The Bank s Risk weighted asset was 58.52% of total asset in Investment The Bank gradually increased its investment portfolio since 2012 and at the end of December 2015 the investment portfolio increased considerably reached BDT 13, million (2014: BDT 6, million). The Bank s investment is solely comprised of high quality liquid asset; like Government Securities. The purpose of investment in these securities is to meet statutory regulatory requirement (SLR) as well as to remain liquid. About 99.22% of total investment fund were kept in Held to Maturity Securities (BDT 13, million) and the rest were kept in Held for Trading Securities (BDT million). The Bank had no investment in capital market as the management does not encourage investment in speculative investment. The investment yield of the Bank was 11.45% in 2015 which was driven by treasury bills/bonds. Credit Risk CRAB reviews the fundamentals of managing credit risk including qualitative and quantitative analysis as a part of credit risk evaluation. Qualitative evaluation includes credit policy, credit approval and credit monitoring. CRAB addresses intrinsic risk, concentration risk as well as risk arising from large loan exposures. Credit Quality CRAB analyzes Bank s credit quality in terms of past trend; present scenario as well as future aspects. The Bank s gross NPL ratio was very high for the last five years. In 2015, gross NPL (in absolute amount) soared to BDT 10, million from BDT 7, million in 2014 resulted from increased fresh NPL. There was BDT million cash recovery from non-performing loans in Table 5 NPL Movement of the Bank --Year ended December 31-- Mil. BDT Particulars Amount % of Total Loans Amount % of Total Loans Amount % of Total Loans Opening balance of 7, , , NPL Add Fresh NPL 4, , , Generation Less: Cash Recovery , Less: Rescheduling , Less: Write off Closing Balance of NPL 10, , , The Head Office of the Bank did not allow rescheduling any loans in Therefore gross NPL ratio increased to 68.76% at the end of Gross NPL was 71.10% of total equity+ LLR at the end of However, according to the auditor, due to stay order from Honourable High Court Division of Supreme Court against showing the borrowers as defaulter in CIB, the loan of BDT 4, million due from certain borrower are shown as standard but necessary provision has been made treating the loan accounts as Bad and Loss. Page 6 of 14

7 Table 6 Loan Loss Provision of the Bank Mil. BDT Particulars Amount % of Total Loans (%) Amount % of Total Loans (%) General Provision Held Specific Provision Held 7, , Total Provision Held 7, , Required Provision 7, , Provision surplus , In 2015, the Bank s provision requirement for classified loans and advances was BDT 5, million which the Bank kept as specific provision. In addition, the Bank maintained BDT 7.58 million as general provision against unclassified loans and advances as well as off balance sheet exposures. There was BDT million excess provisions at the end of The gross NPL coverage ratio of the Bank was 75.85% in Loan Portfolio Analysis The Bank s total loan portfolio reduced marginally (1.73%) in 2015 and reached BDT 15, million in 2015 from 15, million in Sector wise distribution shows that 79.10% of loans and advances portfolio was mainly concentrated in corporate entities. In terms of nature, term loan dominated the loan portfolio (52.24% of total) followed by overdraft facilities (30.94% of total). Capital Adequacy Table 7 Capital Structure of the Bank Year ended December 31 Mil. BDT Particulars Amount % of RWA Amount % of RWA Amount % of RWA Tier 1 Capital 4, , Tier 2 Capital , Total Capital 4, , Required Capital 4, , , Capital Surplus/ (shortfall) (3,286.5) (17.70) In 2015, the Bank infused BDT 1, million capital from head office. But (Bangladesh operation) had retained loss of BDT 6, million during the same duration. Thus shareholders equity reached BDT 6, million at the end of The Bank s shareholders equity to total deposit & borrowing increased to 37.77% in 2015 (2014: 35.53%). The Bank s total capital (tier I + tier II) was BDT 4, million at the end of 2015 against regulatory requirement of BDT 4, million. However, the risk weighted asset of the Bank was very small because of its small loan portfolio due to small operation period. Therefore, risk weighted capital adequacy ratio of the Bank was significant at 20.42% under Basel III at the end of The Bank conducted stress testing based on Simple Sensitivity and Scenario Analysis. Stress test revealed that the Bank s capital adequacy ratio would be highly affected from negative shift in NPLs categories and increase in NPLs due to default of top large loan borrowers. CRAB ICRAB Ratings on Bank Credit Digest I September, 2016 Page 7 of 14

8 Funding and Liquidity Table 8 Funding Mix of the Bank --Year ended December 31-- (Mil. BDT) Particulars Amount % Growth (%) Amount % Growth (%) Current Deposit 10, (6.39) 10, Bills payable (78.95) Savings Deposit Term Deposit/Fixed Deposit 5, , (32.68) Other Deposit Total Deposit & Borrowing 16, , (9.72) During 2015, the Bank s total asset was funded through customer deposits (46.99% of total asset), internal capital generation (19.60% of total asset) and borrowings (4.91% of total). Total deposit of the Bank enhanced slightly by 2.86% in 2015 and reached BDT 16, million. Of the total deposit, 63.22% consisted of current deposits followed by fixed deposits (33.85%). In spite of higher contribution of low cost deposit, the Bank s cost of deposit was 10%. Table 9 Month wise Loans to Deposit Ratio of the Bank Mil.BDT --For the Year Particulars Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Loans Deposit Loans to Deposit (%) In 2015, monthly average loan to deposit ratio of the Bank was unusually high at 99.04%. The Bank actively participated in call money market and was the net borrower throughout the year The Bank paid BDT million as interest expense for call borrowing in Table 10 Liquidity Profile of the Bank Mil.BDT Year ended December 31, 2015 Particulars Up to months 3 to 12 1 to 5 years More than 5 Total month months years Assets 16, , , , , , Liabilities 12, , , , , Net Liquidity Gap 3, (751.12) (260.03) (3,044.00) 7, , Cumulative 3, , , (1,001.83) 6, Liquidity Gap Gap as % of Liability (%) (14.54) (15.46) (38.17) 36, The Bank s asset-liability maturity bucket shows that the Bank possessed positive net liquidity gap for the maturity buckets of up to 1 month and more than 5 years maturity buckets. The Bank s liquid asset to deposit and borrowings ratio increased to 84.15% in 2015 from 77.90% in 2014 on the back of increased investment made in government securities. Page 8 of 14

9 Interest Rate Risk The following exhibit shows the maturity wise interest sensitive asset and liabilities and thereby the exposures to interest rate risk of the Bank. The Bank had liability sensitive positions in all maturity buckets up to 12 months maturity bucket except up to 1month bucket. Gap indicates that the Bank will be benefited on decreasing interest rates and will suffer on increasing interest rate scenario marginally. For 1 percentage point interest rate decrease the Bank will gain BDT 5.16 million and will lose the same amount for 1 percentage point interest rate increase. Table 11: Interest Rate Risk Exposure of the Bank Mil.BDT Year ended December 31, 2015 Particulars Up to 1 month 1-3 months 3 to 6 months 6 to 12 months Int. Sensitive Assets 15, Int. Sensitive Liabilities 1, , , Gap 13, (2,925.17) (461.97) (1,032.88) Cumulative Earning impact (1% point int. rate increase) (4.88) (1.15) (5.16) Cumulative Earning impact (1% point int. rate decrease) (11.49) Foreign Exchange Risk As of 31 st December 2015, the Bank possessed sum of overall net positions in different currencies resulted in net liability position of BDT (228.75) million which was % of core capital of the Bank. The Bank s overall net open position was dominated by USD having % of core capital. Table 12 Foreign Currency Exposure of the Bank Mil.BDT --For the Year Particulars Assets Liabilities Overall Net Overall Net Position*/Core Capital (%) Positions USD , (9,402.00) (229.01) EURO GBP Considering absolute value Off Balance Sheet Exposures Table 13 Contingent Liabilities/Off Balance Sheet Exposure of the Bank --Year ended December 31-- Mil. BDT Particulars Amount % of Total Amount % of Total Letter of guarantee Letter of credit Bills for collection Foreign Exchange Contract-Spot & Forward 9, , Total 9, , In 2015, the Bank s total contingent liabilities reduced by 10.96% and reached BDT 9, million which was % of total asset of the Bank. Contingent liabilities portfolio was strongly dominated by forward contact (97.96% of total). Total off balance sheet exposures of the Bank was 2.37 times of its total capital by the end of December 2015 (2014: 2.27 times). CRAB ICRAB Ratings on Bank Credit Digest I September, 2016 Page 9 of 14

10 MARKET SHARE AND GROWTH In 2015, market share of the Bank in term of loans & advances remained stable at 0.25%. The market share of deposit decreased by 0.04 percentage points and reached 0.20% during the same period. BRANCH NETWORK NBP-BD commenced its operation in Bangladesh in Dhaka in Currently it is operating with four (4) branches in Bangladesh. Besides Dhaka, it has branches in Chittagong, Sylhet. MANAGEMENT Senior Management The management team of the Bank is headed by Mr. Md. Qamruzzaman, Country Manager. He joined the Bank in He is supported by a group of senior professionals including the departmental heads. The Bank has formed the following committees for smooth function: Management Committee (MANCOM) of the Bank is chaired by Mr. Md. Quamruzzaman Country Manager. Other members of the Committee are Mr. Gulam Hussain Azhar, SVP; Mr. Muhammad Khalid Mahmud, Head of Finance and Mr. Shahnur Rahman Lumin, FAVP and Mr. Ehtesham Haider Chaudhuri. The Committee reviews all the policies of the Bank and is responsible for overall governance and internal control system of the Bank. Asset Liability Management Committee (ALCO) is comprised of six members headed by Mr. Md. Quamruzzaman, General Manager and head of Bangladesh operation. This Committee discusses and takes action regarding economic & market status and outlook, liquidity risk related measures to the balance sheet, review of the price or interest rate structure. Human Resource Management NBP-BD has a separate Human Resource Department. By the end of 2015, total human resources of the Bank were 94. The Bank organizes both internal and external training programs to enhance the skills and knowledge. In 2015, 57 employee received training. Management Information System (MIS) The Bank has a separate IT department having three employees. The Bank has been using 2 tier automated application software PC Bank The Bank is providing online banking service to its customers in all its branches. CORPORATE GOVERNANCE To assess the Bank s corporate governance practices CRAB evaluates the quality of financial reporting and disclosures, strength of internal control system and internal audit function; the inclusion of appropriate qualified independent non-executive directors on Board of Directors, the formation of audit committee; delegation of power to executives and staff and protection of shareholders rights. CRAB evaluates how the Bank complies with these corporate governance requirements. Financial Reporting and Disclosures The financial statement of the Bank was audited by a reputed chartered accountants firm A. QASEM & Co. The Auditor has expressed opinion (un-qualified) of the Bank based on financial statement of According to the auditor, There were 15 instances of demand and continuous loan, expiry period for which ranged from 2012 to Total outstanding amount of these loans was BDT million as of 31 Dec Application for renewal of these were sent to Head office Karachi, Pakistan but renewal approvals have not yet been received by the Bangladesh office. Necessary provision has been made by the Bank. Out of total loan portfolio (BDT 15, million) as of 31 December 2015, BDT 10, million was classified. However, according to the auditor, due to stay order from Honourable High Court Division of Supreme Court against showing the borrowers as defaulter in CIB, the loan of BDT 4, million due from certain borrower are shown as standard but necessary provision has been made treating the loan Page 10 of 14

11 accounts as Bad and Loss. The auditor also has opinion that the deferred tax asset mentioned in balance sheet is subject to the local income tax authority approval. Board of Directors of the Group The Bank being a foreign Bank does not have a local Board of Directors. The Head Office in Pakistan and regional office in Bahrain review the overall activity of Bangladesh operation. Bangladesh operation is directed and supervised by the Board of Directors in Pakistan. Half yearly performance of the Bank on 30 June 2016: Table 14: Key Performance Indicator of the Bank --Year ended December 31-- (Mil. BDT) 30-Jun Amount Growth (%) Amount Growth Amount Growth (%) (%) Interest Income (73.54) (78.61) Interest Expense (50.93) 1, (2.56) 1, (29.92) Net Interest Income (598.16) - (1,655.66) (1,353.07) Investment Income (41.65) 1, Commission/Exchange & (71.79) Brokerage Income Other Operating Income 0.31 (90.20) 3.20 (65.47) Total Operating Income (276.11) (64.14) (770.06) (3,285.57) Personnel expense (41.18) (0.23) (5.48) Overhead expense (70.52) (5.50) Total Operating Expense (61.19) (3.89) Pre Provision Profit (494.05) (50.44) (996.81) Provision (81.91) 4, Profit Before Taxes (1,323.94) (76.29) (5,585.06) Provision for tax - - (895.94) (63.54) (2,457.30) 44, Profit After Tax (428.00) (86.32) (3,127.76) Asset quality ratios (%) June 2016 Gross NPL Ratio NPL as % of Sh. equity + LLR was experiencing net loss until As of 30 June 2016, interest income grew considerably along with reduced operating expense and support from investment income. Thus profit before provision was BDT million in the same duration. There was cash recovery of BDT million and loan reschedule and write off was nil on 30 June Specific provision was kept BDT 7, million along with general provision BDT 7.57 million on 30 June Risk weighted capital adequacy ratio was 21.52% on 30 June CRAB ICRAB Ratings on Bank Credit Digest I September, 2016 Page 11 of 14

12 APPENDIX 1: Definitions of Selected Ratios Definitions of Selected Ratios 1. Loans and advances include Loans, Cash Credit, Overdrafts, Bill purchased and discounted unless mentioned otherwise. 2. Deposits include Deposits & other accounts and bills payables unless mentioned otherwise. 3. Average Assets, Average investment assets, Average Earning Assets and Average equity are calculated on the basis of opening and year end balances. 4. Interest Earning Assets include total loans & advances, money at call & short notice, balance with other banks & FIs, foreign currency balance with Bangladesh Bank and interest earning assets in Offshore Unit. 5. Net Loans & Advances has been calculated by deducting Specific Provision and Interest Suspense Accounts from Gross Loans & Advances. 6. Net Profit Margin = Net Profit after Tax / Operating Income 7. Asset Utilization = Operating Income / Average Assets 8. Leverage Multiplier = Average assets / Average Equity 9. Yield on Average Investment = Income from Investment / Average Investment Assets APPENDIX 2: Assumptions for Interest Risk Exposure 1. Assets and liabilities are re-priced on the first day of the re-pricing interval and, therefore, that interest rate change affects the whole period. 2. Assets and liabilities are rolled over into the same types of instruments with the same maturities. Page 12 of 14

13 CRAB RATING SCALES AND DEFINITIONS - LONG TERM: BANKS RATING DEFINITION AAA Triple A (Extremely Strong Capacity & Commercial Banks rated 'AAA' have extremely strong capacity to meet their financial commitments. 'AAA' is the highest issuer credit rating assigned by CRAB. AAA is judged to be of the highest quality, with minimal credit risk. Highest Quality) AA1, AA2, AA3* Double A (Very Strong Capacity & Very High Quality) Commercial Banks rated 'AA' have very strong capacity to meet their financial commitments. They differ from the highest-rated Commercial Banks only to a small degree. AA is judged to be of very high quality and is subject to very low credit risk. Commercial Banks rated 'A' have strong capacity to meet their financial A1, A2, A3 Single A (Strong Capacity & High Quality) commitments but are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than Commercial Banks in higher-rated categories. A is judged to be of high quality and are subject to low credit risk. BBB1, BBB2, BBB3 Triple B (Adequate Capacity & Medium Quality) Commercial Banks rated 'BBB' have adequate capacity to meet their financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the Commercial Banks to meet their financial commitments. BBB is subject to moderate credit risk. Commercial Banks rated 'BB' are less vulnerable in the near term than other BB1, BB2, BB3 Double B (Inadequate Capacity & lower-rated Commercial Banks. However, they faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which may lead to the Commercial Bank s inadequate capacity to Substantial Credit Risk) meet their financial commitments. BB is judged to have speculative elements and is subject to substantial credit risk. Commercial Banks rated 'B' are more vulnerable than the Commercial Banks B1, B2, B3 Single B (Weak Capacity & High Credit Risk) rated 'BB', but the Commercial Banks currently have the capacity to meet their financial commitments. Adverse business, financial, or economic conditions are likely to impair the Banks capacity or willingness to meet their financial commitments. B is considered speculative and weak capacity and is subject to high credit risk. CCC1, CCC2, CCC3 Triple C (Very Weak Capacity & Very High Credit Risk) Commercial Banks rated 'CCC' are currently vulnerable, and are dependent on favorable business, financial, and economic conditions to meet their financial commitments. CCC is judged to be of very weak standing and is subject to very high credit risk. CC Commercial Banks rated 'CC' are currently highly vulnerable. CC is highly Double C speculative and is likely in, or very near, default, with some prospect of (Extremely Weak Capacity & recovery of principal and interest. Extremely High Credit Risk) A 'C' rating is assigned to Banks that are currently highly vulnerable to nonpayment of obligations, or in the verge of default or faced with insolvency C Single C petition or bankruptcy petition or similar actions, but have not yet (Near to Default) experienced a payment default with external support. 'D' is in default. The 'D' rating also will be used upon the filing of a D bankruptcy petition or the taking of a similar action if payments on an (Default) obligation are jeopardized. *Note: CRAB appends numerical modifiers 1, 2, and 3 to each generic rating classification from AA through CCC. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. CRAB ICRAB Ratings on Bank Credit Digest I September, 2016 Page 13 of 14

14 CREDIT RATING SCALES AND DEFINITIONS - SHORTTERM: BANKS RATING DEFINITION Commercial Banks rated in this category are considered to have the highest capacity for ST-1 timely repayment of obligations. Commercial Banks rated in this category are Highest Grade characterised with excellent position in terms of liquidity, internal fund generation, and access to alternative sources of funds is outstanding. Commercial Banks rated in this category are considered to have strong capacity for timely ST-2 repayment. Commercial Banks rated in this category are characterised with commendable High Grade position in terms of liquidity, internal fund generation, and access to alternative sources of funds is outstanding. Commercial Banks rated in this category are considered to average capacity for timely repayment of obligations, although such capacity may impair by adverse changes in ST-3 business, economic, or financial conditions. Commercial Banks rated in this category are Average Grade characterised with satisfactory level of liquidity, internal fund generation, and access to alternative sources of funds is outstanding. Commercial Banks rated in this category are considered to have below average capacity for timely repayment of obligations. Such capacity is highly susceptible to adverse ST-4 changes in business, economic, or financial conditions than for obligations in higher Below Average categories. Commercial Banks rated in this category are characterised with average Grade liquidity, internal fund generation, and access to alternative sources of funds is outstanding. Commercial Banks rated in this category are considered to have inadequate capacity for timely repayment of obligations susceptible to adverse changes in business, economic, or ST-5 financial conditions. Commercial Banks rated in this category are characterised with risky Inadequate Grade position in terms of liquidity, internal fund generation, and access to alternative sources of funds is outstanding. Commercial Banks rated in this category are considered to have obligations which have a ST-6 high risk of default or which are currently in default. Commercial Banks rated in this Lowest Grade category are characterised with risky position in terms of liquidity, internal fund generation, and access to alternative sources of funds is outstanding. The Rating Committee of CRAB is the final authority to award a rating. The Rating Committee of CRAB is comprised of external independence persons who are not members of the Board of the Company and they ensure the independence of rating. Copyright 2016, CREDIT RATING AGENCY OF BANGLADESH LIMITED ("CRAB"). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT CRAB S PRIOR WRITTEN CONSENT. All information contained herein is obtained by CRAB from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided as is without warranty of any kind and CRAB, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. Under no circumstances shall CRAB have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of CRAB or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if CRAB is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings and financial reporting analysis observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY CRAB IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. Page 14 of 14