Phoenix Finance & Investments...

Alpha Credit Rating Limited, SadharanBima Bhaban-2, 139 Motijheel C/A, Dhaka-1000

Tel: + 880-2- 9573026 – 28. Web: www.alpharating.com.bd

Phoenix Finance & Investments Limited

(Eunoos Center, Level-11, 52-53, Dilkusha C/A, Dhaka-1000)

R

A

T

I

N

G

R

E

P

O

R

T

Rating Report – Phoenix Finance and Investments Limited

Contact Analysts

NasibulKhaer [email protected]

Rafi Al Kavi [email protected]

Contents

Rationale 2

Company Profile 2

Industry Overview 5

Business Risk Analysis 7

Financial Risk Analysis 9

Management Quality 14

Asset Quality (BDT in Millions if applicable)

Particulars 2016 2015 2014

Gross NPL 809.23 475.69 684.25

Gross NPL Ratio

3.76% 2.79% 4.73%

Net NPL Ratio 3.10% 2.25% 2.65%

Gross Loan 21,535.15 17,034.85 14,471.36

Loan Growth 26.42% 17.71% 19.76%

Operating Summary (BDT in Millions)


Operating Income

997.54 986.32 950.00

Cost Income Ratio

76.10 74.63 74.57

Loans/Customer Deposits 131.03% 121.69% 156.98%

CAR 11.04% 12.54% 13.60%

Net Loan/ Stable Fund

156.51 176.67 175.86

Data obtained from audited financial statements of 2014-2016

Phoenix Finance & Investments Limited A+ Long Term Rating ST-2 Short Term Rating Stable Outlook

Rating Type Surveillance Date of Declaration December 06, 2017 Valid Till December 05, 2018

Date of Incorporation:

19 April, 1995

Chairman: Ms. Evana Fahmida Mohammad

Managing Director& CEO: Mr. S. M. Intekhab Alam

Authorized Capital: BDT 3,000 million

Paid Up Capital: BDT 1,214.95 million

Total Asset: BDT 24,388.59 million (As on 31 December, 2016)

Total Liabilities: BDT 21,827.59 million (As on 31 December, 2016)

Company Profile

Phoenix Finance and Investments Limited, a leading name in the financial market of Bangladesh, commenced its journey on 19

th

April, 1995 as a Public Limited Company under Companies Act 1994 with an objective to allocate scarce financial resources to capital investment through funding in capital machinery /equipment specially BMRE to already established industrial companies. In addition, the company also provides financial assistance through leasing and other multi dimensional products to all level of entrepreneurs.

Business Risk Solvency Score Asset Quality Profitability Management Quality Distance to Default Industry Group

High Good Good Fair Excellent Fair Financial Institution

Rating History

Long Term Rating: A+ Short Term Rating: AR-2

Declaration Date: December 07, 2016

Valid Till: 06 December, 2017

Outlook: Stable

Phoenix Finance & Investments Limited, a well known Financial Institution in the country aiming to establish a sustainable position in the industry through providing best financial services to its customers.

Rationale Alpha Credit Rating Limited (AlphaRating) affirms the long term rating of A+ (Pronounced as “Single A plus”) and assigns ST-2 in favor of Phoenix Finance and Investments Limited (herein after referred as ‘PFIL or the company’). This rating has been assigned by considering the last three years performance of the entity which has both favorable and unfavorable impact.

The rating has considered increasing asset base with satisfactory asset quality, reasonable fund management, moderate capital and liquidity management and improving earnings and profitability. The rating has also been influenced positively by the wide pool of experienced management team and properly sector wise diversified loan portfolio. Limited number of branches and geographical immobility within the country has limited the scale of operation with a moderate market share.

AlphaRating could not assign more than A+ rating in favor of PFIL due to increased level of NPL, higher dependency on institutional finance rather than depositor’s fund; fall in interest spread despite having lower cost of fund, long term liquidity gap & rising cost to income ratio. Apart from the above factors, the rating report has also considered the political, economic conditions and inflation rates have encouraged AlphaRating to provide the outlook as ‘Stable.’

Further, given the importance of the NBFI’S in the country’s economy, future prospect and goodwill of the parent company, in addition to the financial and non-financial performance of the PFIL has convinced AlphaRating to provide the above rating.

mailto:[email protected]



The company received license from Central Bank on 09 May, 1995 and started its business operation as a NBFI, named Phoenix Leasing Company Limited. Thereafter, the company changed its name to Phoenix Finance and Investments limited (PFIL) on February 2007 and diversified its business operation to multi-dimensional financial activities other than lease finance including Housing and Real Estate, Bridge Financing, Short and Mid Term Loan and so on to cater the increasing need of the economy. In FY 2016, the company reported 24.95% growth in investment with total portfolio of BDT 22,292.59 million (including share investment). Some key moments of the company is presented below:

Milestones

Particulars Date Incorporation & Business Commencement April 19,1995

Signing First Lease Agreement September 25, 1996 Website Launched September 21, 1997

Changing Name to PFIL. February 01, 2007 Opening of SME Branch February 07, 2007 Listed with DSE and CSE September 25, 2007

Changes in Number of Shareholders

1000

3000

5000

7000

9000

2016 2015 2014 2013 2012 2011

Number of Shareholders.

Ownership Pattern

Sponsors (Institutional)

Sponsors Individuals)

General Public (Institutional)

Genera Public (Individuals)

Company Profile Industry Overview Business Risk

Financial Risk Management Quality Company Information

Company Information


Market Capitalization

Market capitalization is a changing metric based on current stock market prices that helps to measure the value of the company. Market capitalization of PFIL amounts to BDT 4,592.32 million as on 26

th November,

2017. (Source: Website of Dhaka Stock Exchange).

Product & Services

The major products PFIL currently offers are:

a. Asset Products:

Lease Finance

Housing &Real Estate

Long Term Finance

Short Term Finance

Mid Term Finance

Finance against confirmed work order

Start-up working capital

Bridge Financing

SME Loan

Investment in Capital Markets

b. Corporate Services:

Syndication of Loan/ Lease

Corporate Advisory

Investment Counseling

Branch Network

Head Office of PFIL is located at Eunoos Center (Level-11), 52-53, Dilkusha C/A, Dhaka-1000. The FI has 9 branches, of which 6 in Dhaka Division, 1 in Chittagong Division, 1 in Khulna Division and another 1 in Rajshahi Division. c. Debt Products:

Periodic Income Option

All at Maturity Option

Platinum Double Scheme

Double Money Scheme

Triple Money Scheme

Monthly Savings Scheme (MSS)



Company Information


Industry Analysis

Non Banking Financial Institutions (FIs) are, in addition to banks, major financial intermediaries in the Bangladesh economy. They are playing a crucial role in the financial sector by providing additional financial services that are not always provided by the full-fledged banking industry. They have achieved impressive growth in recent years, reflecting the process of financial innovation and holding the promise of deepening financial intermediation in long- term financing needs. The financial institutions, with more multifaceted products and services, have taken their place in the competitive financial market to satisfy the changing demands of customers, adding differentiation to the bank based financial market of Bangladesh. NBFIs also play a hefty role in the capital market as well as in real estate sector of Bangladesh. Like the banks, most of the NBFIs have separate subsidiaries to operate merchant banking activities. NBFIs are supervised by Bangladesh Bank in a risk- based supervisory system that reflects their important contributions.

NBFIs have been given license and regulated under the Financial Institution Act, 1993. At present, the minimum paid up capital for NBFIs is Taka 1.0 billion as per the Financial Institution Regulation, 1994. NBFIs' business line is narrow in comparison with banks in Bangladesh. NBFIs are allowed to take term deposit for three months from 2 December 2013. Still business line of NBFIs is much narrower in comparison of bank business, but they are offering some products to a greater extent than banks. NBFIs are working as multi- product financial institutions.

Presently there are 31 FIs operating in Bangladesh and out of the total, 2 is fully government owned, 1 is the subsidiary of a SoCB, 13 were initiated by private domestic initiative and 15 were initiated by joint venture initiative. Meanwhile, the branch network increased to 198 in FY 2015 from 108 as reported in FY 2010.

NBFI’s are investing in different sectors of the economy, but their investments are mostly concentrated in industrial sector. NBFIs are allowed to invest in the capital market to the extent indicated in the Financial Institution Act, 1993.In 2014, all NBFIs' total investment in capital market was Taka 18.4 billion compared to Taka 10.7 billion in 2013.

Investment in capital market accounted for 3.5 percent of the total assets of all NBFIs. At the end of June 2015, NBFIs total investment in capital market stood at Taka 14.8 billion. Total deposits of the NBFIs in 2014 rose to Taka 245.7 billion (58.1 percent of total liabilities) from Taka 198.3 billion (56.6 percent of total liabilities) in 2013 showing an overall increase of 23.9 percent. At the end of June 2015, total deposit of NBFIs increased to Taka 271.8 billion. The aggregate liability of the industry increased to Taka 423.1 billion in 2014 from Taka 350.4 billion in 2013, while equity increased to Taka 94.4 billion from Taka 85.9 billion during the same period showing an overall increase by 20.7 and 9.9 percent respectively. At the end of June 2015, aggregate liability and equity increased to Taka 465.5 and 98.3 billion respectively

Sector wise loan concentration of NBFIs as on 30 June 2015 Source: Department of FIs and Markets, Bangladesh Bank



Company Information


Though Gross NPL ratio of this industry was within tolerance but a dramatic increase of 29.20% in total non-performing loan is reflecting deep erosion of asset quality in FY 2013. In FY 2014, FIs’ have been recovered from this trouble by reducing Gross NPL ratio to 5.30% from 5.60% as recorded in FY 2013.

As a security against this Non Performing Assets this industry kept loan loss provision of BDT 11.00 billion representing 55.50% of total Classified Loans and Leases. In FY 2013, NBFIs maintained total loan loss provision of BDT 9.50 billion against the requirement of BDT 8.60 billion.

In FY 2013 this industry reported 39.90% increase in Profit Before Tax (PBT), mainly derived from 300% increase in non -interest income. In FY 2014, this sector increased its profitability further though the growth rate has been slowed down to 23.60% only. Among 23 listed FIs only one FI has experienced Net Loss of BDT 370.70 million in FY 2014. ICB and IDLC Finance was top positioned FIs in FY 2014 reporting highest profit of BDT 3,605.76 million and BDT 1,245.51 million respectively.

Net Profit and Basic EPS of listed NBFIs:

Company Name After Tax

Profit (BDT in Million)

Basic EPS

Bay Leasing & Investment Limited. 138.17 1.06 Bangladesh Finance & Investment Company Ltd.

107.87 0.94

Delta Brac Housing Finance Corp. Ltd. 597.34 5.15 Fareast Finance &Investment Ltd. 308.45 1.93 FAS Finance & Investment Limited. 136.20 1.22 First Finance Ltd. 73.28 0.66 GSP Finance Company(BD) Ltd. 115.86 1.72 ICB 3,605.76 8.55 IDLC Finance Ltd. 1,245.51 6.19 International Leasing & Financial Service Ltd.

125.98 0.74

Industrial Prom. & Dev. Co. of BD Ltd. 165.51 1.44 Islamic Finance &Investment Ltd. 193.16 1.66 Lanka Bangla Finance Ltd. 442.10 2.02 MIDAS Financing Ltd. (370.70) (3.08) National Housing Fin. & Inv. Ltd. 209.60 1.97 Phoenix Finance and Investments Ltd. 198.85 1.64 Bangladesh Industrial Fin. Co. Ltd. - - Peoples Leasing & Fin. Services ltd. 196.70 0.76 Premier Leasing and Finance Ltd. 7.33 0.07 Prime Finance & Investment Ltd. 432.76 1.59 Union Capital Limited 199.99 1.65 United Finance Ltd. 323.79 2.31 Uttara Finance and Investment Limited. 176.51 1.55 As on 31 December 2014. Source: Website of Dhaka Stock Exchange Ltd.

Figure 1: Required Provision vs. Maintained Provision

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Mill

ion

s

Capital Management of this industry was always up to the level which has been reflected on extremely high CAR ratio maintained in last four years. FIs’ reported CAR ratio of 18.30% in FY 2011, which reached to 21.20%, well in excess of regulatory requirement as well as prior year’s CAR, in FY 2014 though only one FI was failed to satisfy the regulatory requirement. As on December 2014, FIs reported CRR of 5.70% and SLR of 27.00%. Figure 2: Regulatory Requirement Vs. Maintained CAR of NBFIs

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2011 2012 2013 2014

Required CAR Maintained CAR



Company Information




Business Risk Analysis

Information Technology Risk

Financial information are mostly processed and delivered through technological platform, which inherently contains the risk of security breach, loss of data and data contamination. Continuity of company’s operation and services are completely dependent on a strong, reliable and secured technology. To manage this risk, PFIL has establish its policy which covers password & input control, network security, data encryption, virus protection and so on.

However, according to Auditors’ management report, PFIL does not have any disaster recovery site (DRS) non-complying with the Bangladesh Bank IT Policy but meanwhile PFIL has taken initiative for maintaining an effective DRS.

Liquidity Risk

Liquidity risk refers to the probability that the FI will incur financial losses due to its inability to meet its financial obligations in full, in a timely manner and at minimal expense.

To control liquidity risk, the company shapes the structure of its assets and liabilities. As per Bangladesh bank guideline, PFIL has formed Asset Liability Committee (ALCO), which works with financial market activities; manages liquidity and interest rate risk considering market position and competition. This committee plays vital role for PFIL to mitigate liquidity risk.

Asset-Liability Mismatch

Asset-liability mismatch is another cause of concern for FIs. Demand for funds to meet the increasing lending requirements has increased in a great number but the availability of funds has become inadequate, as FIs are mostly dependent on loan from commercial banks and customer deposits.

PFIL is highly dependent on customer deposit and it has to reduce this reliance to alleviate asset-liability mismatch risk. This dependency is increasing over the years.

Credit Risk

Credit risk refers to a risk that a borrower may fail to

meet its obligations in accordance with agreed terms to

the institution. The credit risk management in the FI aims

at ensuring sustainable growth of healthy loan portfolio

while identifying and managing the credit risk both at the

transaction and portfolio level. To encounter and

mitigate this risk PFIL has taken various strategies

including annual review of client, adequate insurance

coverage of funded assets, rigorous monitoring and

follow up conducted by Special Assets Management

Team and so on. Additionally, the company has a Credit

Evaluation Team engaged in reviewing the market and

credit risk in order to keep this risk within tolerance.

Investment in High Risk Portfolio

Generally, Cost of funds for FIs’ are higher than that of banks. In order to sustain the high cost of borrowing, FIs may be inclined to invest in the high return segments, which can expose them to high risks. Moreover, fierce competition among competitors may also force many FIs to reduce the margin at the expense of quality of the asset portfolio.

PFIL has diversified loan & lease portfolio and it is observed that the risk management capabilities is satisfactory, which results well-managed investment portfolio. However, PFIL should invest cautiously with concentrating more on asset quality.

Competition with Banks

With the advent of new FIs, the market share is spreading over the competing firms and the demand facing each firm is becoming more elastic. Active participation of commercial banks in the non-bank financing activities has further increased the intensity of competition in the industry.

The asset growth of PFIL indicates that the market share is growing. The company always endeavors to keep pace with the market competition. Now, PFIL adapts risk-taking attitude, which might expose more opportunities to enhance profitability.


Equity Price Risk

Equity price risk is the risk that the fair value of equities decreases as a result of changes in the levels of equity indices and the value of individual stocks in the stock markets dynamics. PFIL minimizes this risk through portfolio diversification as per investment policy of the FI and Investment Division manages the entire portfolio of the company.

Money Laundering Risk

Money laundering is the generic term used to describe the process by which criminals disguise the original ownership and control of the proceeds of criminal conduct by making such proceeds appear to have derived from a legitimate source. All financial institutions, both banks and non-banks, are susceptible to money laundering activities. Banks and other Financial Institutions conducting relevant financial business of liquid products are clearly most vulnerable to use by money launderers, particularly where they are of high value.

PFIL has established its AML department at its Head Office headed by CAMLCO. CAMLCO is empowered with sufficient authority to implement and enforce corporate wide anti-money laundering policies, procedures & measures. CAMLCO reports directly to senior management importantly providing added assurance that the officers have sufficient authority to investigate potentially suspicious activities.

Portfolio Management Risk

For any financial institution, portfolio management is the crucial issue as any slackness in management of portfolio may cause serious setback. The reported Gross NPL ratio of last four years was always lower in comparison to industry average, which reflects effective and efficient CRM process of the PFIL to fulfill the thrust sectors of the economy.

Operational Risk

Operating risks are the risk resulting from inadequate or failure of internal control system of the entity. PFIL has an established and well-functioning Internal Control and Compliance Division to encounter and mitigate such risks Apart from this, PFIL uses basic indicators approach for calculation capital charge against operational risk.




FYE 31 December 2017* 2016 2015 2014

Total Asset (Million) 29,172.19 24,388.59 20,038.04 17,656.25

Asset Growth (%) 19.61 21.71 13.49 -

Gross Loan (Million) 25,861.92 21,535.15 17,034.85 14,471.36

Loan Growth (%) 20.09 26.42 17.71 -

Gross NPL (Million) 1,289.81 809.23 475.69 684.26

Gross NPL Ratio (%) 4.99 3.76 2.79 4.73

Net NPL(Million) 1,109.89 667.26 377.78 370.39

Net NPL Ratio (%) 4.29 3.14 2.24 2.59

Loan Loss Provision /Gross NPLs (%)

- 51.96 56.31 68.46

General Provision/Net NPLs (%)

- 41.74 44.99 41.73

Specific Provision /Gross NPLs (%)

- 17.54 20.58 45.87

(Net NPL – General Provision)/ Equity (%)

- 15.18 8.24 8.63

Data obtained from audited financial statements of 2014-2016

*Data obtained from unaudited financial statements up to 30th June, 2017 Asset Quality

Quality & performance of a financial institution’s assets mainly depends on extent of nonperforming loan as loans provided to clients comprises most significant portion of these companies’ asset base. A nonperforming loan (NPL) is the sum of borrowed money upon which the debtor has not made his scheduled payments for at least 90 days. A financial institution might have to face increased risk of not being paid by customers. It is observed that, PFIL was not being able to reduce its non-performing loan as a whole since FY 2015 against growing loan portfolio. Due to this, overall quality of PFIL’s asset base has fallen which is also reflected in increasing trend of gross NPL ratio in the subsequent year. However PFIL could not sustain the control of classified loan as indicated by pumped up Gross NPL & Net NPL volume of BDT 809.23 (70.31% growth) & 667.26 million (76.92%) respectively in FY 2016. This deteriorating scenario has even become worse till 30.06.2017. This unusual increase in Non-Performing Loan is an indicator of deteriorated quality of PFIL’s asset. However gross & net NPL ratios for the period ended 30 June 2017 is almost same compared to that of 6 month period ended 2016. This kind of companies has a culture of collecting overdue loan & recognizing bad loss at the second half of the year. So it is expected that both gross & net NPL ratios are expected to improve at the yearend date as the same happened in FY 2016. But letting loose control on customers throughout the year and collection of outstanding amount at the yearend also has an adverse impact. It increases the risk of both not being paid and impairment of relationship. To reduce this credit risk, PFIL has made more than sufficient provision although this has affected the profitability of the company on the other hand. At this point it is worth mentioning that, NPL ratio of PFIL is still better than industry average in FY 2016 and representing remarkable performance of the company. PFIL has also maintained an investment portfolio of BDT 757.44 million in FY 2016 consists of 34 listed & 1 unlisted securities. Further scrutiny revealed that, only the investment in manufacturing industries has market value which is remarkably 180.61% higher than cost value. Whereas, all other investments are still in loss making situation. At the year-end of 2016 total market value of the investment was 14.19% lower than cost value. To address this PFIL has made sufficient provision as per guideline from Bangladesh bank.

Loan Loss Provision to Gross NPL ratio is considered as one of the important indicator used to evaluate the security of Non-Performing Loan. In recent year this ratio has slightly fallen as non-performing loan has increased to a higher pace compared to the provision growth. This ratio of FY 2016 indicates that, 49.04% total classified loan is still uncovered. Evidence of deteriorating quality of loan portfolio has also been justified by deteriorating general provision/net NPL, Specific Provision/Gross NPL & (Net NPL – General Provision)/ Equity ratios.



Financial Risk Analysis

Asset Composition

Total asset base of PFIL is observed to increase by double digit growth rate since FY 2014. Asset base of PFIL is comprised of cash (1.22%), Balance with other Banks and Financial Institutions (3.79%), Investment (3.10%), Loans, Leases and Advances (88.30%), fixed & other asset (3.59%) in FY 2016. In the same year, only cash, loan & advance has shown a growth of 7.41% & 26.42% while investment, balance with other banks & other asset has been dropped by 6.08%, 1.59% & 10.76% respectively.

From above scenario AlphaRating notices more concentration on core business area while not jeoperdizing capital requirement for regulatory purpose as reflected in more than sufficient CRR & SLR .The increased asset base has mostly been financed by growing level of depositor’s fund. On the other hand debt facilities from other bank & non-bank financial institute have also followed a rising trend, though it still is insignificant amount against the total asset volume of the company.

https://www.investopedia.com/terms/d/debtor.asp

https://www.investopedia.com/terms/p/payment.asp


Name of Industry (BDT in million)

2016 2015

Disbursement NPL (%) Disbursement NPL (%)

Agriculture 12.30 1.64 84.20 0.27

Cement & Allied Industry 50.00 - 250.30 -

Electronics and Electrical - - 276.60 -

Food Production & Processing - 0.56 681.50 0.61

Garments and Knitwear 962.30 2.08 465.80 4.79

Glass Industry - - 504.50 -

Housing 182.40 10.07 1,845.70 26.78

Iron, Steel and Engineering 2,200.00 1.14 1,859.90 8.91

Jute & Jute Products - 100.00 85.30 6.5

Leather and Leather-Goods 50.00 - 270.30 0.02

Paper, Printing and Packaging 150.00 4.48 652.60 5.59

Pharmaceuticals and Chemicals 542.30 1.39 871.90 0.8

Plastic Industry - - 63.10 3.05

Power, Gas, Water Services 123.50 - 212.60 -

Ship Manufacturing Industry 5.00 - 175.77 -

Telecommunication and IT - 2.23 537.30 2.44

Textile 1,020.37 5.02 2,355.10 6.64

Trade and Commerce 250.00 9.01 851.00 15.16

Transport and Aviation 886.50 2.41 2,350.30 10.49

Others 880.60 4.46 2,816.90 7.95

Sector wise disbursement &NPL exposure of FY 2015 &2016



Loan Diversification & Concentration

AlphaRating observed a well-diversified portfolio mix when evaluating sector-wise loan concentration. Diversification reduces the unsystematic risk of a portfolio by spreading them over a relatively less risky investment. Sometimes, it need to compromise profitability to achieve diversification as higher return is often associated with increased level of risk. An efficient portfolio management would be achieved with a highest possible return minimum level of risk thorough diversification or any other means.

Outstanding of Textile, Garments and Knitwear, Housing, Iron, Steel and Engineering, Transport and Trade& Commerce consists of considerable (62.50%) portion of total loan portfolio. Each of these sectors are relatively stable & have expanding market base in terms of current macro-economic context of Bangladesh. So, allocation of more than

half resources in above mentioned sectors demonstrates the effectiveness of proper sector wise diversification. In light of current economic situation, AlphaRating observed a controlled approach while making disbursement in FY 2016 as justified by reduced level of disbursement in the sectors with higher NPL. Among these, only disbursement made in garments & knitwear and iron, steel & engineering has achieved a growth compared to previous year along with improved control over NPL. Similarly, all major sectors has experienced a reduction of NPL percentage which provides a reasonable evidence of sustainable development of the quality of overall loan portfolio. On the contrary, amount of classified loan as a percentage of closing balance has slightly increased in favor of agriculture & pharmaceuticals. On the other hand, total outstanding balance of whole Jute sector has become classified and become 10.12% of total non-performing loan in recent year. Except this, management was able to improve PFIL’s performance regarding portfolio management in almost every aspect by executing insightful strategic course of action. Though making no further disbursement in FY 2016 is quite unusual regarding Electrical & electronics and Glass industries as these are performing well and had no classified loan in both years.

By nature the portfolio can be divided into four categories which are lease finance, term finance, real estate finance & staff loan. The relative percentages of these items are 25.66%, 66.74%, 7.30% and 0.28% respectively. However true quality of nature wise diversification can only be evaluated upon assessment of terms & conditions of the loan agreement. It is observed that 87.09% of the total loan portfolio was secured by collateral/mortgage in FY 2016. These secured loans can be considered good in term of nature which also represents the true qualitative substance of PFIL’s loan portfolio. In recent years, especially after the stock market recession, an exponential growth in country level NPL has been observed. Addressing this situation, PFIL’s adaptive capability & continuation of dynamic loan approval process has been considered positively by AlphaRating. It also answers the question, how the company is maintaining it’s gross NPL ratio well below the country wise NPL of Bangladesh.

With existing branch network, PFIL only covers commerce & industry intensive locations within only four divisions which are Dhaka, Chittagong, Rajshahi & Khulna. Because of two specific reasons, AlphaRating considers this as poor example geographical diversity of its loan portfolio. Firstly, PFIL is not able to cover 100% of the whole country. However PFIL may need to undertake extensive expansion plan to get total coverage. But in a short notice it seems unrealistic as other limiting factors may arise such as cost-inefficiency, shortfall of resources etc. Secondly, uneven distribution of loan in Dhaka area which comprises 87.09% of PFIL’s total exposure. Accordingly natural disaster and/or infrastructure damage in Dhaka area may significantly jeopardize profitability status of the company.


Large Loan Exposure

Total large loan exposure of PFIL includes only 19 accounts and total outstanding of which stood at BDT 6,239.33 million at the end of FY 2016. In previous year, total large loan outstanding was BDT 3,081.84 million owed by 9 borrower accounts. Further scrutiny allows us to identify large borrowers operating under the umbrella of same management such as Beximco, Basundhara, Buildstrade &Opex Sinha group represents 13%, 7%, 13% & 11% respectively. As on 31

st December 2016 largest borrower of

the company was Buildstrade Foils Limited with outstanding of BDT 715.39 million representing 3.32% of total portfolio. This loan portfolio is extensively diversified in various industries such as ship breaking, leather, iron & still, paper, ceramic, textile etc.

Performance of Rescheduled Loan

Total outstanding of classified loans has been stood at BDT 809.23 million in FY 2016 whereas this number for previous year was BDT 475.68 million. Total classified loan includes 159 accounts of which only 41 accounts has classification status as SS, 19 accounts became default & the rests are BL. Among these, PFIL has rescheduled the transaction of only 19 accounts representing a total outstanding balance of BDT 679.69 million. These loans consists of 3.15% of total outstanding do not reflect healthy performance. Out of 19 only two accounts has been rescheduled second time, one for the third time and the rest have been rescheduled first time. However total rescheduled amount of FY 2016 is comprised of 83.93% of total classified amount.

Capital Adequacy

Overall capitalization is observed to increase by a tiny growth rate of 2.79% compared to previous year which has been triggered by movement in retained earnings only in FY 2016. In the same year PFIL maintained a 16.92% higher supplementary capital than that of previous year. The company also was able to keep surplus capital against the minimum requirement as indicated by CAR ratio higher than 10.00% since the effectiveness of Basel-II guidelines has come live. Major contributions to PFIL’s strong capital adequacy ratio are high capital base, increased level of provision against non-performing assets & low risk profile associated with balance sheet exposure. In spite of growing capital base, CAR ratio is observed follow a decreasing trend only due to increased risk weighted asset base since FY 2014. This ratio of each year indicates that significant portion of the company’s asset base is funded by liabilities (name customers deposit).



Figure 5: Sector Wise Loan 2014-2016


Tier - I 2,127.23 2,069.49 2,029.20

Tier - II 456.18 390.42 389.11

Total Capital 2,583.42 2,459.91 2,418.31

Minimum Requirement 2,340.01 1,961.78 1,778.77

Surplus/ (Deficit) 243.41 498.13 639.54

CAR 11.04% 12.54% 13.60%

Capital Adequacy Status (BDT in millions)

0 2,000 4,000

Garments & Knitwear

Textile

Jute, plastic & agriculture

Food Production & Processing

Leather & Leather Goods

Iron Steel & Engineering

Pharmaceuticals & Chemical

Cement & Allied Industry

Telecommunication & IT

Paper, Printing & Packaging

Glass, Glassware and Ceramic

Ship Manufacturing

Electronics & Electrical Product

Power, Gas, Water & Sanitary Service

Transport & Aviation

Trade & Commerce / Others

Real Estate

Others

Margin Loan

Millions2014 2015 2016


Fund & Liquidity

Fund Management

In recent year, PFIL has increased it’s dependency on banking facilities to finance the rising level of loan portfolio as substantiated by worsening situation of both loans/customer deposit & interbank liabilities/total funding base ratio. On the other hand, PFIL was unable to collect deposit from customers in recent year compared to the loan portfolio growth which is also reflected by deposit growth ratio. It is observed that the company was able to finance only 76.31% of loan portfolio from customer deposit the same year whereas it was 82.17% in last year. The company reported deteriorating loan to Deposit ratio which also crossed the maximum regulatory requirement threshold of 110%, reflecting risky flexible loan disbursement as justified by increased level of NPL. This indicator may improve profitability in short term but increase the liquidity risk with prospective effect on NPL & profitability in longer term.

FYE 31 December(%) 2016 2015 2014

Loans / Customers Deposits 131.03 121.69 156.98

Total Customer Deposit Growth 17.41 51.86 26.05

Net Loans / Stable Funding Base 156.51 176.67 175.86

Net Loans / Customer Deposits 128.47 119.78 151.9

Deposit / Total Liability & Equity 67.39 69.86 52.21

Interbank Liabilities /Total Funding Base

15.44 10.03 25.59

Data obtained from audited financial statements of 2016

Moreover, further sign of having fund management risk is evident from PFIL’s Net Loan to Stable funding base ratio though it has improved in recent year. A more detailed analysis revealed that, nearly 98.58% of total Deposit was represented by Term Deposit, supporting the company to manage the liquidity risk to some extent. Moreover it is observed that 48.50% of total bank borrowing is non-current (has maturity period over one year) by nature. Both non-current portion of customer deposit & bank loan is observed to increase by 43.93% & 209.90% respectively in FY 2016. Along with these, increased cumulative retained earnings has developed stable funding base. In order to meet the increased demand, PFIL need to secure the smooth influx of money in the following years which will not be possible unless accelerated growth achieved in terms of customer deposit.

Liquidity Management

Asset & liability maturity statement displays that PFIL was able to maintain optimized short term liquidity profile as verified by fine-tuned level of positive gap in brackets with less than one year maturity. A shortfall of BDT 118.15 million in 1 to 5 years maturity bracket signifies a flaw in asset & liability management. However, short term depositors tend to renew their instruments on recurring basis. Accordingly it can be assumed that, the negative gap of the bracket with maturity up to 5 years will definitely increase. So, impact of the shortfall will be more severe than how it currently seems. PFIL needs to invest more in assets with up to 5 years maturity for backing up of expected future liabilities.

Liquidity Profile (BDT in millions)

Maturity (BDT in million)

Assets Liabilities Net Excess/ (Shortage)

Up to 1 Month 603.58 590.76 12.53 Up to 3 Months 1,530.67 1,513.13 17.54

Up to 12 Months 8,201.67 8,134.19 67.48 Up to 5 years 11,056.34 11,174.49 (118.15) Above 5 years 2,996.33 415.01 2,581.32

Total 24,388.59 21,827.59 2,561.01

Data obtained from audited financial statements of 2016

In last year the liquidity gap was BDT 2,522.44 million which was 12.58% of total assets. In the following year, liquidity gap achieved a tiny 1.15% growth & stood at 10.50% of total asset base. Total liquid asset of FY 2016 was BDT 1,224.61 million which was 7.44% of the total deposits received and borrowings from other financial institutions. This ratio was almost same to the previous year and represents an average level of security provision regarding customer’s deposit.

PFIL has maintained a surplus CRR of BDT 26.48 million SLR of BDT 380.05 million in FY 2016. The total surplus statutory deposits of the company stood at BDT 406.53 million whereas it was BDT 491.26 million in previous year. In both years PFIL maintained higher ratios than minimum regulatory requirements (SLR 5%, CRR 2.5%).




Earning Trend & Profitability

In recent year, interest income from term finance has increased by 18.04% whereas interest payment has a growth of only 9.99%. Combined effect of these two factor mainly enabled the company to achieve a growth of 7.23%. in operating income in FY 2016. Since FY 2011 the company was able to manage a positive growth in revenue trend, displaying more subtle effort & precise concentration on core business area. However it is observed that income has been generated at a much slower pace compared to growth in loan portfoilo (26.42%). It is observed that volume of PFIL’s loan portfolio has increased mainly due to easier customer assessment process because of a moderate fall in interest rates. Accordingly, higher loan volume is achieved by compromising quality which is justified by dramatic rise in non-performing loan. If NPL continues to grow in future, profitability of the company will be jeopardized to accommodate higher level of provision.

Unlike Net Interest Income, Non-Interest Income of the company had shown deteriorating trend over last three years period. This is mainly due to having lower capital gain justified by company as most securities in the portfolio has market value well below their cost value except manufacturing industry.

Operating expenditure of PFIL has increased by 3.36% in recent year against 1.13% growth in total revenue. This increased growth rate in expenses against revenue growth has affected the operational efficiency throughout FY 2016 which is also justified by cost to income ratio.

Since FY 2014 AlphaRating observed minor ups & downs in the trend of ROA. Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. Both standalone & comparative use of this ratio can depict true performance measures of invested assets in a company. ROA of the company has been slightly affected in recent year as total asset has increased at a higher pace than that of post tax profit. ROA of PFIL is observed to be following a improved trend compared to the industry ROA since FY 2012. Even the company was able to defend It’s ROA position in recent year though industry ROA has significantly deteriorated.

Company Profile Industry Overview Business Risk Financial Risk Management Quality Company Information

FYE 31 December (BDT Million)

2017* 2016 2015 2014

Net Interest Income 409.49 861.72 803.5 751.24

Non Interest Income 57.93 135.82 182.82 198.76

Pre-Tax Profit (BDT 250.53 556.20 520.18 437.21

Post - Tax ROA (%) 1.27 1.41 1.21

Post - Tax ROE (%) 11.05 10.57 7.88

Net interest Margin (%) 4.98 4.93 5.34

Cost Income Ratio (%) 76.10 74.63 74.57

Average Earning Asset 20,066.8

9 16,283.8

5 14,065.8

5

Interest Rate Spread (%) 4.73 4.93 5.34

Cost of Fund (%) 10.01 12.03 12.63

Data obtained from audited financial statements of 2014-2016 *Data obtained from unaudited financial statements up to 30th June 2017

Figure 6: ROA of Industry vs. PFIL

2.07% 2.07%

1.21%1.41%

1.27%1.90%

1.50%

1.80%

1.30%0.80%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2012 2013 2014 2015 2016

PFIL Industry

Unlike the Return on Assets (ROA), PFIL has experienced a gradual increase in the trend of Return on Equity (ROE) as post tax net profit has a higher growth rate compared to cumulative earnings. PFIL has also achieved improved ROE in FY 2016 compared to the industry average of 9.70%. Moreover the company is generating income well above than the current risk free rate of return and representing a satisfactory performance.




Bank Facilities (As on 30.09.2017)

Bank Branch Limit Outstanding

Expiry date (BDT in millions)

Pubali Bank Limited Principal Branch 400.00 300.00 24.06.2020

Prime Bank Limited Corporate Branch 600.00 298.50 28.11.2021

NCC Bank Limited Nawavpur Road Branch 203.60 152.10 25.05.2021

Mutual trust Bank limited Dilkhusha Branch 250.00 188.60 11.01.2021

Dutch Bangla bank Limited Sat Moshjid Road Branch 500.00 307.90 15.06.2019

Dutch Bangla bank Limited Corporate Banking Branch 150.00 139.10 14.05.2020

Uttara Bank Limited Corporate Btanch 500.00 366.90 30.12.2019

Shahjalal Islami Bank Limited Motijheel Branch 200.00 171.00 23.09.2021

Shahjalal Islami Bank Limited Dhaka Main Branch 200.00 170.80 20.11.2021

United Commercial Bank Limited New Eskaton Branch 200.00 175.70 27.12.2021

Jamuna Bank Limited Dilkhusha Branch 250.00 219.30 18.12.2021

Bank Asia Limited Elephjant Road Branch 300.00 276.60 8.02.2022

Basic Bank Limited Dilkhusha Branch 300.00 275.60 01.03.2022

Modhumoti Bank Limited Uttara Branch 500.00 471.70 29.03.2022

Southeast Bank Limited Mogh Bazar Ladies Branch 200.00 191.90 17.04.2022

Midland Bank limited Corporate Banking Branch 600.00 583.90 12.05.2022

One Bank Limited Ashkona Branch 300.00 283.30 25.10.2018

Al Arafah Islami Bank Limited Azampur branch 200.00 185.50 5.06.2020

Total 5853.60 4858.40

PFIL is availing external finance facilities from above banks.As on 30.09.2017, it had an outstanding liability of BDT 4858.40 million against loan limit of BDT 5853.60 million. AlphaRating considered above mentioned external financing facilities only while assigning the rating.


Management & Other Qualitative Factors

Corporate Governance

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

PFIL is dedicated to comply with the standards of corporate governance in order to ensure disclosure and transparency, to define the responsibilities of the board and the management, to define the rights and role of shareholders and stakeholders, to ensure the equitable treatment and to avoid conflicts of interests.

Board of Directors

The Board of PFIL consists of 10 Members including the Managing Director, 2 Independent Directors and 4 Nominee Directors. The Chairman of the Board and the managing director are different individuals. Appointment of new director is made with the consent of all senior directors. The Board handles company’s affairs and ensures that the organization is in right track all time. During 2016, the Board of Directors held 12 meetings.

Executive Committee

Executive committee is comprised of three non-executive directors, managing director. The committee is responsible to scrutinize the proposals sent to Board of Directors for decision. The committee also reviews the policies & guidelines issued by Bangladesh bank regarding credit & other operations. The committee met 12 times during 2016 in order to approve strategic plans and policy guidelines.

Audit Committee

It is the responsibility of the Audit Committee to consult with and advise the Board on the scope of internal audits. In accordance to the compliance set by BSEC, the committee is composed of more than 3 members. Committee is run by 3 members. The committee also examines the status of implementation of the company policies & manuals, BSEC & Bangladesh Bank guidelines. The committee also formulates procedures and policies in the light of Standard Accounting Systems of the country for PFIL. The committee held 4 meetings during 2016.

Risk Management Department

PFIL’s Risk Management departments are headed by well skilled senior executives. These departments are playing effective role to mitigate various risks in all banking operational area and setting strategy and policy to overcome the risks matter of the Bank.

Independent Director

As per Corporate Governance Guideline, as a listed company, PFIL is required to appoint 2 Independent Directors representing 1/5 of Board of Directors. In order to comply with this, the company has appointed two Independent Directors having no shareholding in PFIL.

Management

Mr. S. M. Intekhab Alam is the Managing Director & CEO of the company. The management of the company is headed by Managing Director and CEO who is being assisted by other senior members of the team in running day to day operation & formulates line of action towards increasing profitability and growth of PFIL. The management functions through several committees to assist the management team in running different affairs of the company. The committees are Management Committee (MANCOM), Asset Liability Committee (ALCO), Credit Committee (CC), Central Compliance Unit (CCU) etc.



http://www.investopedia.com/terms/s/stakeholder.asp

http://www.investopedia.com/terms/i/internalcontrols.asp

http://www.investopedia.com/terms/d/disclosure.asp


Green Banking

PFIL has formulated “Green Banking Policy” in line with the Guideline issued by Bangladesh Bank. A separate Green Banking Cell (GBC) has also been formed in order to develop policies & planning and monitor the Green Banking activities of the FI. The unit regularly communicates with the Green banking and CSR Department of Bangladesh Bank in order to receive directives and advices from them.

Communication to Shareholders

PFIL keeps its shareholders and stakeholders always in touch to serve and to inform company related information. To hold successful Annual General Meeting (AGM) PFIL declares date of AGM at a stipulated time, send Annual Reports and other required documents and arranges AGM in a convenient place and time. The shareholders are completely free to speak in the meeting. The complaints, suggestions, proposals of the shareholders are recorded in minutes for consideration and implementation.

Corporate Social Responsibility

The notion of Corporate Social Responsibility (CSR) is globally fast gaining acceptance as the business can and should make significant contributions towards environmentally sustainable and socially equitable development. PFIL contributed BDT 1.41 million in FY 2016 in various sectors including Education, Health etc.

Internal Control and Compliance (ICC)

PFIL has established its Internal Control and Compliance Divisions in order to ensure proper maintenance of internal control procedure. The company has designed its own internal control system to address internal control deficiencies and take proper measures to overcome this. Additionally, effectiveness of this system is closely monitored by the Audit Committee of PFIL.



Management Committee (MANCOM)

This is the highest level policy making Committee of PFIL. This management team is headed by the Managing Director which is consisted of mainly heads of various divisions. The committee sits on regular basis & takes decision on various important issues & also ensures implementation thereof.

Credit Committee (CC)

Credit committee of the company is consisted of 3 members and chaired by Managing Director of PFIL. This committee mainly deals with activities related to ordinary business operation, evaluation and sanction of loans, lease facilities and so on.

Asset Liability Committee (ALCO)

The committee has been formulated as per the guideline of Bangladesh Bank. The committee consists of 6 members and the Managing Director is the chairman of the committee. ALCO monitor the activities of asset and liability coordination. Main responsibility of ALCO is to look after the financial market activities, manage liquidity and interest rate risk considering market position and competition. The meeting of the ALCO held on regular basis.

Anti Money Laundering Committee (AMLCO)

Money laundering risk is one of the 6 core risk elements in banking &FI business. The company has designed a Chief Anti Money Laundering Compliance Officer (CAMLCO) at its head office who empowered with sufficient authority to implement and enforce corporate wide anti-money laundering policies, procedures & measures and reports directly to senior management.

Human Resource Management

The company has taken several initiatives to enhance the level of employee motivation, commitment and productivity. There are nearly 137 employees engaged in handling the business operation of the company.


Company Information:

Board of Directors

Ms. Evana Fahmida Mohammad Chairman

Mr. Mobarak Ali Director

Ms. Selina Akhter Director

Mr. Abdur Rahman Director

Mr. Azizur Rahman Nominee Director (Representing Phoenix Insurance Co. Ltd.)

Mr. Dost Mohammad Nominee Director (Representing Phoenix Insurance Co. Ltd.)

Mr. Rakibul Islam Khan Nominee Director (Representing Pakiza Cotton Spinning Mills (Pvt.) Ltd.)

Ms. Nasreen Ali Independent Director

Mr. Reshad Imam Independent Director

Mr. Intekhab Alam Managing Director

Shareholders Composition as on 31 December, 2016

Sponsors (Institutions) 10.92%

Sponsors (Individuals) 44.15%

General Public (Institutions) 24.18%

General Public (Individuals) 20.75%

Total 100%

Management Committee

Mr. S.M. Intekhab Alam Managing Director

Dr. M. Shah Alam Deputy Managing Director

Mr. Mohammad Sayduzzaman FCA, FCS Head of Investment & Company Secretary

Mr. Md. Badrul Haque Patwary Head of Credit Administration Division and HR& Logistics

Mr. Md. Abu Sukkur Head of Finance & Accounts

Mr. Sardar Mahbub Ali Head of Internal Control and Compliance Division

Mr. Mohammed Mahbub Alam Head of Credit Risk Management

Mr. Mohammed Ashaduzzaman Head of Treasury, Liability



Auditor Malek Siddique Wali & Co. 9-G, Motijheel C/A, Dhaka-1000 Phone: 9560919, 01711684821.

Head Office

Eunoos Center (Level-11) 52-53, Dilkusha C/A, Dhaka-1000, Bangladesh.

Telephone No.: 9569007,955685 FAX: 880-2-9567787 Email:[email protected] [email protected]

URL (Website): www.phoenixfinance.com.bd



http://www.phoenixfinance.com.bd/


Business Risk Analysis

Financial Risk Analysis

Management/ Ownership/ Governance Risk Analysis

Rating Committee

Analysis is segmented

into two or three sub

sectors:

Industry

Outlook

Competitive

Position

Operational

Analysis

Analysis is segmented into

four sub sectors:

Earnings

Cash Flow

Generating Ability

& Debt Servicing

Capacity

Capital Adequacy

Financial

Flexibility

It is one of the key

elements of the rating

methodology since

management decides

what businesses to be

in, what strategies

should be pursued and

how these activities

should be financed.

Senior personnel review

each company to determine

the appropriate final credit

rating.

Review Modeling

Assumption

Approve Company-

Specific

Adjustments

AAA Exceptionally Strong Capacity AA Very Strong Capacity A Strong Capacity BBB Adequate Capacity BB Some Obvious Weakness

in Operating Practices & Key Financial Indicators

B Fundamental Weakness in Operating Practices

& Key Financial Indicators C Several Immediate

Problems of a Serious Nature

D Requires Sustained

External Support without which its Continued Viability is in Doubt

Notes: Ratings from AA to B may be

modified by the addition of a plus (+) or minus (-) suffix to show relative standing within the major rating categories.

BB A BBB

CC AAA D

B AA CCC

ST-4 ST-5

ST-1 ST-2

ST-6 ST-3

ST-1 Superior Capacity

ST -2 Strong Capacity ST -3 Adequate Capacity

ST -4 Inadequate Capacity ST -5 High Likelihood of

Default, with little Capacity to Address Further Adverse Changes in Financial Circumstances

ST -6 Payment in Default

Rating Outlook

POSITIVE Rating may be raised NEGATIVE Rating may be lowered STABLE Rating is likely to remain

unchanged DEVELOPING Rating may be raised,

lowered or remain unchanged.

AlphaRating’s Research Methodology for Determining Rating of FI


--------------------------------------------------------------------- Disclaimer ----------------------------------------------------------------

The Credit Rating Report is the property of Alpha Credit Rating Limited (AlphaRating). The Rating Report and all information contained herein shall not be copied or

otherwise reproduced, repackaged, further transmitted, transferred, disseminated, redistributed or resold for any purpose, in whole or in part, in any form or manner or

by any means whatsoever, by any person without AlphaRating's prior written consent. The Credit Rating Report and all information contained herein is provided on the

basis of information believed by AlphaRating to be accurate and reliable as derived from publicly available sources or provided by the rated entity or its agents. A credit

rating is not a recommendation to buy, sell, or hold any security and no investment decision should be made solely on the basis of a credit rating. AlphaRating may make

modifications and/or changes in the Credit Rating Report and all information contained herein at any time, for any reason. Under no circumstances will AlphaRating or its

affiliates be liable for any special, indirect, incidental or consequential damages of any kind, including, but not limited to, compensation, reimbursement or damages on

account of the loss of present or prospective profits, expenditures, investments or commitments, whether made in the establishment, development or maintenance of

business reputation or goodwill, cost of substitute materials, products, services or information, cost of capital, and the claims of any third party, or for any other reason

whatsoever, even if AlphaRating has been advised of the possibility of such damages. Any person making use of and/or relying on the Credit Rating Report and all

information contained herein hereby acknowledges that he has read this Disclaimer and has understood it and agrees to be bound by it.

---------------------------------------------------------------------------------------------------------------------------------------------------------

© Alpha Credit Rating Ltd 2017

Phoenix Finance & Investments...

Documents

Transcript of Phoenix Finance & Investments...