Karachi, April 01, 2019: VIS Credit Rating Company Ltd. (VIS) has maintained the entity ratings of Foundation Securities (Private) Limited (FSL) at ‘A-/A-2’ (Single A Minus/A-Two). Outlook on the assigned ratings has been revised from ‘Stable’ to ‘Negative’. The previous rating action was announced on March 12, 2019.
The assigned ratings to FSL incorporate strong sponsor profile, existing market position and low overall exposure to risk given conservative policy adopted by the management. Revision in rating outlook reflects weakening in sector outlook and resultant pressure on profitability profile and capitalization levels. Ratings also factor in low diversification in revenue streams.
Performance of the equity market has remained dismal over the last 22 months with trading volumes depicting a significant decline, largely owing to aggressive foreign selling, sizeable current account deficit & rising fiscal deficit and slow-down in GDP growth. Given the operating environment, players with efficient and variable cost structures focusing on high margin business and diversification in revenue streams are expected to fare better vis-à-vis peers. Going forward, focus of brokerage companies is expected to remain on cost rationalization, increased portfolio diversification into derivatives and focus on higher margin business. Nevertheless, sector outlook is expected to remain challenging. FSL continues to operate on an overall low business risk model with no proprietary book (limited exposure to market risk), low exposure to settlement risk and cap on underwriting exposure in relation to adjusted equity.
Given limited diversification in revenue streams and decline in market volumes, FSL incurred operating losses during FY18 and HFY19. However, quantum of losses has reduced during HFY19 due to cost rationalization initiatives undertaken by the management. Equity base of the company has depicted a declining trend on account of increase in accumulated losses and dividend declared for the year FY17 which were paid out in FY18. Going forward, trend in operating performance and capitalization levels will be key rating drivers.