PACRA Transition and Default Study CY16-CY25

The Pakistan Credit Rating Agency Limited
Transition & Default Study CY16-CY25
31st January 2026

2
Contents
Section I: Concept of Transition & Default Study
Section II: PACRA’s Transition & Default Trends
Annexures

SECTION I: CONCEPT OF TRANSITION &
DEFAULT STUDY

What is a Transition & Default Study?
A Set of Standardized Tools & Analyses for a Credit Rating Company’s (CRC) ratings’ performance appraisal. Need for a Transition & Default Study

• Self-assessment of CRC
• Peer Analysis with other CRCs
• Regulatory Requirement:
  “A credit rating company shall.- publish annually, within one month of the calendar year, a comprehensive default and transition study developed in line with methodologies practiced by credit rating agencies globally. The annual default and transition study must contain cumulative default rates (CDRs) and transitions for each rating grade for periods 1, 3 and 5 years.” Credit Rating Companies Regulations, 2016 Chapter III, Section 11-A-(l) 4 Concept of Transition and Default Study

Performance of
PACRA Ratings
Stability
(The frequency and magnitude of rating changes) Transition Analysis Transition Matrices Accuracy (The correlation between ratings and the risk of default) Default Analysis Default Rates Time-to￾Default Schematic – A Typical Transition & Default Study 5 Ratings Data (Withdrawal Adjusted) Transition Statistics Static Pools PACRA's Transition and Default Study assesses the accuracy and stability of its entity ratings by analyzing historical rating changes and default rates across one, three, five, and ten-year horizons. This enhances the credibility and transparency of its rating process. Default Statistics

SECTION II: PACRA TRANSITION &
DEFAULT TRENDS
NOTE: PACRA’s ongoing enhancement of the database used to generate the results contained in this study may lead to some differences compared to previous studies.

7
Rating Distribution
Original
Static Pool 93 102 135 193 239 253 280 344 357 354 Withdrawals 7 5 8 10 10 13 11 18 20 12

• PACRA’s rating universe was limited in size until CY17 which posed limitations to the interpretation of study
  results.
• Significant growth in rating opinions over the past 6 years has made the results of the study statistically more
  meaningful.
  0
  40
  80
  120
  160
  200
  240
  280
  320
  360
  400
  0%
  10%
  20%
  30%
  40%
  50%
  60%
  70%
  80%
  90%
  100%
  CY16 CY17 CY18 CY19 CY20 CY21 CY22 CY23 CY24 CY25 Ratings Composition (%) PACRA Original Static Pools Composition (CY16-CY25) AAA AA A BBB BB B CCC-C Total

8

• The mean rating for PACRA has shifted from “AA” to “A” category between CY16 and CY25 while the median
  rating category during CY25 has largely remained unchanged at “A”.

• The decline in the mean rating is attributable to the rating universe having expanded threefold over the decade
  and addition of relatively lower rated clients, resulting in a more balanced rating mix. Rating Distribution – Continued 0% 10% 20% 30% 40% 50% 60% AAA AA A BBB BB B Static Pools' Issuer-level Ratings (%) PACRA Ratings' Composition (CY16-CY25) CY16 CY25

• Pakistan posted a positive real GDP growth of
  ~2.68% during FY25 (FY24: ~2.38%) due to an increase in agriculture income and the services sector. In 1QFY26, real GDP grew by ~3.7%, whereas the expected FY26 real GDP growth rate has been revised to 3.75%-4.75%. The headline inflation dropped significantly to ~0.3% in Apr'25; however, it gradually increased to ~5.6% in Dec'25 on a YoY basis. The policy rate reduced by 150 bps during CY25, ending the year at 10.5%.

• Meanwhile, Pakistan posted a current account
  deficit of $244mln at the end of CY25 (CY24:
  $454mln-profit) due to faster growth of imports relative to exports.

• The official exchange rate increased slightly to PKR
  280.1 per USD at the end of CY25 (Year-end CY24:
  PKR 278.6 per USD).
  9
  Overview of Economy
  -2.0%
  0.0%
  2.0%
  4.0%
  6.0%
  8.0%
  10.0%
  12.0%
  14.0%
  (4,000)
  -
  4,000
  8,000
  12,000
  16,000
  20,000
  24,000
  28,000
  Jan'25 Feb'25 Mar'25 Apr'25 May'25 Jun'25 Jul'25 Aug'25 Sep'25 Oct'25 Nov'25 Dec'25 Trend in Key Policy Indicators (CY25) Current Account Balance (USD mln) (LHS) Total Liquid FX Reserves (USD mln) (LHS) Avg National CPI (%) (RHS) MPR (period end) (%) (RHS)

• Amid gradual macroeconomic stabilization during CY25, PACRA recorded an entity rating upgrade rate of ~8.5%
  (29 total upgrades), while the downgrade rate remained low at ~1.8% (6 total downgrades), indicating a broadly stable credit environment with limited downside pressure.

• During CY25, PACRA undertook one multi-notch upgrade alongside three multi-notch downgrades, reflecting
  selective stress in weaker credits. Additionally, 28 single-notch upgrades were recorded against only four single￾notch downgrades. 10 Impact on PACRA Ratings 3 2 1 0 1 2 3 4 5 6 7 8 CY16 CY17 CY18 CY19 CY20 CY21 CY22 CY23 CY24 CY25 Multinotch Rating Activity (Nos.) Annual Multi-notch Rating Activity (CY16-CY25) Upgrades (Nos.) Downgrades (Nos.) 15 10 5 0 5 10 15 20 25 30 35 40 CY16 CY17 CY18 CY19 CY20 CY21 CY22 CY23 CY24 CY25 Singlenotch Rating Activity (Nos.) Annual Single-notch Rating Activity (CY16-CY25) Upgrades (Nos.) Downgrades (Nos.)

• Within multi-notch rating movements, one entity experienced a two-notch upgrade, while two entities were
  downgraded by two notches. Additionally, one entity was downgraded by a cumulative five notches.

• Out of the 29 total upgrades, the sectors that witnessed the highest number of upgrades were Energy, Banks,
  Infrastructure, Consumer Goods & Services.

• PACRA upgraded 6 entities in the Energy cluster in CY25, particularly within the Oil Marketing Companies sector.
  This was primarily driven by a recovery in volumetric demand and stable exchange rate conditions, which improved earnings visibility and strengthened credit profiles.

• All 5 upgrades in the Banking sector were concentrated within the microfinance segment, with the upgrades
  driven by improving operating performance, capitalization, and asset quality, supported by a more stable macro environment.

• Both Infrastructure and Consumer Goods & Services sectors witnessed 3 upgrades respectively, with no
  particular trend in their sub-segments.

• Unlike the upgrade trends, downgrades did not exhibit any clear sector-wise concentration. The sample size for
  downgrades remained limited, with only six downgrades recorded within the withdrawal-adjusted static pool. 11 Impact on PACRA Ratings – Continued Sector Energy Banks Infrastructure Consumer Goods & Services Others Number of Upgrades 6 5 3 3 12

12
Annual Rating Activity Trend

• The default rate has remained unchanged at 0% for entity ratings after CY16.
• Upgrade rate slowed down in CY25 while the downgrade rate remained stable.
  0.0%
  5.0%
  10.0%
  15.0%
  20.0%
  25.0%
  30.0%
  35.0%
  40.0%
  0
  5
  10
  15
  20
  25
  30
  35
  40
  CY16 CY17 CY18 CY19 CY20 CY21 CY22 CY23 CY24 CY25 Annual Rating Activity Trends (CY16-CY25) Upgrades (Nos.) Downgrades (Nos.) Upgrade Rate (%) Downgrade Rate (%)

CY25 Transition Matrix
13

• In CY25, rating transitions were largely stable, with a higher incidence of upgrades concentrated within
  the “A” (Single-A) and “BBB” (Triple-B) rating categories, while higher-rated and lower-rated segments largely exhibited rating stability. Transition (Years) : 1 End of Year (CY25) Withdrawal Adjusted Static Pool AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC-C D Withdrawals Beginning of Year (CY25) AAA 13.00 100.0% 0.00 AA+ 12.00 100.0% 1.00 AA 29.00 3.4% 96.6% 2.00 AA- 31.00 6.5% 93.5% 1.00 A+ 37.00 2.7% 97.3% 0.00 A 46.00 10.9% 89.1% 1.00 A- 86.00 7.0% 93.0% 4.00 BBB+ 26.00 92.3% 3.8% 3.8% 1.00 BBB 32.00 18.8% 78.1% 3.1% 0.00 BBB- 18.00 27.8% 66.7% 5.6% 2.00 BB+ 5.00 20.0% 60.0% 20.0% 0.00 BB 6.00 33.3% 50.0% 16.7% 0.00 BB- 0.00 - 0.00 B+ 0.00 - 0.00 B 1.00 100.0% 0.00 B- 0.00 - 0.00 CCC-C 0.00 - 0.00

CY25 Transition Matrix - Corporates
13

• One-year average rating transition of Corporates is consistent with its overall trend of migration to higher
  rating categories.
  Transition
  (Years) : 1
  End of Year (CY25)
  Withdrawal
  Adjusted
  Static Pool
  AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC-C D Withdrawals Beginning of Year (CY25) AAA 3.00 100.0% 0.00 AA+ 7.00 100.0% 1.00 AA 22.00 4.5% 95.5% 2.00 AA- 28.00 3.6% 96.4% 1.00 A+ 32.00 3.1% 96.9% 0.00 A 42.00 9.5% 90.5% 1.00 A- 70.00 5.7% 94.3% 4.00 BBB+ 23.00 95.7% 4.3% 1.00 BBB 29.00 17.2% 79.3% 3.4% 0.00 BBB- 16.00 25.0% 75.0% 2.00 BB+ 4.00 25.0% 75.0% 0.00 BB 5.00 40.0% 40.0% 20.0% 0.00 BB- 0.00 - 0.00 B+ 0.00 - 0.00 B 1.00 100.0% 0.00 B- 0.00 - 0.00 CCC-C 0.00 - 0.00

CY25 Transition Matrix – Financial Institutions 13

• One-year average rating transition of Financial institutions reveals a positive trajectory with six FI’s being
  upgraded and three being downgraded.
  Transition
  (Years) : 1
  End of Year (CY25)
  Withdrawal
  Adjusted
  Static Pool
  AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC-C D Withdrawals Beginning of Year (CY25) AAA 10.00 100.0% 0.00 AA+ 5.00 100.0% 0.00 AA 7.00 100.0% 0.00 AA- 3.00 33.3% 66.7% 0.00 A+ 5.00 100.0% 0.00 A 4.00 25.0% 75.0% 0.00 A- 16.00 12.5% 87.5% 0.00 BBB+ 3.00 66.7% 33.3% 0.00 BBB 3.00 33.3% 66.7% 0.00 BBB- 2.00 50.0% 0.0% 50.0% 0.00 BB+ 1.00 0.0% 100.0% 0.00 BB 1.00 100.0% 0.00 BB- 0.00 - 0.00 B+ 0.00 - 0.00 B 0.00 - 0.00 B- 0.00 - 0.00 CCC-C 0.00 - 0.00

One-year Average Transition Matrix
13

• PACRA’s higher rating categories have generally witnessed stronger stability rate than the lower rating
  categories.
  Transition
  Period
  (1-Year)
  Average Annual Transition (CY16-CY25)
  AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC-C D Withdrawal￾Adjusted Static Pool Data Counts Beginning of Year (Average CY16-CY25) AAA 100.0% 8.60 86.00 AA+ 2.8% 96.3% 0.9% 10.90 109.00 AA 4.3% 95.7% 20.90 209.00 AA- 8.8% 90.7% 0.5% 20.50 205.00 A+ 0.5% 6.9% 89.8% 2.8% 21.60 216.00 A 1.0% 11.3% 86.4% 1.0% 0.3% 30.90 309.00 A- 0.4% 0.2% 6.6% 91.1% 0.9% 0.6% 0.2% 54.20 542.00 BBB+ 17.5% 78.9% 3.0% 0.6% 16.60 166.00 BBB 0.5% 13.5% 83.9% 1.6% 0.5% 19.30 193.00 BBB- 1.6% 0.8% 20.2% 75.0% 0.8% 1.6% 12.40 124.00 BB+ 6.4% 31.9% 59.6% 2.1% 4.70 47.00 BB 4.8% 23.8% 57.1% 9.5% 4.8% 2.10 21.00 BB- 100.0% 0.0% 0.10 1.00 B+ 50.0% 50.0% 0.20 2.00 B 60.0% 20.0% 20.0% 0.50 5.00 B- 100.0% 0.10 1.00 CCC-C - 0.00 0.00 NOTE: Withdrawal-adjusted static pool and data counts appear in decimal places as a result of averaging the number of periods from CY16 to CY25.

Three-year Average Transition Matrix
13
Transition
Period
(3-Year)
Average Annual Transition (CY16-CY25)
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC-C D Withdrawal￾Adjusted Static Pool Data Counts Beginning of Year (Average CY16-CY25) AAA 100.0% 7.75 62.00 AA+ 10.1% 87.3% 2.5% 9.88 79.00 AA 11.4% 88.6% 18.63 149.00 AA- 1.5% 24.6% 73.1% 0.7% 16.75 134.00 A+ 1.5% 18.2% 73.7% 6.6% 17.13 137.00 A 0.5% 5.4% 29.3% 59.0% 3.4% 1.0% 0.5% 1.0% 25.63 205.00 A- 2.0% 0.6% 19.9% 73.4% 2.0% 1.5% 0.3% 0.3% 42.75 342.00 BBB+ 47.4% 45.4% 4.1% 2.1% 1.0% 12.13 97.00 BBB 8.2% 34.0% 52.6% 3.1% 2.1% 12.13 97.00 BBB- 1.5% 7.7% 4.6% 46.2% 40.0% 8.13 65.00 BB+ 23.3% 60.0% 16.7% 3.75 30.00 BB 20.0% 20.0% 10.0% 20.0% 20.0% 10.0% 1.25 10.00 BB- 100.0% 0.0% 0.13 1.00 B+ 0.0% 50.0% 50.0% 0.25 2.00 B 0.0% 100.0% 0.13 1.00 B- - 0.00 0.00 CCC-C - 0.00 0.00

• The three-year average rating stability manifests that rating categories above A+ show greater stability as
  compared to the lower investment grade rating categories. The lowest rating categories show a tendency to migrate towards lower ratings.

Five-year Average Transition Matrix
13

• Analysis of five-year average transition matrices reveals a consistent trend, characterized by higher migration
  rates among issuers in the lower investment-grade ratings. Conversely, issuers with AA and higher rating categories exhibit significantly higher stability. Transition Period (5-Year) Average Annual Transition (CY16-CY25) AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC-C D Withdrawal￾Adjusted Static Pool Data Counts Beginning of Year (Average CY16-CY25) AAA 100.0% 6.83 41.00 AA+ 18.2% 78.2% 3.6% 9.17 55.00 AA 17.6% 82.4% 17.00 102.00 AA- 3.6% 36.9% 58.3% 1.2% 14.00 84.00 A+ 2.4% 33.3% 54.8% 7.1% 1.2% 1.2% 14.00 84.00 A 2.6% 9.6% 42.6% 35.7% 7.0% 1.7% 0.9% 19.17 115.00 A- 1.6% 4.8% 27.8% 59.9% 3.7% 1.1% 0.5% 0.5% 31.17 187.00 BBB+ 8.7% 56.5% 21.7% 6.5% 4.3% 2.2% 7.67 46.00 BBB 3.0% 12.1% 48.5% 33.3% 3.0% 5.50 33.00 BBB- 6.9% 20.7% 10.3% 55.2% 6.9% 4.83 29.00 BB+ 5.3% 10.5% 31.6% 52.6% 0.0% 3.17 19.00 BB 66.7% 33.3% 0.0% 0.50 3.00 BB- 100.0% 0.0% 0.17 1.00 B+ 0.0% 100.0% 0.17 1.00 B - 0.00 0.00 B- - 0.00 0.00 CCC-C - 0.00 0.00

Ten-year Average Transition Matrix
13

• Ten-year average rating transition exhibits an overall trend of migration to higher rating categories.
  Transition
  Period
  (10-Year)
  Average Annual Transition (CY16-CY25)
  AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC-C D Withdrawal￾Adjusted Static Pool Data Counts Beginning of Year (Average CY16-CY25) AAA 100.0% 5.00 5.00 AA+ 28.6% 57.1% 14.3% 7.00 7.00 AA 9.1% 27.3% 63.6% 11.00 11.00 AA- 27.3% 45.5% 27.3% 11.00 11.00 A+ 20.0% 60.0% 20.0% 10.00 10.00 A 16.7% 83.3% 0.0% 6.00 6.00 A- 14.3% 57.1% 28.6% 7.00 7.00 BBB+ 25.0% 50.0% 0.0% 25.0% 4.00 4.00 BBB 0.0% 100.0% 1.00 1.00 BBB- 100.0% 0.0% 1.00 1.00 BB+ - 0.00 0.00 BB - 0.00 0.00 BB-
• 0.00 0.00
  B+ - 0.00 0.00
  B - 0.00 0.00
  B-
• 0.00 0.00
  CCC-C - 0.00 0.00

Transition Rates – Financial Institutions vs. Corporates 20 Financial Institutions Upgrade Rate (%) 13.2% 7.9% 9.8% - 2.4% 4.3% 8.0% 2.0% 9.1% 10.0% Downgrade Rate (%) 5.3% 2.6% 2.4% 7.3% - 2.1% 4.0% 8.0% 3.6% 5.0% Maintain Rate (%) 81.6% 89.5% 87.8% 92.7% 97.6% 93.6% 88.0% 90.0% 87.3% 85.0% Default Rate (%) - - - - - - - - - -

• Corporates demonstrated higher rating stability in CY25, while financial institutions exhibited relatively
  higher rating transition activity, characterized by both higher upgrade and downgrade rates. Overall Upgrade Rate (%) 12.8% 7.2% 14.2% 7.7% 9.6% 13.8% 13.4% 7.7% 11.0% 8.5% Downgrade Rate (%) 4.7% 1.0% 0.8% 4.9% 1.3% 1.3% 1.1% 1.8% 1.5% 1.8% Maintain Rate (%) 82.6% 91.8% 85.0% 87.4% 89.1% 85.0% 85.5% 90.5% 87.5% 89.8% Default Rate (%) - - - - - - - - - - Corporates Upgrade Rate (%) 12.5% 6.8% 16.3% 9.9% 11.2% 16.1% 14.6% 8.7% 11.3% 8.2% Downgrade Rate (%) 4.2% - - 4.2% 1.6% 1.0% 0.5% 0.7% 1.1% 1.1% Maintain Rate (%) 83.3% 93.2% 83.7% 85.9% 87.2% 82.9% 84.9% 90.6% 87.6% 90.7% Default Rate (%) - - - - - - - - - - Transition Rates CY16 CY17 CY18 CY19 CY20 CY21 CY22 CY23 CY24 CY25

21 NOTE: "-" notation appears in one of two situations: (i) if the CDR for a rating grade happens to be exactly zero, or, (ii) if there is absence of data to have undergone maturity or "seasoning" for the purpose of CDR calculation. PACRA Average Cumulative Default Rates (CDRs) - CY16-CY25 1-Year 2-Year 3-Year 4-Year 5-Year 6-Year 7-Year 8-Year 9-Year 10-Year AAA 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% AA+ 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% AA 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% AA- 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% AA 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% A+ 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% A 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% A- 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% A 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% BBB+ 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% BBB 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% BBB- 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% - BBB 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% BB+ 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% - - BB 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% - - BB- 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% - - - BB 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% - - B+ 0.0% 0.0% 0.0% 0.0% 0.0% - - - - - B 0.0% 0.0% 0.0% - - - - - - - B- 0.0% - - - - - - - - - B 0.0% 0.0% 0.0% 0.0% 0.0% - - - - - CCC – C - - - - - - - - - - Investment Grade (AAA￾BBB) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

• No entity within PACRA's rated universe has experienced a default since the calendar year 2016.
  Default Trends - CDRs

Default Trends – Time to Default (since inception) 22

• Since inception to Dec 31, 2025, there have been 12
  entity defaults in PACRA’s rated portfolio.
• There are no defaults in the “AAA” category.
• The “AA” category has one (1) default from an entity
  that attained its lifetime-high rating within this category that was re-affirmed twice.
• The ’A’ category has an average time-to-default from the
  initial rating of 53 months and from all ratings of 47 months.
• For the BBB category, it is 74 months from initial ratings
  and 41 months from all ratings.
• The time-to-default for initial ratings is not
  representative at the BB category. This is so as PACRA has only two defaults emanating from this category widely varying in the time elapsed pre-default - One entity defaulting after 148 months and the other only after 14 months, hence skewing the data. CY25 Time to default (in months) Rating Category Initial Ratings All Ratings AAA N/A N/A AA N/A 81 A 53 (7)* 47 BBB 74 (3)* 41 BB 81 (2)* 17

• Default Counts

ANNEXURES

24
Glossary
Key Terms Definition / Explanation
Static Pool Groupings of data that stay together in the group for the entire length and breadth of the measurement period of the pool. Upgrade Rate The rate of upward rating transition (Ceiling: Triple A “AAA”). Downgrade Rate The rate of downward rating transition (Floor: Single C “C”). Default Rate Proportion of entities / issuers that have been assigned a Default “D” rating (As per PACRA Default Policy “How PACRA Recognizes Default”) to the total number of entities / issuers over the measurement period. Transition Rate Statistics quantifying the transition of ratings on the rating scale between a certain time period. Time-to-Default A term denoting how far a rating lies from the time of its default.

Study Inputs
30
Long-term entity / issuer public ratings
Adjustments DATA SET
Including:

• Entity Ratings:
• Corporate
• Financial Institutions
• Multiple debt instruments of a
  single entity are consolidated into a single entity rating
• Instrument-only ratings (IOR) are
  used to derive entity ratings (ER) as per the security structure and other clauses
• Ratings emanating from one entity
  (credit substitution ) are consolidated into one single data￾entry STATIC POOLS AT ISSUER LEVEL

Static Pools
31
Measurement period
A rating put in default & subsequently withdrawn is reported as “D” (Default) only An initial rating of CY22 will form part of the next year (CY22) pool, if not withdrawn Static Pools are adjusted for all withdrawals during a measurement period

• Annual (Single / Multiple)
• Monthly (Smallest
  measurement period)
  Withdrawal Adjustment
  Treatment of initial ratings
  Post-default withdrawals

Understanding Rating Transition Analysis
32
End of Year ( CY20)
Transition
(Years) : 1 AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC-C D Beginning of Year (CY20) AAA 75.0% 25.0% - - - - - - - - - - - - - - - - AA+ 50.0% 50.0% - - - - - - - - - - - - - - - - AA - - - - - - - - - - - - - - - - - - AA- 30.0% - - 30.0% - - - - - - 40.0% - - - - - - - A+ - - - - - - - - - - - - - - - - - - A - - - - - - - - - - - - - - - - - 100.0% A- - - - - - - - - - - - - - - - - - 100.0% BBB+ - - - - - - - - - - - - - - - - - - BBB - - - - - - - - - - - - - - - - - - BBB- - - - - - - - - - - - - - - - - - - BB+ - - - - - - - - - - - - - - - - - - BB - - - - - - - - - - - - - - - - - - BB- - - - - - - - - - - - - - - - - - - B+ - - - - - - - - - - - - - - - - - - B - - - - - - - - - - - - - - - - - - B- - - - - - - - - - - - - - - - - - - CCC-C - - - - - - - - - - - - - - - - - - Stability of ratings is measured along the diagonal of a transition matrix Transition of ratings is measured on either side of the diagonal of a transition matrix

ADRs and CDRs

• Annual Default Rates (ADRs) reflect the probability that an entity / issuer that has
  survived in a Static Pool in the beginning of a particular year will default by the end of the same year.
• Cumulative Default Rates (CDRs) reflects the probability that an entity / issuer that has
  survived in a Static Pool up to the beginning of each subsequent year of the Measurement Period underlying the CDR will default by the end of last year of such Measurement Period. Time-to-default Statistics
• Time-to-Default from Initial ratings: Measures the time elapsed between the initial rating
  (as assigned by PACRA) and default.
• Time-to-Default from All ratings: Measures the rating path to default, tracking from the
  time of initial rating to all successive rating transitions on the rating scale prior to default. 28 Understanding Default Analysis

III-11-A-(l): A credit rating company shall, - publish annually, within one month of calendar year, a comprehensive default and transition study developed in line with methodologies practiced by credit rating agencies globally. The annual default and transition study must contain cumulative default rates (CDRs) and transitions for each rating grade for periods 1, 3 and 5 years. Annexure H: Other information to be disseminated on the website of a credit rating company/agency 3: Detail of transitions/changes in the credit ratings reviewed during the last five years. The detail should contain the ratings upgraded, downgraded and those remained unchanged. For ease of comparison both the rating i.e. before and after the review and the number of notches upgraded or downgraded should be disclosed. 6: Definition of the term, “default”. 7: Entity-wise list of defaults for all the outstanding issues and for all the issues redeemed during the last five years. 8:Rating scale-wise list of default for all the outstanding issues and for all the issues redeemed during the last five years separately for structured instruments and non-structured instruments. https://www.secp.gov.pk/document/credit-rating-companiesregulation-2016/?wpdmdl=16929 29 Regulatory Framework > SECP SECP | Credit Rating Companies Regulations, 2016 | August 05, 2016 (As Amended September 19, 2022)

a) Objectivity of the methodology: ECAI should have methodology of assigning credit rating that is rigorous, systematic, continuous and subject to validation. To establish that ECAI fulfills this primary component of eligibility criteria, it must demonstrate that it meets minimum standards given below:
5. ECAI should demonstrate that the rating methodologies are subject to quantitative back testing. For this
purpose, ECAI should calculate and publish default studies, recovery studies and transition matrices. For the purpose, the ECAI should have a definition of default that is equivalent to international standard and is relevant to domestic market. d) Disclosure: ECAI should demonstrate that it provide access to information that are sufficient to enable its stakeholders to make decision about the appropriateness of risk assessments. The purpose of this disclosure requirement is to promote transparency and bring in market discipline. ECAI is therefore expected to make public following information:
2. Definition of default
6. Actual default rates experienced in each assessment category
7. Transition matrices
http://www.sbp.org.pk/bsd/Criteria_Rating_Agencies.pdf 30 Regulatory Framework > SBP SBP | Eligibility Criteria for recognition of External Credit Assessment Institutions (ECAIs), July 2005

ACRAA Explanation of Clause 3.8 -

1. Each rating agency should publish at least annually a default and transition study along with the
   methodology.
2. The default study should provide details of the following:

• Annual default rates for each rating category;
• 3-year average cumulative default rates;
• 1-year transition rates
  http://acraa.com/images/pdf/DCRA.pdf
  31
  Best Practices Guidelines > ACRAA
  ACRAA | Code of Conduct Fundamentals for domestic Credit Rating Agencies – April 2011

3.18: To promote transparency and to enable investors and other users of credit ratings to compare the performance of different CRAs, a CRA should disclose sufficient information about the historical transition and default rates of its credit rating categories with respect to the classes of entities and obligations it rates. This information should include verifiable, quantifiable historical information, organized over a period of time, and, where possible, standardized in such a way to assist investors and other users of credit ratings in comparing different CRAs. If the nature of the rated entity or obligation or other circumstances make such historical transition or default rates inappropriate, statistically invalid, or otherwise likely to mislead investors or other users of credit ratings, the CRA should disclose why this is the case. https://www.iosco.org/library/pubdocs/pdf/IOSCOPD482.pdf 32 Best Practices Guidelines > IOSCO IOSCO CODE OF CONDUCT FUNDAMENTALS FOR CREDIT RATING AGENCIES - REVISED MARCH 2015

Head Office
FB1 Awami Complex, Usman Block, New Garden Town, Lahore Phone +92 42 3586 9504 – 6 Karachi Office 169/1, Street No-21 Khayaban-e-Qasim, DHA Phase-8, DHA, Karachi Phone +92 346 2578624 The Pakistan Credit Rating Agency Limited DISCLAIMER Each transition and default study issued by PACRA is self-contained. This is so as PACRA’s continuing data enhancement efforts may result in slightly different statistics than in previously published studies and statistics. In addition, comparisons with earlier studies should be viewed within the context of the differing methodologies and definitions, employed therein. PACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is not guaranteed. The information in this document may be copied or otherwise reproduced, in whole or in part, provided the source is duly acknowledged. The presentation should not be relied upon as professional advice. Report Prepared by:
Muhammad Hamza Tahir | Criteria Analyst | Solutions | hamza.tahir@parca.com Muhammad Danish Nadeem | Senior Criteria Analyst | Solutions | danish.nadeem@parca.com Momin Farooque | Supervising Senior – Criteria | Solutions | momin.farooque@parca.com