The B3 long-term deposit ratings of Pakistan’s top five banks were affirmed by Moody’s Investors Service on Wednesday, but the outlook on the bank’s long-term deposit ratings was revised from stable to negative.
Allied Bank Limited (ABL), Habib Bank Limited (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP), and United Bank Limited (UBL) are the banks in question (UBL).
ABL, MCB, and UBL’s long-term foreign currency Counterparty Risk Ratings were similarly cut to B3 from B2 by the rating agency; these ratings are now bound by the Government of Pakistan’s foreign currency nation ceiling, which was decreased to B3 from B2.
“Today’s rating moves follow Moody’s decision on June 2, 2022, to modify the government of Pakistan’s B3 ratings to negative from stable, and to lower the country’s local and foreign currency country ceilings to B1 and B3, respectively, from Ba3 and B2.
The sovereign’s poor outlook stems from Pakistan’s increased external vulnerability risk and concern about the sovereign’s ability to get additional external funding to meet its demands.
Pakistani banks are also profitable, with a systemwide return on assets of 1.0 percent in 2021, according to Moody’s, while increasing financial inclusion and other government efforts are increasing lending chances.
These advantages are offset by significant asset risks due to sensitive operating and macro conditions, with systemwide non-performing loans (NPLs) at 7.9% of gross loans in 2021; and limited capital buffers, with a systemwide equity-to-assets ratio of 6.3 percent in 2021.
The negative outlook on the bank ratings, according to Moody’s, reflects:
- the rated banks’ large holdings of securities, primarily sovereign debt securities, valued at between 5-8 times their shareholders’ equity, which ties their creditworthiness to that of the government; and 2) the rated banks’ sizable holdings of securities, primarily sovereign debt securities, valued at between 5-8 times their shareholders’ equity, which ties their creditworthiness to that of the government.
- The risk of the government’s ability to support banks in the event of a crisis deteriorating further. The latter is especially important for the National Bank of Pakistan and Habib Bank Ltd., whose ratings have been upgraded by one notch due to increased government backing.
The latter is especially important for the National Bank of Pakistan and Habib Bank Ltd., whose ratings have been upgraded by one notch due to increased government backing.
More broadly, the five banks’ deposit ratings of B3 are the same as the government’s, implying that a potential deterioration in the government’s credit profile will imply a deterioration in the banks’ credit profile.
Given the poor outlook, any upward rating pressure on Pakistani banks’ ratings is restricted, according to the rating agency.
If the sovereign rating outlook is stabilized and the banks maintain their solid financial performance, the banks’ outlook might go back to stable, according to the report.
Following a downgrading of the sovereign rating, downward pressure on bank ratings would develop, indicating the significant interconnections between the banks’ credit profile and that of the government, as well as suggesting a diminution in the government’s ability to give financial support.
A worsening in financial measures – notably asset quality, profitability, and capital adequacy – could put downward pressure on individual banks’ BCAs, but Moody’s believes this is a low-probability occurrence at this time.