Limassol, October 11, 2022: Moodyʼs Investors Service (“Moodyʼs”) has today downgraded the long-term deposit ratings to Caa1 from B3 of five Pakistani banks: Allied Bank Limited (ABL), Habib Bank Ltd. (HBL), MCB Bank Limited
(MCB), National Bank of Pakistan (NBP) and United Bank Ltd. (UBL).
The rating agency has also downgraded the five banksʼ long-term foreign currency Counterparty Risk Ratings (CRRs) to Caa1 from B3. As part of the same rating action, Moodyʼs lowered the Baseline Credit Assessments (BCAs) of ABL, MCB and UBL to caa1 from b3, and as a result also downgraded their local-currency long-term CRRs to B3 from B2 and their long-term Counterparty Risk Assessments to B3(cr) from B2(cr). The BCAs of NBP and HBL were affirmed at caa1.
The outlook on all banksʼ deposit ratings remains negative.
Todayʼs rating actions follow Moodyʼs decision to downgrade the Government of Pakistanʼs issuer and senior unsecured debt ratings to Caa1 from B3, and maintain a negative outlook.
RATINGS RATIONALE
Today’s rating actions reflect (1) the Government of Pakistan’s reduced capacity to support the banks, which has affected the banks whose ratings benefit from government support (namely NBP and HBL); (2) the high credit linkages between the banks’ balance sheets and sovereign credit risk, which constrains the banks’ Baseline Credit Assessments at the level of the Caa1 rated government; and (3) the lowering of Pakistan’s foreign currency ceiling to Caa1, which has affected the foreign currency CRRs of all rated banks.
REDUCED CAPACITY OF THE GOVERNMENT TO SUPPORT BANKS
The downgrade of the National Bank of Pakistan’s and Habib Bank Ltd.’s local-currency deposit ratings to Caa1, from B3, reflects the reduced capacity of the Pakistani government to support the banks in case of need. This is indicated by the downgrade of the sovereign’s bond rating to Caa1, from B3, which was driven by worsening economic outlook, increased government liquidity and external vulnerability risks and higher debt sustainability risks, in the aftermath of devastating floods that hit the country since June 2022. The floods have exacerbated Pakistan’s liquidity and external credit weaknesses and increased social spending needs, while government revenues were also hit. As a result, NBP’s and HBL’s deposit ratings no longer incorporate a government support uplift.
HIGH CORRELATION WITH SOVEREIGN CREDIT RISK
The lowering to caa1 of the Baseline Credit Assessments of Allied Bank Limited, MCB Bank Limited, and United Bank Ltd., reflects the high linkages between the banks’ balance sheets and sovereign credit risk, given their direct exposures to government securities. As of June 2022, government securities accounted for around 11x of ABL’s Tier 1 capital, around 7x for MCB and 10x for UBL, according to Moody’s estimates. These high exposures to government securities link the banks’ standalone credit profiles to the sovereign’s creditworthiness and leave the banks vulnerable to potential event risk at the sovereign level, constraining their Baseline Credit Assessments at the level of the government’s rating.
FOREIGN CURRENCY CEILING LOWERED
Moody’s has downgraded all banks’ foreign-currency long-term CRRs to Caa1 from B3, to reflect the lowering of the foreign-currency ceiling for Pakistan to Caa1.
NEGATIVE OUTLOOK
According to the rating agency, the negative outlook on the bank ratings primarily reflects the rated banks’ very large holding of sovereign debt securities, at between 7-14 times their Tier 1 capital, which will continue to link their creditworthiness to that of the government, whose ratings are on negative outlook. The negative outlook also captures increased vulnerabilities on the banks’ financial metrics and standalone credit profile that stem from Pakistan’s challenging macro-economic and operating conditions; the latter could also lead Moody’s to reassess its macro profile for Pakistan, which currently stands at “Very Weak +”. More specifically, Moody’s has lowered Pakistan’s real GDP growth to 0-1% for fiscal 2023 (the year ending in June 2023), while increased government liquidity and external vulnerability risks and higher debt sustainability risks suggest that the government will continue to rely on the banks, hence the credit interlinkages between the sovereign and the banks will only deepen.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Any upward rating pressure on the Pakistani banks’ ratings is limited given the negative outlook. The banks’ outlook could change back to stable if the sovereign rating outlook is stabilised and if the banks maintain their resilient financial performance. Downward pressure on the banks’ ratings would develop following a downgrade of the sovereign rating, reflecting the high interlinkages between the banks’ credit profile and that of the government. Downward pressure on the BCAs of individual banks could also develop from a deterioration in the operating conditions that could also impact Moody’s assessment of the macro profile, as well as from a deterioration in banks’ financial metrics, and specifically their asset quality, profitability, and capital adequacy.
