Moody's affirms Habib Bank's B3 local-currency deposit rating; downgrades its baseline credit assessment to caa1

September 19, 2017 -- Moody's Investors Service, ("Moody's") has today affirmed Habib Bank Ltd. (HBL)'s B3/Not-Prime local currency deposit ratings and its Caa1/Not-Prime foreign currency deposit ratings.
At the same time, Moody's downgraded the bank's baseline credit assessment (BCA) and adjusted BCA to caa1 from b3 and the bank's long-term Counterparty Risk Assessment (CR Assessment) to B3(cr) from
B2(cr). The outlook remains stable.

The decision to downgrade HBL's BCA reflects the weakening in the bank's capital buffers and concerns regarding the bank's risk management and governance framework following the $225 million fine imposed on the bank's New York branch by the New York Department of Financial Services (DFS).

The decision to affirm HBL's long-term local currency deposit rating reflects Moody's assessment of a 'very high' probability of government support from Pakistan (B3 stable) in case of need, which now results in one notch of uplift from the bank's caa1 standalone BCA.

RATINGS RATIONALE

DOWNGRADE OF THE STANDALONE BCA TO caa1 FROM b3

Today's rating action follows the announcement that the New York DFS has fined HBL $225 million for failure to comply with New York laws and regulations governing money laundering, terrorism financing and other prohibited financial transactions. According to the authorities, HBL -- which has been under scrutiny since 2006 -- did not take remedial actions to address these deficiencies, pointing to risk management and governance weaknesses.

The fine will have a material impact on the bank's capital and profitability, equivalent to 12% of the bank's June 2017 equity and 68% of its full-year 2016 earnings. The $225 million fine lowers HBL's
reported Tier 1 ratio by an estimated 200 basis points, with the bank's June 2017 equity-to-assets ratio declining to 6.5% (from a reported value of 7.4%). Moody's estimates that the bank's return on assets will decline to 0.3% for 2017 (H1 2017: 1.2%). At these levels, the bank's capitalisation and profitability metrics compare unfavorably with similarly-rated peers.

HBL has also decided to surrender its license and to conduct an orderly wind down of its New York branch. Going forward, Moody's will also be monitoring the impact of the fine on the bank's business operations and corresponding banking relationships, although there has been no impact so far according to the bank's management.

The bank's standalone credit profile also reflects the bank's high exposure to the Government of Pakistan through holdings of government securities and government-related loans (exceeding 7x the bank's equity
as of June 2017), which links the bank's creditworthiness to that of the government. In light of these high exposures, we consider the bank's capital levels — with its Moody's-adjusted 2016 Common Equity Tier 1 (CET1) ratio at 6.1% — to be modest. The bank maintains, however, a stable deposit-based funding profile and good earnings-generating capacity, supported by its dominant domestic franchise as Pakistan's
largest commercial bank, while Pakistan's sustained progress on structural reforms should also stimulate lending growth going forward.