August 11, 2020: Moody's Investors Service, (“Moody's”) has today confirmed the B3 long-term local-currency and Caa1 foreign-currency deposit ratings 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 outlook on all Pakistani banks' long-term local currency deposit ratings has changed to stable from ratings under review.
This rating action concludes the review initiated on 19 May 2020.
Today's rating actions follow Moody's decision to confirm the Government of Pakistan's B3 issuer and senior unsecured ratings on 8 August 2020. For further information on the sovereign rating action, please refer to Moody's press release: “Moody's confirms Pakistan's rating at B3, outlook stable“. The Sovereign action concluded the review for downgrade initiated on 14 May 2020 with a confirmation of Pakistan's B3 ratings with a stable outlook and is driven by Moody's assessment that, although some uncertainty about the terms of implementation of the bilateral debt service relief from G20 creditors continues to prevail, the absence of significant progress in the discussions about how private sector involvement would be effected and evidence of some debt payments being made to private sector creditors, suggest that the probability of broad-ranging private sector involvement has diminished.
Moody's decision to confirm the banks' ratings follows Moody's decision to confirm Pakistan's B3 sovereign ratings, which signals reduced pressure on Pakistan's credit profile, indirectly supporting bank ratings, given their high exposures to government credit risk — at around 7.6x of Tier-1 capital for ABL, 8.3x for HBL, 6.0x for MCB, 9.0x for NBP and 6.5x for UBL as per the latest available data — renders the banks susceptible to event risk at the sovereign level and constrains their Baseline Credit Assessments (BCAs) at the government rating.
Moody's decision to confirm Pakistan's B3 government bond ratings with a stable outlook, also results in the stabilisation of Moody's view of the capacity of the government to support the country's banks in case of need. The local-currency deposit ratings of two rated banks, NBP and HBL, incorporate one notch of support uplift from their caa1 BCAs.
The outlook on all five Pakistani banks' long-term local currency deposit ratings was changed to stable from ratings under review, as a result of the change in the sovereign rating outlook to stable. The stable outlook balances their stable funding and liquidity positions and Moody's assumptions that government support will be forthcoming in case of need, against a difficult economic environment and renewed pressure on banks' asset quality and profitability metrics.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Improvements in the operating environment and in the sovereign's credit risk profile, combined with improvements in banks' solvency metrics (profitability, asset quality and capital), could place upward rating pressures.
Conversely, downward pressure on 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, and signaling a reduction in the government's capacity to extend financial support to banks in case of need. Downward pressure on the BCAs of individual banks could also develop from a greater-than-expected deterioration in operating conditions from the coronavirus spread, weakening their asset quality, profitability, and capital adequacy.
Moody's Press Release