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Moody’s expect NBP, UBL, HBL to meet additional capital requirements set by SBP

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Moody’s Investors service expects that the Pakistani banks- National Bank of Pakistan, Habib Bank and United Bank Limited will meet the additional capital requirements condition set by the State Bank of Pakistan last week.

Moody’s in a report on Thursday said that despite the recent increase in private-sector lending and the short time frame for the implementation of the  domestic systemically important bank (D-SIBs)all three banks earmarked would achieve the given target.

All three banks met the Common Equity Tier 1 (CET1) requirements for year-end 2019 (including the D-SIB buffer) as of December 2017, and if the need rises they can also adjust their dividend payout ratios (as HBL and NBP did in 2017) and/or optimize their balance sheets to strengthen capital ratios and increase buffers over the regulatory minimum ratios.

Notwithstanding any idiosyncratic events that lead to erosion of capital buffers (e.g. NBP’s contingent liability), we expect that the three D-SIBs are well positioned to meet the additional 1.5 percent-2.0 percent D-SIB buffer.

Last Thursday, the State Bank of Pakistan, the central bank, designated three commercial banks as domestic systemically important banks (D-SIBs). The D-SIBs are required to set aside additional Common Equity Tier 1 (CET1) capital relative to risk-weighted assets by March 2019 and will also be subject to enhanced supervisory requirements.

The D-SIBs’ enhanced requirements are credit positive because they will support overall banking system financial stability by strengthening the capital buffers and loss-absorption capacity of the country’s largest banks and will further develop their risk-management framework.

The three newly designated D-SIBs are Habib Bank Ltd. (HBL, B3 stable, caa11 ), National Bank of Pakistan (NBP, B3 stable, caa1) and United Bank Ltd. (UBL, B3 stable, b3).

The additional CET1 buffer is 2% for HBL, and 1.5% for both NBP and UBL. The additional capital requirement will be an add-on to the banks’ rising CET1 requirement SBP determined which banks were D-SIBs on the basis of size, inter-connectedness, substitutability (i.e., whether certain bank services are critical, such as payments activity, assets under custody or underwriting activity that cannot be easily replaced by other banks) and complexity. All three banks are important to the country’s national payment system and any failure would have wide repercussions on the payment system and the economy. National Bank of Pakistan, the largest public-sector bank and one in which the authorities have around a 76% stake, acts as an agent to the State Bank of Pakistan by handling treasury transactions for the government and distributing government-to-person and person-to-government payments.

UBL is also active in the government-to-person payment space through its branchless banking platform. As such, the additional capital requirements for the three largest banks will enhance the overall financial stability of Pakistan’s banking system.

The additional capital requirements will strengthen the D-SIBs’ capital buffers, which lag those of their Moody’s-rated domestic peers, and enhance their loss-absorption capacity at a time when all three face idiosyncratic pressures.

HBL is recovering from a settlement payment of $225 million made to US authorities in third-quarter 2017 as it scales down its international operations because of increased compliance risks. NBP faces a significant contingent liability related to pension disputes (equal to roughly 20% of its March 2018 equity), which if it materializes will weigh on the bank’s capital buffers.

UBL’s asset quality pressures in its international loan book (around a third of the total loan book) are ongoing and will likely lead to additional provisioning costs (1.15% of gross loans in first quarter 2018) as the bank builds up its coverage of overseas nonperforming loans.

The three D-SIBs will also be subject to enhanced supervisory requirements that will strengthen their risk-management frameworks.

These include preparing comprehensive risk-appetite frameworks and conducting macro stress tests that will be incorporated into the banks’ internal capital adequacy assessment process, establishing effective recovery plans commensurate with the size and complexity of the bank and enhanced engagement between senior management and supervisory authorities.

Posted on: 2018-06-21T12:59:00+05:00