May 19, 2020: Moody's Investors Service, (“Moody's”) has today placed on review for downgrade the B3 long-term local-currency deposit ratings of Allied Bank Limited (ABL), Habib Bank Ltd. (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP) and United Bank Ltd. (UBL). The banks' foreign currency deposit ratings and baseline credit assessments were also placed on review for downgrade.
Today's rating actions follow Moody's decision to place the Government of Pakistan's B3 issuer and senior unsecured ratings on review for downgrade on 14 May 2020. The Sovereign action is driven by Moody's expectation that the Pakistani government will request bilateral official sector debt service relief under the recently announced G20 initiative, and the rating agency's need to assess whether Pakistan's participation in the initiative would entail a default on private sector debt.
The bank rating actions reflect (1) Moody's view that the government's potentially weakening creditworthiness will weigh on the standalone credit profile of the banks given the high credit linkages between their balance sheets and sovereign credit risk; and (2) the risk of a further weakening in the government's capacity to support the banks in case of need.
The second factor driving the reviews for downgrade is the potential deterioration of the Pakistani government's capacity to extend support to 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 baseline credit assessments.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on the banks' ratings is limited, as indicated by the review for downgrade. However, the ratings would likely be confirmed if Pakistan's B3 sovereign rating is confirmed. This is also conditioned by no material deterioration in banks' standalone fundamentals throughout this coronavirus crisis.
Conversely, downward pressure on banks' ratings would develop following a downgrade of the sovereign rating, reflecting the high interlinkages between 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 baseline credit assessments 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.
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