Moody’s Investors Service (Moody’s) affirmed five Pakistani banks’ B3 long-term deposit ratings: Allied Bank Limited (ABL), Habib Bank Ltd. (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP), and United Bank Ltd. (UBL), but changed the outlook on the bank’s long-term deposit ratings to negative from stable.
ABL, MCB, and UBL’s long-term foreign currency Counterparty Risk Ratings were similarly decreased to B3 from B2; these ratings are now bound by Pakistan’s foreign currency nation ceiling, which was lowered to B3 from B2.
“Today’s rating actions follow Moody’s decision to change the Government of Pakistan’s B3 ratings to negative from stable on June 2, 2022, and also lower the country’s local and foreign currency country ceilings to B1 and B3, from Ba3 and B2, respectively,” it said.
On June 3, Moody’s changed the outlook of the Pakistan Water and Power Development Authority (Wapda) from stable to negative.
The confirmation of the five Pakistani banks’ ratings, according to the rating agency, reflects their stable, deposit-based funding profiles and ample liquidity.
“Approximately 12% of assets are held in cash and interbank placements, with the remaining 45 percent invested in government securities, the majority of which can be repoed with the central bank in the event of a crisis.” Pakistani banks are also profitable, with a systemwide return on assets of 1.0 percent projected for 2021 while increasing financial inclusion and other government measures are increasing lending opportunities.
“These strengths are balanced against the still high asset risks given the vulnerable operating and macro conditions, with the 2021 systemwide non-performing loans (NPLs) at 7.9 percent of gross loans; and modest capital buffers, with the 2021 systemwide equity-to-assets ratio at 6.3 percent .”
The negative outlook on the bank ratings, according to the rating agency, reflects 1) the rated banks’ large holdings of securities, primarily sovereign debt securities, at between 5-8 times their shareholders’ equity, which ties their creditworthiness to the government’s; and 2) the risk of the government’s ability to support the banks in the event of a crisis.
The latter is especially important for NBP and HBL, whose ratings include a one-notch boost in government backing. More broadly, the five banks’ deposit ratings of B3 are the same as the government’s, implying that a potential deterioration in the government’s credit profile will imply a deterioration in the banks’ credit profiles, it noted.
Factors that could lead to a rating upgrade or downgrade
Given the gloomy outlook, Moody’s believes that any upward rating pressure on Pakistani banks’ ratings is limited.
“If the sovereign rating outlook is stabilized and the banks maintain their resilient financial performance, the banks’ outlook could change back to the stable.”
“Following a downgrade of the sovereign rating, downward pressure on banks’ ratings would develop, reflecting the high inter-linkages between the banks’ credit profile and that of the government, and also signaling a reduction in the government’s capacity to provide financial support to banks in the event of need.”
“Downward pressure on the BCAs of individual banks could also develop from a deterioration in their financial metrics – and specifically their asset quality, profitability, and capital adequacy – but we consider this a low probability event at this stage.”