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December 6, 2019

Moody’s upgrades ratings for 5 Pakistani banks to stable


December 6, 2019

KARACHI: Moody’s on Thursday changed its outlook on five Pakistani banks to stable from negative and also confirmed B3 long-term deposit ratings, citing improvements in operating environment in the country.

The rating agency upgraded Allied Bank Limited (ABL), Habib Bank Ltd (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP), and United Bank Ltd (UBL).

“The banks' rating actions reflect improvements in the operating environment in Pakistan and in the country's sovereign credit profile, which affect the banks' given their high government exposures that link their credit profiles to that of the government and expectation that the government's capacity to support banks in case of need will not deteriorate,” it said in a statement.

Moody’s said the rating actions follow its decision earlier this week to affirm B3 rating for Pakistan and change the outlook on the sovereign rating to stable from negative.

The primary driver of its decision to change banks' outlooks to stable is “the extensive interconnectedness between their balance sheets and sovereign credit risk, owing to the banks' high exposures to government securities,” rating agency said.

The five banks' direct exposure to government credit risk stood at around 10.2x of Tier-1 capital for ABL, 8.1x for HBL, 6.4x for MCB, 9.5x for NBP and 6.8x for UBL.

These credit strengths balance banks' modest capital buffers and high asset risks, as well as their high exposure to the government, which links their credit profile to that of the government.

“This is reflected by the stable outlook on Pakistan's sovereign B3 bond rating which is driven by reduced external vulnerability risks on the back of policy adjustments and currency flexibility, as well as ongoing fiscal reforms that will mitigate risks related to debt sustainability and government liquidity.”

The International Monetary Fund-backed tough reforms measures were initiated in April after the country secured a three-year rescue package of $6 billion to shore up its fragile public finances and support a slowing economy.

Moody's said its decision to affirm the banks' ratings reflects their stable deposit-based funding structures, high liquidity buffers and good earnings generating capacity, as well as Pakistan's high growth potential.

Further improvements in the operating environment and in the sovereign's credit risk profile could place upward rating pressures, it said

“Moody's would downgrade the banks' ratings in the event of a weakening of the Pakistan sovereign's creditworthiness. Additional pressure may arise from a weakening in banks' baseline credit assessment, driven by asset quality pressures that also affect banks' capital buffers.”

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