Moody’s puts Pakistan’s banks under review for rating downgrade

KARACHI: Moody’s on Tuesday linked any downgrade in ratings of Pakistan’s five big banks with risks to their credit profiles emanating from the government’s potentially weakening creditworthiness in case of default on its private debts.

Credit rating agency Moody’s said it 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 bank rating actions reflect 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 the risk of a further weakening in the government's capacity to support the banks in case of need,” Moody’s said in a statement.

The banks’ foreign currency deposit ratings and baseline credit assessments were also placed on review for downgrade.

The rating actions followed the agency’s decision last week to place the Pakistan’s B3 issuer and senior unsecured ratings on review for downgrade on an expectation that the government would request bilateral official sector debt service relief under the recently announced G20 initiative. Moody’s said it would assess the impact of the government’s potentially weakening creditworthiness on the standalone credit profile of the banks given the high credit linkages between their balance sheets and sovereign credit risk, during the review period. According to the rated banks’ latest financial statements, their direct exposure to government securities stood at around 7.6x of tier-1 capital for ABL, 8.1x for HBL, 6x for MCB, 8.7x for NBP and 6.5x for UBL.

“The high direct exposure to government credit risk renders the banks susceptible to event risk at the sovereign level and constrains their baseline credit assessments at the government rating,” it added.

Moody’s would further assess the impact of the coronavirus pandemic on economic and business activity and on the financial performance of the big-five banks, especially on their asset quality and profitability.

“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,” said the rating agency. “The local-currency deposit ratings of two rated banks, NBP and HBL, incorporate one notch of support uplift from their caa1 baseline credit assessments.” Moody’s said 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,” it added. “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.”