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Moody’s Downgrades Ratings of 5 Pakistani Banks

Islamabad: Moody’s Investors Service on Tuesday downgraded the long-term deposit ratings of five Pakistani banks – Allied Bank Limited (ABL); Habib Bank Ltd. (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP) and United Bank Ltd. (UBL) – from B3 to Caa1.

According to a statement issued by the rating agency, it also downgraded the five banks’ long-term foreign currency Counterparty Risk Ratings (CRRs) to Caa1 from B3.

Similarly, Moody’s also lowered the Baseline Credit Assessments (BCAs) of ABL, MCB, and UBL to caa1 from b3, and as a result, also downgraded their local-currency long-term CRRs to B3 from B2 and their long-term Counterparty Risk Assessments to B3(cr) from B2(cr). The BCAs of NBP and HBL were affirmed at caa1.

The statement said that the outlook on all banks’ deposit ratings remains negative.

The development of downgrading the ratings of the five Pakistani banks followed Moody’s decision of October 6. when the agency, citing increased government liquidity and external vulnerability risks following the devastating floods that hit the country, cut Pakistan’s sovereign credit rating.

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In its statement, Moody’s said that today’s rating actions reflected the Government of Pakistan’s reduced capacity to support the banks; the high credit linkages between the banks’ balance sheets and sovereign credit risk; and the lowering of Pakistan’s foreign currency ceiling to Caa1, which has affected the foreign currency CRRs of all rated banks.

It said that the reduced capacity of the government to support banks was indicated by the downgrade of the sovereign’s bond rating to Caa1 from B3, which was driven by a worsening economic outlook, increased government liquidity and external vulnerability risks, and higher debt sustainability risks, in the aftermath of devastating floods that hit the country since June 2022.

“The floods have exacerbated Pakistan’s liquidity and external credit weaknesses and increased social spending needs, while government revenues were also hit. As a result, NBP’s and HBL’s deposit ratings no longer incorporate a government support uplift,” the statement read.

Moody’s said the negative outlook on the banks’ ratings was mainly because of “the rated banks’ very large holding of sovereign debt securities, at between 7-14 times their Tier 1 capital, which will continue to link their creditworthiness to that of the government, whose ratings are on negative outlook”.

The outlook also reflected “increased vulnerabilities on the banks’ financial metrics and standalone credit profile that stem from Pakistan’s challenging macro-economic and operating conditions; the latter could also lead Moody’s to reassess its macro profile for Pakistan, which currently stands at “Very Weak