NEW YORK – 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).
The rating agency has also “downgraded the five banks' long-term foreign currency Counterparty Risk Ratings (CRRs) to Caa1 from B3”.
As part of the same rating action, Moody's 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 outlook on all banks' deposit ratings remains negative,” read Moody’s official statement.
The development comes days after Moody’s cut the Pakistan’s issuer and senior unsecured debt ratings to Caa1 from B3, and maintained a negative outlook, for first time in seven years.
Moody’s said that the rating actions reflect Pakistani government's reduced capacity to support the banks, which has affected the banks whose ratings benefit from government support (namely NBP and HBL); the high credit linkages between the banks' balance sheets and sovereign credit risk, which constrains the banks' Baseline Credit Assessments at the level of the Caa1 rated government; and the lowering of Pakistan's foreign currency ceiling to Caa1, which has affected the foreign currency CRRs of all rated banks.
“The reduced capacity of the Pakistani government to support the banks in case of need… is indicated by the downgrade of the sovereign's bond rating to Caa1, from B3, which was driven by 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.
“As a result, NBP's and HBL's deposit ratings no longer incorporate a government support uplift,” it said.
It highlighted that ratting of the banks has been downgraded 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”.