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Rating Action:

Moody's downgrades five Pakistani banks' ratings; maintains negative outlook

11 Oct 2022

Actions follow downgrade of Pakistan's sovereign rating to Caa1

Limassol, October 11, 2022 -- Moody's Investors Service ("Moody's") has today downgraded the long-term deposit ratings to Caa1 from B3 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.

Today's rating actions follow Moody's decision to downgrade the Government of Pakistan's issuer and senior unsecured debt ratings to Caa1 from B3, and maintain a negative outlook (please see "Moody's downgrades Pakistan's rating to Caa1; outlook remains negative; 6 October 2022, https://www.moodys.com/research/--PR_469871).

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL470132 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

Today's rating actions reflect (1) the Government of Pakistan's reduced capacity to support the banks, which has affected the banks whose ratings benefit from government support (namely NBP and HBL); (2) 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 (3) the lowering of Pakistan's foreign currency ceiling to Caa1, which has affected the foreign currency CRRs of all rated banks.

--- REDUCED CAPACITY OF THE GOVERNMENT TO SUPPORT BANKS

The downgrade of the National Bank of Pakistan's and Habib Bank Ltd.'s local-currency deposit ratings to Caa1, from B3, reflects the reduced capacity of the Pakistani government to support the banks in case of need. This 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. 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.

--- HIGH CORRELATION WITH SOVEREIGN CREDIT RISK

The lowering to caa1 of the Baseline Credit Assessments of Allied Bank Limited, MCB Bank Limited, and United Bank Ltd., reflects the high linkages between the banks' balance sheets and sovereign credit risk, given their direct exposures to government securities. As of June 2022, government securities accounted for around 11x of ABL's Tier 1 capital, around 7x for MCB and 10x for UBL, according to Moody's estimates. These high exposures to government securities link the banks' standalone credit profiles to the sovereign's creditworthiness and leave the banks vulnerable to potential event risk at the sovereign level, constraining their Baseline Credit Assessments at the level of the government's rating.

--- FOREIGN CURRENCY CEILING LOWERED

Moody's has downgraded all banks' foreign-currency long-term CRRs to Caa1 from B3, to reflect the lowering of the foreign-currency ceiling for Pakistan to Caa1.

NEGATIVE OUTLOOK

According to the rating agency, the negative outlook on the bank ratings primarily reflects 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 negative outlook also captures 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 +". More specifically, Moody's has lowered Pakistan's real GDP growth to 0-1% for fiscal 2023 (the year ending in June 2023), while increased government liquidity and external vulnerability risks and higher debt sustainability risks suggest that the government will continue to rely on the banks, hence the credit interlinkages between the sovereign and the banks will only deepen.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Any upward rating pressure on the Pakistani banks' ratings is limited given the negative outlook. The banks' outlook could change back to stable if the sovereign rating outlook is stabilised and if the banks maintain their resilient financial performance.

Downward pressure on the banks' ratings would develop following a downgrade of the sovereign rating, reflecting the high interlinkages between the banks' credit profile and that of the government. Downward pressure on the BCAs of individual banks could also develop from a deterioration in the operating conditions that could also impact Moody's assessment of the macro profile, as well as from a deterioration in banks' financial metrics, and specifically their asset quality, profitability, and capital adequacy.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL470132 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• EU Endorsement Status

• UK Endorsement Status

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Constantinos Kypreos
Senior Vice President
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol, CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Henry MacNevin
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol, CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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