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Rating Action:

Moody's downgrades the local currency ratings of Pakistani banks; outlook negative

10 Dec 2010

Foreign currency ratings affirmed

Limassol, December 10, 2010 -- Moody's Investors Service has today downgraded by one notch the global local-currency (GLC) deposit ratings and standalone bank financial strength ratings (BFSRs) of five Pakistani banks: Allied Bank Ltd (ABL), Habib Bank Ltd (HBL), MCB Bank Ltd (MCB), National Bank of Pakistan Ltd (NBP) and United Bank Ltd (UBL).

At the same time, Moody's has affirmed the foreign-currency deposit ratings assigned to these banks at B3/Not Prime (Stable outlook). The foreign-currency deposit ratings remain constrained by Pakistan's B3 (Stable outlook) country ceiling for foreign-currency deposits. Please see a full list of the rating actions below.

RATINGS RATIONALE

Moody's notes that the rating downgrades are primarily driven by the Pakistani banks' growing exposure to (B3 rated) Pakistan government securities and government-related lending, as a consequence of limited private sector lending opportunities within the country's deteriorating macroeconomic conditions. Moody's estimates that as of end-June 2010, the rated Pakistani banks' total exposure to sovereign-related risk assets had reached 38% of their total assets, from 24% in 2008, representing a material exposure concentration and raising the banking system's susceptibility to event risk at the B3 sovereign level. While the financial fundamentals of Pakistani banks have shown relative resilience during adverse conditions in previous years, their inability to curb their rising overall exposure to the government sector highlights the limitations in depth and diversification of the country's banking system. Although Moody's considers Pakistani rated banks' capitalisation levels as currently adequate, the high, and growing, exposure concentration to the B3-rated sovereign -- in conjunction with the prevailing weak macroeconomic conditions -- could challenge solvency levels. Driven by these considerations, Moody's has narrowed the gap between the Pakistani banks' ratings and the government rating (B3/stable).

As a result of the heavy flooding in Pakistan earlier this year, Moody's expects low economic growth and subdued loan demand from the private sector to prevail, leading to a further rise in banks' sovereign-related exposures, primarily in the form of T-Bills. At the same time, the sovereign structural subsidy-related debt arrears, mainly in the utility and commodity sectors, are unlikely to be settled in the near term, and such arrears will continue to exert further pressure on the corporate sector and, as a result, on the Pakistani banking system's asset quality.

Despite these growing challenges, Moody's believes that certain factors continue to support Pakistani banks' ratings being positioned at a higher level than the government rating. In particular, the rated banks have minimal reliance on sensitive market-funding, and instead display stable customer deposit-funded profiles that have shown a degree of stability during previous shocks or crises that Pakistan has experienced. Furthermore, Moody's believes that the rated banks' overall financial fundamentals remain relatively good, with profitability and capitalisation sufficiently absorbing the increased credit and impairment costs of the past two years, as stressed by the deterioration in asset quality, stemming from the challenging macroeconomic conditions.

Moody's decision to maintain the negative outlook on the banks' standalone and long-term local-currency deposit ratings reflects the Pakistani banking sector's still growing exposure concentration to the sovereign, and on-going vulnerability to macroeconomic deterioration, which could negatively impact both the sovereign and the country's banking system.

The rating actions are as follows:

-ABL's GLC deposit ratings have been downgraded by one notch to B1/Not Prime, from Ba3/Not Prime and its standalone BFSR to E+ (mapping to B1), from D-. The local currency deposit ratings carry a negative outlook.

-HBL's GLC deposit ratings have been downgraded by one notch to B1/Not Prime, from Ba3/Not Prime and its standalone BFSR to E+ (mapping to B1), from D-. The local currency deposit ratings carry a negative outlook.

-MCB's GLC deposit ratings have been downgraded by one notch to Ba3/Not Prime, from Ba2 / Not Prime and its standalone BFSR to D- (mapping to Ba3) from D. The ratings carry a negative outlook.

-NBP's GLC deposit ratings have been downgraded by one notch to Ba3/Not Prime, from Ba2/Not Prime and its standalone BFSR to D- (mapping to Ba3), from D. The ratings carry a negative outlook.

-UBL's GLC deposit ratings have been downgraded by one notch to B1/Not Prime, from Ba3/Not Prime and its standalone BFSR to E+ (mapping to B1), from D-. The local currency deposit ratings carry a negative outlook.

The principal methodologies used in this rating were "Bank Financial Strength Ratings: Global Methodology", published in February 2007, and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", published in March 2007.

The last rating action for all Pakistani rated banks was implemented on 2 September 2010, when Moody's changed the outlook on their local currency deposit ratings and standalone ratings to negative, from stable.

Headquartered in Lahore, Pakistan, Allied Bank had total assets of USD4.8 billion as of the end of September 2010.

Headquartered in Karachi, Pakistan, Habib Bank had total assets of USD10.1 billion as of the end of September 2010.

Headquartered in Lahore, Pakistan, MCB Bank had total assets of USD6.3 billion as of the end of September 2010.

Headquartered in Karachi, Pakistan, National Bank of Pakistan had total assets of USD10.9 billion as of the end of September 2010.

Headquartered in Karachi, Pakistan, United Bank had total assets of USD7.6 billion as of the end of September 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, and public information.

Moody's Investors Service considers the quality of information available on the issuers or obligation satisfactory for the purposes of maintaining a credit rating.

The ratings for Habib Bank Ltd, National Bank of Pakistan and United Bank were initiated by Moody's Investors Service and were not requested by the issuers.

These rated entities participated in the credit rating process. The rated entities or their related third party, if any, provided the rating committee access to the books, records and other relevant internal documents of the rated entities.

The rating has been disclosed to the rated entities or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Limassol
Christos Theofilou, CFA
Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Limassol
Mardig Haladjian
General Manager
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades the local currency ratings of Pakistani banks; outlook negative
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