Moody’s Investors Service (Moody’s) has placed five Pakistani banks’ ratings under review for a downgrade.

The company has placed the following banks on review for downgrading their B3 long-term local-currency deposit ratings:

  • Allied Bank Limited (ABL)
  • Habib Bank Ltd. (HBL)
  • MCB Bank Limited (MCB)
  • National Bank of Pakistan (NBP)
  • United Bank Ltd. (UBL).

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

Moody’s stated that rating actions follow its decision to place the government of Pakistan’s B3 issuer and senior unsecured ratings on review for downgrade on 14 May 2020.

The sovereign action is driven by Moody’s expectation that the Pakistani government will request bilateral official sector debt service relief under the recently announced G20 initiative, and the rating agency’s need to assess whether Pakistan’s participation in the initiative would entail a default on private sector debt.

The bank rating actions reflect:

  • Moody’s view that the government’s potentially weakening creditworthiness will weigh on the stand-alone credit profile of the banks given the high credit linkages between their balance sheets and sovereign credit risk;
  • The risk of a further weakening in the government’s capacity to support the banks in case of need.

During the review period for the bank ratings, Moody’s will assess two factors.

The first is 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.

According to the 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
  • 6.0x for MCB
  • 8.7x for NBP
  • 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.

Moody’s will also assess the impact of the coronavirus pandemic on economic and business activity and on the financial performance of Pakistani banks, especially on their asset quality and profitability. It regards the coronavirus outbreak as a social risk under its environmental, social, and governance (ESG) framework, given the substantial implications for public health and safety.

The second factor driving the reviews for the downgrade is the potential deterioration of the Pakistani government’s capacity to extend support to banks in case of need. The local-currency deposit ratings of two rated banks, NBP and HBL, incorporate one notch of support uplift from their caa1 baseline credit assessments.

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.

Conversely, downward pressure on banks’ ratings will develop following a downgrade of the sovereign rating, reflecting the high interlinkages between banks’ credit profile and that of the government, and signaling a reduction in the government’s capacity to extend financial support to banks in case of need, noted Moody’s.

The credit rating agency further stated that 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.

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