Moody’s downgrades Pakistani banks: The long-term deposit ratings of five Pakistani banks were reduced by Moody’s Investors Service on Friday from Caa1 to Caa3. The banks include United Bank Limited, Habib Bank Ltd, MCB Bank Limited, National Bank of Pakistan, and Allied Bank Limited (UBL).
The five banks’ long-term foreign currency Counterparty Risk Ratings (CRRs) were also reduced by Moody’s, moving from Caa1 to Caa3.
Moody’s downgraded the five banks’ Baseline Credit Assessments (BCAs) to Caa3 from Caa1 as part of the same rating action. As a result, the five banks’ local currency long-term CRRs were also downgraded to Caa2 from B3 and their long-term Counterparty Risk Assessments were also downgraded to Caa2(cr) from B3 (cr).
However, the rating agency stated in a statement that the outlook on the long-term bank deposit ratings for all institutions has been altered from negative to stable.
The Government of Pakistan’s issuer and senior unsecured debt ratings were earlier this week downgraded to Caa3 from Caa1, reflecting Moody’s judgment that Pakistan’s increasingly precarious financial and external position significantly increases default risks.
Moody’s Downgrades Ratings of Five Pakistani Banks
According to Moody’s, the downgrade of the long-term ratings of the five Pakistani banks reflects two factors: (1) a weakening operating environment, as evidenced by the downgrading of Pakistan’s Macro Profile to “Very Weak” from “Very Weak+”; and (2) strong connections between the banks’ balance sheets and the sovereign’s weakened creditworthiness, given the banks’ close ties to the government.
According to Moody’s, “The deterioration in Pakistan’s operating environment reflects both the rising government liquidity and external vulnerability risks, with foreign exchange reserves declining to critically low levels, as well as the high cost of living, with headline inflation likely to rise further as energy prices increase in tandem with the removal of energy subsidies,”
The rating agency, the culmination of these elements, along with the high-interest rates, will erode consumer trust and jeopardize borrowers’ ability to repay their debts.
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“In turn, these factors will pressure banks’ earnings, asset quality, and capital metrics, and also potentially jeopardize financial stability. These pressures have led to the lowering of the country’s Macro Profile to Very Weak from Very Weak+,” said Moody’s.
Moreover, Moody’s highlighted that the banks’ high sovereign exposure, mainly in the form of government debt securities that range between 36%-61% of their total assets, also links their credit profile to that of the government.
The government’s Caa3 rating effectively limits these banks’ standalone credit profiles and ratings due to the link between sovereign and bank credit risk, the report stated.
According to Moody, which explained the stable outlook, the stable outlooks given to all of the bank’s long-term deposit ratings are consistent with the stable outlook of the Government of Pakistan.
