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Rating Action:
03 Mar 2023
Today's rating actions follow Moody's decision to downgrade the Government of Pakistan's issuer and senior unsecured debt ratings to Caa3 from Caa1 (please see "Moody's downgrades Pakistan's rating to Caa3; changes outlook to stable from negative", https://ratings.moodys.com/ratings-news/399437, 28 February 2023), to reflect Moody's assessment that Pakistan's increasingly fragile liquidity and external position significantly raises default risks.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL474265 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
Moody's downgrade of the long-term ratings of the five Pakistani banks reflects (1) the weakening operating environment, as captured by Moody's lowering of its Macro Profile for Pakistan to "Very Weak" from "Very Weak+"; and (2) the high interlinkages between the sovereign's weakened creditworthiness – as indicated by the downgrade of the sovereign rating to Caa3 from Caa1 – and the banks' balance sheets, given the banks' significant holdings of sovereign debt securities.
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 costs of living with headline inflation likely to rise further as energy prices increase in tandem with the removal of energy subsidies. According to Moody's, the combination of these factors, together with the high interest rates, will dampen consumer confidence and compromise borrowers' repayment capacity. In turn, these factors will pressure banks' earnings, asset quality and capital metrics, and also potentially jeopardise financial stability. These pressures have led to the lowering of the country's Macro Profile to Very Weak from Very Weak+.
According to Moody's, 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. In view of the correlation between sovereign and bank credit risk, these banks' standalone credit profiles and ratings are effectively constrained by the Caa3 rating of the government.
STABLE OUTLOOK
The stable outlooks assigned to all the banks' long-term deposit ratings are in line with the stable outlook on Government of Pakistan. The stable outlook further reflects banks' stable local currency funding and liquidity and resilient earnings-generating capacity that partly mitigate macro- and sovereign-driven risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded following a material strengthening of the operating environment and in the government's credit profile, and provided that the banks maintain their resilient financial performance.
Pakistani banks' ratings could be downgraded if the sovereign rating is downgraded, given the banks' sizeable holdings of sovereign debt securities. Downward pressure on the BCAs of individual banks could also develop from a deterioration in banks' financial metrics, in particular 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_ARFTL474265 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 entity or its 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
Moody's downgrades five Pakistani banks; deposit rating outlook changed to stable
03 Mar 2023
Limassol, March 03, 2023 -- Moody's Investors Service ("Moody's") has today downgraded to Caa3 from Caa1 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). Moody's has also downgraded the five banks' long-term foreign currency Counterparty Risk Ratings (CRRs) to Caa3 from Caa1. As part of the same rating action, Moody's lowered the five banks' Baseline Credit Assessments (BCAs) to caa3 from caa1, and as a result also downgraded their local currency long-term CRRs to Caa2 from B3 and their long-term Counterparty Risk Assessments to Caa2(cr) from B3(cr). The outlook on all banks' long-term bank deposit ratings has been changed to stable from negative.Today's rating actions follow Moody's decision to downgrade the Government of Pakistan's issuer and senior unsecured debt ratings to Caa3 from Caa1 (please see "Moody's downgrades Pakistan's rating to Caa3; changes outlook to stable from negative", https://ratings.moodys.com/ratings-news/399437, 28 February 2023), to reflect Moody's assessment that Pakistan's increasingly fragile liquidity and external position significantly raises default risks.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL474265 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
Moody's downgrade of the long-term ratings of the five Pakistani banks reflects (1) the weakening operating environment, as captured by Moody's lowering of its Macro Profile for Pakistan to "Very Weak" from "Very Weak+"; and (2) the high interlinkages between the sovereign's weakened creditworthiness – as indicated by the downgrade of the sovereign rating to Caa3 from Caa1 – and the banks' balance sheets, given the banks' significant holdings of sovereign debt securities.
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 costs of living with headline inflation likely to rise further as energy prices increase in tandem with the removal of energy subsidies. According to Moody's, the combination of these factors, together with the high interest rates, will dampen consumer confidence and compromise borrowers' repayment capacity. In turn, these factors will pressure banks' earnings, asset quality and capital metrics, and also potentially jeopardise financial stability. These pressures have led to the lowering of the country's Macro Profile to Very Weak from Very Weak+.
According to Moody's, 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. In view of the correlation between sovereign and bank credit risk, these banks' standalone credit profiles and ratings are effectively constrained by the Caa3 rating of the government.
STABLE OUTLOOK
The stable outlooks assigned to all the banks' long-term deposit ratings are in line with the stable outlook on Government of Pakistan. The stable outlook further reflects banks' stable local currency funding and liquidity and resilient earnings-generating capacity that partly mitigate macro- and sovereign-driven risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded following a material strengthening of the operating environment and in the government's credit profile, and provided that the banks maintain their resilient financial performance.
Pakistani banks' ratings could be downgraded if the sovereign rating is downgraded, given the banks' sizeable holdings of sovereign debt securities. Downward pressure on the BCAs of individual banks could also develop from a deterioration in banks' financial metrics, in particular 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_ARFTL474265 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 entity or its 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
Moody's downgrades five Pakistani banks; deposit rating outlook changed to stable
Rating Action
www.moodys.com
