Moody’s downgrades ratings of five banks

Affected institutions include ABL, HBL, MCB Bank, NBP and UBL.

KARACHI:

Moody’s Investors Services has downgraded to Caa1 from B3 the local-currency deposit ratings of five Pakistani banks and assigned positive outlooks to these ratings, according to the rating agency’s website.

The affected banks are Allied Bank Limited, Habib Bank Limited, MCB Bank Limited, National Bank of Pakistan and United Bank Limited.

The downgrades conclude the review initiated on March 17 following the publication of Moody’s new bank methodology.

The following ratings of the five banks were not affected by this action: the Caa1 baseline credit assessments, Caa2 long-term foreign currency deposit ratings and short-term ‘Not Prime’ ratings.

Ratings rationale

The downgrades of the banks’ local-currency deposit ratings to Caa1, aligning them with the rating assigned to the government of Pakistan, reflect Moody’s revised approach in determining the capacity of a government to support banks under the new bank rating methodology.

Previously, when imputing systemic support assumptions in bank ratings, deposit and senior unsecured debt ratings were, in certain cases, positioned above their relevant sovereign rating.

This reflected an expectation that the extensive policy tools available to central banks to support domestic banks, such as the provision of liquidity or regulatory forbearance, could result in a capacity for the sovereign to provide support to its country’s banks that is higher than its own creditworthiness.

However, insights gained from historical experiences showed that when a crisis is prolonged, these measures remain insufficient to restore confidence to the system and an outright recapitalisation of the banks is necessary.

Consequently, Moody’s new methodology relies solely on a bank’s home government’s long-term local-currency rating as the anchor for determining the capacity of the government to provide support and, at the same time, as the upmost point that a bank’s supported rating can reach from systemic support assumptions.

Accordingly, in this case, the five banks’ deposit ratings have now been aligned with Pakistan’s Caa1 rating.

Published in The Express Tribune, March 28^th, 2015.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.