Moody’s cuts five Pakistani banks’ long-term deposit ratings

Moody's Investors Service has downgraded the long-term deposit ratings of five Pakistani commercial banks — Allied Bank Limited (ABL), Habib Bank Ltd, (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP) and United Bank Ltd (UBL) — to Caa1 from B3.

The rating agency has also downgraded the five banks' long-term foreign currency Counterparty Risk Ratings (CRRs) to Caa1 from B3, according to Moody’s statement issued on Tuesday.

“As part of the same rating action, Moody's lowered the Baseline Credit Assessments (BCAs) of ABL, MCB and UBL to Caa1 from B3, and as a result also downgraded their local-currency long-term CRRs to B3 from B2 and their long-term Counterparty Risk Assessments to B3(cr) from B2(cr).”

However, the BCAs of NBP and HBL were affirmed at Caa1. “The outlook on all banks' deposit ratings remains negative.”

The latest rating actions follow Moody's last week’s decision to downgrade Pakistan's credit rating to Caa1 from B3 and maintained a negative outlook.

Also read: Moody’s downgrades Pakistan’s credit rating

“Today's rating actions reflect (1) the Government of Pakistan's reduced capacity to support the banks, which has affected the banks whose ratings benefit from government support (namely NBP and HBL); (2) the high credit linkages between the banks' balance sheets and sovereign credit risk, which constrains the banks' Baseline Credit Assessments at the level of the Caa1 rated government; and (3) the lowering of Pakistan's foreign currency ceiling to Caa1, which has affected the foreign currency CRRs of all rated banks,” the rating said in the statement.

The downgrade of the NBP and HBL’s local-currency deposit ratings to Caa1 from B3, reflects the reduced capacity of the government to support the banks in case of need.

“This is indicated by the downgrade of the sovereign's bond rating to Caa1, from B3, which was driven by the worsening economic outlook, increased government liquidity and external vulnerability risks and higher debt sustainability risks, in the aftermath of devastating floods that hit the country since June 2022.”

The floods have exacerbated Pakistan's liquidity and external credit weaknesses and increased social spending needs, while government revenues were also hit. As a result, NBP's and HBL's deposit ratings no longer incorporate government support uplift, it added.