Moody’s keeps negative outlook unchanged

Moody’s Investors Service keeps its negative outlook unchanged for the five largest banks of the country.

KARACHI: Moody’s Investors Service, a credit rating agency, has kept its negative outlook unchanged for the five largest banks of the country.

The five banks include Allied Bank, Habib Bank, MCB Bank, National Bank of Pakistan and United Bank.

The outlook expresses Moody’s expectations about fundamental credit conditions in the banking system over the next 12 to 18 months. Heavy flooding during August and consequent deteriorating macroeconomic conditions severely weakened the banks’ operating environment, says Moody’s in its new banking system outlook released on its website.

However, direct impact on the rated banks has been modest as the floods plagued largely unbanked, rural areas.

Moody’s expects weaker economic growth and higher inflation in the short term as the floods have led to food shortages, rising commodity prices and renewed recourse by the government to deficit monetisation. “These adverse developments create a difficult operating environment for banks, which is a key driver of our negative system outlook,” says Moody’s analyst and author of the report Christos Theofilou.

Higher inflation in the near term will likely lead to rising lending rates, which coupled with the weakened economy, will challenge borrowers’ payment capacity, contributing to further asset-quality deterioration for banks.

“Importantly, we expect that banks will further increase their already very high exposure to the B3-rated sovereign as the subdued economy constrains corporate and household loan demand and limits the banks’ risk appetite. In contrast, the government remains an active borrower in order to support the economy and cope with the flood damages,” added Theofilou.

Moody’s estimates that government-related exposure amounted to a very high 36 per cent of the top five banks’ total assets as of end-September 2010.

Positively, Moody’s expects liquidity and funding to remain stable drivers over the outlook horizon, supported by strong deposit franchises and minimal reliance on market funding.

“We believe that the banks will continue to focus on attracting low-cost current account and savings account deposits, estimated to account for 70 per cent of our rated banks’ total deposits and 56 per cent of total assets at end-September 2010,” said Theofilou.

Published in The Express Tribune, December 21^st, 2010.