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Five Pakistani Banks Downgraded By Moody’s

Five Pakistani banks including Allied Bank Limited (ABL) Habib Bank Ltd (HBL) and National Bank of Pakistan (NBP) have had their long-term deposit ratings downgraded to Caa3 from Caa1 by Moody’s Investors Service (Moody’s). According to a press release issued today the banks are Habib Bank Limited (HBL) MCB Bank Limited (MCB) National Bank of Pakistan (NBP) and United Bank Ltd. (UBL).

Moreover, Moody’s has downgraded the Top Five banks’ long-term foreign currency Counterparty Risk Ratings (CRRs) to Caa3 from Caa1.

The long-term foreign currency Counterparty Risk Ratings (CRRs) for the five banks have also been lowered by Moody’s moving from Caa1 to Caa3.

As part of the same rating action, Moody’s lowered the five banks’ Baseline Credit Assessments (BCAs) to Caa3 from Caa1 downgrading their long-term CRRs in local currency from B3 to Caa2 and their long-term Counterparty Risk Assessments from B3 (cr) to Caa2 (cr). In all banks, the long-term bank deposit ratings have been changed to stable from negative.

After Moody’s downgraded Pakistan’s issuer and senior unsecured debt ratings to Caa3 from Caa1 today’s rating actions reflect Moody’s assessment that Pakistan’s increasingly fragile liquidity and external position significantly increases default risks.

Rationale For Ratings:

In downgrading the long-term ratings for Pakistani banks, Moody’s reflects (1) a weakening operating environment, as evidenced by the lowering of the macro profile for Pakistan to “Very Weak” from “Very Weak+” and (2) the high interrelationship between the sovereign’s weakened creditworthiness as indicated by the downgrading of the sovereign rating to Caa3 from Caa1 – and the banks’ balance sheets due to their significant holdings of sovereign debt securities.

Pakistan’s operating environment has deteriorated due to rising government liquidity and external vulnerability risks with foreign exchange reserves falling to critical levels and high living costs which are likely to rise further as energy prices rise with the removal of energy subsidies.

Combined with the high-interest rate, these factors will dampen consumer confidence, according to Moody. As a result banks’ earnings, asset quality, and capital metrics will be impacted and financial stability may be compromised. Due to these pressures, the country’s macro profile has been lowered from Very Weak+ to Very Weak.

According to Moody the bank’s high sovereign exposure mainly in the form of government debt securities that range between 36% and 61% of their total assets also links their credit profile to that of the government. Due to the correlation between sovereign credit risk and bank credit risk these five banks’ standalone credit profiles and ratings are effectively restricted by the government’s Caa3 rating.

Outlook Stable:

According to the Government of Pakistan stable outlook, all of the bank’s long-term deposits ratings have stable outlooks. In addition to stable local currency funding and liquidity banks also have a strong earnings-generating capacity that partly mitigates macro and sovereign-driven risks.

Rating Could Be Upgraded or Downgraded Based on The Following Factors:

Providing the operating environment and government credit profile strengthen and the banks maintain their resilient financial performance the ratings could be upgraded.

Considering the Top Five Pakistani banks’ large holdings of sovereign debt securities their ratings may be downgraded if the sovereign rating is downgraded.

Bank Baseline Credit Assessments (BCAs) could also be affected by deteriorating financial metrics including asset quality profitability and capital adequacy.

The Banks Shine

In a vicious cycle of borrowing more to repay old loans, banks have lent 85% of total industry deposits to the government.

In January 2023, JS Global Research reported that banks’ lending to the government increased 12.5 percentage points to 85% of total deposits (equivalent to Rs19.2 trillion).

Pakistan’s top five private sector banks’ profit grew 18% (Rs26 billion) to Rs166 billion in 2022, while their tax almost doubled to Rs194 billion.

PKR 2.25 trillion Injected by the SBP

For up to 77 days, the central bank has injected Rs2.25 trillion into commercial banks through open market operations (OMOs).

After the central bank raised its key policy rate to 20%, it injected the funds at a rate of return of 20.10%.

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