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

The rating agency also downgraded the five banks' long-term foreign currency Counterparty Risk Ratings (CRRs) to Caa1 from B3.

Moody’s cuts Pakistan’s rating to Caa1

“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).

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

The development comes days after Moody’s downgraded the government of Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa1 from B3.

Meanwhile, giving a rationale behind its decision, Moody’s said that the rating actions reflect 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); 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 the lowering of Pakistan's foreign currency ceiling to Caa1, which has affected the foreign currency CRRs of all rated banks.

“The downgrade of the NBP's and HBL's local-currency deposit ratings to Caa1, from B3, reflects the reduced capacity of the Pakistani 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 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,” said Moody’s.

The rating agency said that 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 a government support uplift,” it said.

Moreover, the lowering to Caa1 of the Baseline Credit Assessments of ABL, MCB Bank Limited and UBL reflects the high linkages between the banks' balance sheets and sovereign credit risk, given their direct exposures to government securities.

According to the rating agency, the negative outlook on the bank ratings primarily reflects the rated banks' “very large holding of sovereign debt securities, at between 7-14 times their Tier 1 capital, which will continue to link their creditworthiness to that of the government, whose ratings are on negative outlook”.

“The negative outlook also captures increased vulnerabilities on the banks' financial metrics and standalone credit profile that stem from Pakistan's challenging macro-economic and operating conditions,” it said.

The agency said that any upward rating pressure on the Pakistani banks' ratings is limited given the negative outlook. “The banks' outlook could change back to stable if the sovereign rating outlook is stabilised and if the banks maintain their resilient financial performance,” it said.

Meanwhile, downward pressure on the banks' ratings would develop following a downgrade of the sovereign rating, reflecting the high interlinkages between the banks' credit profile and that of the government.

“Downward pressure on the BCAs of individual banks could also develop from a deterioration in the operating conditions that could also impact Moody's assessment of the macro profile, as well as from a deterioration in banks' financial metrics, and specifically their asset quality, profitability, and capital adequacy,” it added.