ISLAMABAD: Moody’s Ratings (Moody’s) upgraded the long-term deposit ratings to Caa2 from Caa3 of five Pakistani banks - Allied Bank Limited (ABL), Habib Bank Ltd (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP) and United Bank Ltd (UBL).
“We have also upgraded ABL, HBL, MCB and UBL’s Baseline Credit Assessments (BCAs) to caa2 from caa3, while affirming the BCA of NBP at caa3. The outlook on all banks’ long-term deposit ratings has been changed to positive from stable,” the rating agency added.
Rating action follows Moody’s decision to upgrade the government of Pakistan’s issuer and senior unsecured debt ratings to Caa2 from Caa3. “Today’s rating action reflects Pakistan’s strengthened creditworthiness – as indicated by the upgrade of the sovereign rating to Caa2 from Caa3 – and is driven by the country’s improving macroeconomic conditions and moderately better government liquidity and external positions, from very weak levels.
Moody’s upgrades Pakistan’s banking sector outlook from negative to ‘stable’
These developments also benefit Pakistani banks, given their significant holdings of sovereign debt securities and resultant high interlinkages between the banks’ credit profile and that of the government. The upgrade of NBP is also driven by the government’s improved capacity to provide support in case of need“, it added.
Moody’s stated that the positive outlook on all banks’ long-term deposit ratings is in line with the positive outlook on Pakistan’s government rating, and reflects the potentially higher capacity of the Pakistani government to support the banks in case of need.
The positive outlook also reflects potential improvements in the operating environment that could result in a higher macro profile for Pakistan and lead to higher BCAs.
The ratings could be upgraded following a strengthening of the operating environment reflected in a higher macro profile, and in the event of a sovereign rating upgrade, provided that the banks maintain their resilient financial performance.
Pakistani banks’ outlook on the long-term deposit ratings could be stabilized if the sovereign rating is stabilized, given the banks’ sizeable holdings of sovereign debt securities.
A stabilisation of the outlook of individual banks could also develop from a deterioration in their financial metrics, specifically on asset quality, profitability, and capital adequacy.
“We have affirmed NBP’s BCA and Adjusted BCA at caa3, while upgrading the long-term deposit ratings to Caa2 from Caa3. The affirmation of NBP’s BCA at caa3 balances its good funding and liquidity profile and adequate earnings generating capacity, against the expected weakening of its capital ratios.
The latter follows a Supreme Court ruling against the bank relating to a pension litigation case, which management estimates to cost PKR 98 billion or around 25% of its shareholders’ equity. We continue to incorporate a very high probability of government support to NBP’s long-term deposit ratings given the bank’s significant size in the banking system and the 75% government ownership through Pakistan Sovereign Wealth Fund (PSWF), which now translates into one notch of sovereign support uplift, and brings the long-term deposit ratings of the bank to Caa2 in line with the sovereign rating“, it added.
It further stated, “we have upgraded the BCA and Adjusted BCA of HBL to caa2 from caa3, as well as the bank’s long-term deposit ratings to Caa2 from Caa3.
The upgrade of HBL’s long-term deposit ratings to Caa2 follows the sovereign rating upgrade and reflects its good liquidity buffers, strong deposit-funded profile and good earnings generating capacity, but also the elevated nonperforming loans and modest adjusted capital buffers when we risk-weigh Pakistani government securities at 150%. The deposit ratings were previously constrained by the sovereign rating given the bank’s very high exposure to government securities, accounting for 45% of total assets as of June 2024.
“We have upgraded UBL’s BCA and Adjusted BCA to caa2 from caa3, and the long-term deposit ratings to Caa2 from Caa3.UBL’s long-term deposit ratings were upgraded to Caa2 further to the upgrade of the sovereign rating. This upgrade reflects the bank’s stable deposit base, strong liquid buffers, moderating profitability, but also its higher than system average nonperforming loans and modest adjusted capitalisation when we risk-weigh Pakistani government securities at 150%.
The deposit ratings were previously constrained by the sovereign rating given the bank’s very high exposure to government securities, accounting for 75% of total assets as of June 2024,“ Moody’s added.
The Rating agency further stated, “we have upgraded the BCA and the Adjusted BCA of MCB to caa2 from caa3 and the long-term deposit ratings to Caa2 from Caa3.
The upgrade of MCB’s long-term deposit ratings to Caa2 follows the upgrade of the sovereign rating and reflects the bank’s strong profitability, stable deposit base and liquidity buffers, but also its high asset risks amid a challenging environment, while adjusted capitalisation remains weak when we risk-weigh Pakistani government securities at 150%.
The deposit ratings were previously constrained by the sovereign rating given the bank’s very high exposure to government securities, accounting for 49% of total assets as of March 2024.“
It further stated: “We have upgraded the BCA and Adjusted BCA of ABL to caa2 from caa3 and the long-term deposit ratings to Caa2 from Caa3.ABL’s long-term deposit ratings were upgraded to Caa2 further to the sovereign rating upgrade.
The upgrade captures the bank’s relatively low stock of problem loans, well below the system average, stable deposit-based funding and ample liquid buffers, but also its modest adjusted capital buffers amid a challenging operating context.
The deposit ratings were previously constrained by the sovereign rating given the bank’s very high exposure to government securities, accounting for 48% of total assets as of March 2024.“
Copyright Business Recorder, 2024