All Round View (Islamabad): Moody’s Investors Service (“Moody’s”) has affirmed the B3 long-term local currency deposit ratings of five Pakistani banks and changed the outlook to stable from negative. The banks banks include Allied Bank Limited (ABL), Habib Bank Limited HBL), Muslim Commercial Bank Limited (MCB), National Bank of Pakistan (NBP) and United Bank Limited (UBL).
The rating actions follow Moody’s decision on December 2 to affirm the B3 rating for the Government of Pakistan and change the outlook on the sovereign rating to stable from negative and reflect reduced external vulnerability risks and ongoing fiscal reforms. The banks’ rating actions reflect improvements in the operating environment in Pakistan and in the country’s sovereign credit profile, which increased their high government exposures that link their credit profiles to that of the government and the expectation that the government’s capacity to support banks in case of need will not deteriorate.
According the service, the primary driver of Moody’s decision to change the five Pakistan banks’ outlooks to stable was the extensive interconnectedness between their balance sheets and sovereign credit risk, owing to the banks’ high exposures to government securities. According to Moody’s estimates as of the latest available information, the five banks’ direct exposure to government credit risk stood at around 10.2x of Tier-1 capital for ABL, 8.1x for HBL, 6.4x for MCB, 9.5x for NBP and 6.8x for UBL.
The high direct exposure to government credit risk, in addition to the primarily Pakistan focus of their operations, links the banks’ credit profile to that of the government. As a result, the improvements in the operating environment and in the sovereign credit profile have eased pressures on banks as well. The stable outlook assigned to the banks’ local currency deposit ratings also reflects Moody’s expectation that the government’s capacity to support banks in case of need will not deteriorate.
This was reflected by the stable outlook on Pakistan’s sovereign B3 bond rating which was driven by reduced external vulnerability risks on the back of policy adjustments and currency flexibility, as well as ongoing fiscal reforms that will mitigate risks related to debt sustainability and government liquidity. The local currency deposit ratings of NBP and HBL incorporate one notch of support uplift from their caa1 baseline credit assessments.
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