The rating actions follow Moody''''s decision on June 20 to affirm the B3 rating for the government of Pakistan and change the outlook on the sovereign rating to negative from stable. The bank rating actions reflect: (1) Moody''''s view that the government''''s weakening creditworthiness weighs on the standalone credit profile of the banks given the high credit linkages between their balance sheets and sovereign credit risk; and (2) the risk of further weakening in the government''''s capacity to support the banks in case of need. Moody''''s stated that the primary driver of decision to change the five Pakistani banks'''' outlooks to negative is 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 at year-end 2017, the five banks'''' direct exposure to government credit risk stood at around 9x of Tier-1 capital for ABL, 8.7x for HBL, 4.7x for MCB, 11.0x for NBP and 8.3x for UBL.
The high direct exposure to government credit risk, in addition to the primarily Pakistan focus of their operations (the regional geographic diversification of 20% and 13% of UBL''''s and HBL''''s assets is not sufficient to alleviate credit linkages to the Pakistan sovereign), renders the banks susceptible to event risk at the sovereign level and constrains their baseline credit assessments at the level of the government''''s bond rating.
The negative outlook assigned to the banks'''' local-currency deposit ratings also reflects the risk of a further weakening in the capacity of the Pakistan government to support the banks in case of need. This is reflected by the negative outlook on Pakistan''''s sovereign B3 bond rating which is driven by heightened external vulnerability risk. Foreign exchange reserves have fallen to low levels and, absent significant capital inflows, will not be replenished over the next 12-18 months. Low reserve adequacy threatens continued access to external financing at moderate costs, in turn potentially raising government liquidity risks. The local-currency deposit ratings of NBP and HBL incorporate one notch of support uplift from their caa1 baseline credit assessments.
Moody''''s decision to affirm the banks'''' ratings reflects the banks'''' stable deposit-based funding structures, high liquidity buffers and good earnings generating capacity, as well as Pakistan''''s robust growth potential, supported by ongoing improvements in energy supply and physical infrastructure. These credit strengths balance banks'''' relatively modest capital buffers and high asset risks, primarily because of their high exposure to the government, which links their credit profile to that of the government.
The outlook on the five affected banks'''' deposit ratings is negative, aligned with the negative outlook on the sovereign rating of the government of Pakistan. Moody''''s would downgrade the banks'''' ratings in the event of a further weakening of the Pakistan sovereign''''s creditworthiness.
Though upward pressure on the banks'''' ratings is currently limited given the negative outlook, improvements in the operating environment and in the sovereign''''s credit risk profile could prompt Moody''''s to restore the outlook on the five banks'''' ratings to stable.
LIST OF AFFECTED RATINGS
Issuer: Allied Bank Limited
Affirmations:
....LT bank deposits (local currency), affirmed at B3, outlook changed to negative, from stable.
....LT bank deposits (foreign currency), affirmed at Caa1.
....ST bank deposits, affirmed at not-prime.
....LT counterparty risk ratings, affirmed at B2.
....ST counterparty risk ratings, affirmed at not-prime.
....Adjusted baseline credit assessment, affirmed at B3.
....Baseline credit assessment, affirmed at B3.
....LT counterparty risk assessment, affirmed at B2 (cr).
....ST counterparty risk assessment, affirmed at not-prime (cr)
Outlook Actions:
....Outlook changed to negative, from stable.
Issuer: Habib Bank Ltd.
Affirmations:
....LT bank deposits (local currency), affirmed at B3, outlook changed to negative from stable.
....LT bank deposits (foreign currency), affirmed at Caa1
....ST bank deposits, affirmed at not-prime.
....LT counterparty risk ratings, affirmed at B3.
....ST counterparty risk ratings, affirmed at not-prime.
....Adjusted baseline credit assessment, affirmed at caa1.
....Baseline credit assessment, affirmed at caa1.
....LT counterparty risk assessment, affirmed at B3 (cr).
....ST counterparty risk assessment, affirmed at not-prime (cr).
Outlook Actions:
....Outlook changed to negative from stable.
Issuer: MCB Bank Limited.
Affirmations:
....LT bank deposits (local currency), affirmed at B3, outlook changed to negative from stable.
....LT bank deposits (foreign currency), affirmed at caa1.
....ST bank deposits affirmed at not-prime.
....LT counterparty risk ratings, affirmed at B2.
....ST counterparty risk ratings, affirmed at not-prime.
....Adjusted baseline credit assessment, affirmed at B3.
....Baseline credit assessment, affirmed at B3.
....LT counterparty risk assessment, affirmed at B2 (cr).
....ST counterparty risk assessment affirmed at not-prime (cr).
Outlook Actions:
....Outlook changed to negative from stable.
Issuer: National Bank of Pakistan.
Affirmations:
....LT bank deposits (local currency) affirmed at B3, outlook changed to negative from stable.
....LT bank deposits (foreign currency), affirmed at caa1.
....ST bank deposits affirmed at not-prime.
....LT counterparty risk ratings affirmed at B3.
....ST counterparty risk ratings, affirmed at not-prime.
....Adjusted baseline credit assessment affirmed at caa1.
....Baseline credit assessment affirmed at caa1.
....LT counterparty risk assessment affirmed at B3 (cr).
....ST counterparty risk assessment affirmed at not-prime (cr).
Outlook Actions:
....Outlook changed to negative from stable.
Issuer: United Bank Ltd.
Affirmations:
....LT bank deposits (local currency) affirmed at B3, outlook changed to negative from stable.
....LT bank deposits (foreign currency) affirmed at caa1.
....ST bank deposits affirmed at not-prime.
....LT counterparty risk ratings, affirmed at B2.
....ST counterparty risk ratings affirmed at not-prime.
....Adjusted baseline credit assessment affirmed at B3.
....Baseline credit assessment affirmed at B3.
....LT counterparty risk assessment affirmed at B2 (cr).
....ST counterparty risk assessment affirmed at not-prime (cr).
Outlook Actions:
....Outlook changed to negative from stable.