Moody’s changes Pakistani banks’ outlook to negative from stable

ISLAMABAD: Moody’s Investors Service has affirmed the B3 long-term deposit ratings of five Pakistani banks but changed the outlook on the banks’ long-term deposit ratings to negative from stable.

The banks included Allied Bank Limited (ABL), Habib Bank Ltd. (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP) and United Bank Ltd. (UBL).

According to Moody’s, the affirmation of the five Pakistani banks’ ratings reflects their stable, deposit-based, funding profiles and adequate liquidity.

“Around 12% of assets are held as cash and interbank placements and an additional 45% are invested in government securities, a large proportion of which can be repo’ed with the central bank in case of need. Pakistani banks also display a resilient profitability, with the 2021 systemwide return on assets at 1.0%, while growing financial inclusion and other government initiatives are boosting lending opportunities.

“These strengths are balanced against the still high asset risks given the vulnerable operating and macro conditions, with the 2021 systemwide non-performing loans (NPLs) at 7.9% of gross loans; and modest capital buffers, with the 2021 systemwide equity-to-assets ratio at 6.3%.”

According to the rating agency, the negative outlook on the bank ratings reflects 1) the rated banks’ sizable holding of securities holdings, predominantly sovereign debt securities, at between 5-8 times their shareholders’ equity, which links their creditworthiness to that of the government; and 2) the risk of a further weakening in the government’s capacity to support the banks in case of need.

The latter is particularly relevant for NBP and HBL, whose ratings incorporate one notch of government support uplift. More broadly, all five banks’ deposit ratings of B3 are at the same rating level of the government, and a potential weakening in the government’s credit profile will therefore translate to a weaker credit profile for the banks, it added.