ISLAMABAD: In a follow-up to Pakistan’s sovereign rating downgrade, Moody’s Investors Service on Tuesday downgraded the long-term deposit ratings and long-term Foreign Currency Counter Risk Rating (CRR) to Caa1 from B3 of five leading Pakistani banks.

These banks include Allied Bank Ltd (ABL), Habib Bank Ltd (HBL), MCB Bank Ltd, National Bank of Pakistan (NBP) and United Bank Ltd (UBL). “The outlook on all banks’ deposit ratings remains negative,” said the New York-based rating agency in a statement.

Finance Minister Ishaq Dar had strongly questioned the Moody’s sovereign rating downgrade, saying it was done unilaterally and without confronting the authorities even though one of the factors behind the negative rating action was the purported rescheduling of Paris Club debt which was not at all under consideration of the government of Pakistan. He also challenged the data used by Moody’s in reaching the sovereign’s rating downgrade decision.

Moody’s said its rating actions on banks followed its “decision to downgrade the government of Pakistan’s issuer and senior unsecured debt ratings to Caa1 from B3 and maintains a negative outlook. The downgrade has moved Pakistan and its leading banks to C-category after seven years, i.e. since March 2015.

Says outlook on deposit ratings remains negative

As part of the same rating action, Moody’s also lowered the Baseline Credit Assessments (BCAs) of ABL, MCB Bank 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.

The rating agency said its rating reflected the government’s reduced capacity to support the banks, which has affected the banks whose ratings benefit from government support (namely NBP and HBL) and 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.

The downgrade of the NBP and HBL 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 a 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.

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 a negative outlook.

“These high exposures to government securities link the banks’ standalone credit profiles to the sovereign’s creditworthiness and leave the banks vulnerable to potential event risk at the sovereign level, constraining their Baseline Credit Assessments at the level of the government’s rating,” Moody’s said, adding that the downgrade of all banks’ foreign-currency long-term CRRs to Caa1 from B3 reflected the lowering of the foreign-currency ceiling for Pakistan to Caa1.

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; the latter could also lead Moody’s to reassess its macro profile for Pakistan, which currently stands at “Very Weak +”.

More specifically, Moody’s has lowered Pakistan’s real GDP growth to 0-1pc for fiscal 2023 while increased government liquidity and external vulnerability risks and higher debt sustainability risks suggest that the government will continue to rely on the banks, hence the credit interlinkages between the sovereign and the banks will only deepen.

Published in Dawn, October 12th, 2022