moody-s-changes-5-pakistani-banks-outlook-to-stable

LIMASSOL: Moody’s Investors Service Wednesday affirmed the B3 long-term local-currency deposit ratings of five Pakistani banks and changed the outlook on these ratings to stable from negative.

According to a press release issued by the Moody’s, at the same time, the rating agency has affirmed the banks’ Caa2 foreign-currency deposit ratings and Not- Prime short-term ratings.

The banks’ standalone E financial strength ratings corresponding to caa1 baseline credit assessments (BCA) have also been affirmed.

The five banks are: Allied Bank Limited, Habib Bank Ltd, MCB Bank Limited, National Bank of Pakistan and United Bank Ltd.

The rating actions follow Moody’s decision on 14 July to affirm the Caa1 rating for the Government of Pakistan and change the outlook on the sovereign rating to stable from negative (see Moody’s changes Pakistan’s rating outlook to stable, 14 July 2014 ). The bank rating actions take into account a stabilization of the government’s risk profile and its capacity to support the banks, and the high underlying inter-linkages between the banks’ standalone credit risk profiles and that of the sovereign, owing to their high lending concentrations to the government and to government related entities.

Rationale

The affirmation and outlook change on the five banks’ B3 deposit ratings primarily reflects Moody’s view of a stabilization of the sovereign’s risk profile and its capacity to support the banks. Moody’s notes that the government’s implementation of structural reforms agreed with the International Monetary Fund support a gradual shift to a higher growth trajectory and strengthen its capacity to support the banks. The banks’ B3 deposit ratings incorporate one notch of support from their caa1 standalone BCAs, reflecting Moody’s view of the likelihood that support would be forthcoming for these banks given their systemic importance as the five largest banks in Pakistan, with deposits market shares ranging from 8% to 14%.

The affirmation of the banks’ standalone credit profiles also takes into account both the on-going challenges the five banks are facing in terms of concentrations to sovereign and quasi-sovereign risk and stability provided by their predominately deposit funded profiles and high levels of liquidity.

The five Pakistani banks have very high concentration to Government of Pakistan securities ranging from 3.2x to 6.7x their Common Equity Tier 1(CET1) as of December 2013. These banks also have indirect exposures through sizeable lending to government-owned entities, bringing total government and quasi-government concentration to between 5x and 7.8x their CET1 as of December 2013. This high concentration makes the banks vulnerable to a sovereign credit event, and aligns their credit risk profile with that of the government. Moreover, the banks’ increasing exposures to government securities also weigh on their capital levels. According to the rating agency, if the banks’ risk-weighted assets are adjusted to reflect the Pakistani government’s high credit risk and low credit rating, their capital buffers decline, with the CET1 ranging from 5.65% to 8.66% as of December 2013.

Moody’s assessment of the Pakistani banks’ standalone caa1 BCAs also captures their stable deposit funding profiles, which enhance financial stability. The banks’ are predominately funded by deposits, mainly short term, which, on average, account for 85% of non-equity funding as of March 2014. Although Moody’s notes risks related to the short-term nature of this funding source, the rating agency also notes that these risks are partly mitigated by the deposits’ stable behaviour and the banks’ high liquidity buffers with liquid assets representing on average 56% of total assets as of March 2014.

Moody’s affirmation of the Pakistani banks’ Caa2 long-term foreign-currency deposit ratings reflects the affirmation of the foreign-currency deposit ceiling in Pakistan, which is the highest rating that can be assigned to a foreign-currency deposit obligation of a domestic bank and captures foreign-currency transfer and convertibility risks.

What could change the rating up/down?

Upward pressure could be exerted on the five Pakistani banks’ standalone ratings as a result of any improvement in the credit risk profile of the sovereign or a material reduction in government securities, coupled with significant diversification into lower risk markets.

Downward pressure could be exerted on the five Pakistani banks’ ratings: (1) in the event of significant deterioration in the banks’ funding and liquidity profiles; or (2) if there is a significant deterioration in the banks’ asset quality that negatively affects their profitability and capital. A weakening in the government’s creditworthiness or evidence of a reduced likelihood of government support to the banks in case of need would also have negative rating implications.

List of affected ratings:

Allied Bank Limited

– BFSR: Affirmed at E with stable outlook, mapping to a caa1 baseline credit assessment (BCA)

– LC deposit rating: Affirmed at B3, outlook changed to stable, from negative

– FC deposit rating: Affirmed at Caa2

– Short-term ratings: Affirmed at Not Prime

Habib Bank Ltd

– BFSR: Affirmed at E with stable outlook, mapping to a caa1 baseline credit assessment (BCA)

– LC deposit rating: Affirmed at B3, outlook changed to stable, from negative

– FC deposit rating: Affirmed at Caa2

– Short-term ratings: Affirmed at Not Prime

MCB Bank Limited

– BFSR: Affirmed at E with stable outlook, mapping to a caa1 baseline credit assessment (BCA)

– LC deposit rating: Affirmed at B3, outlook changed to stable, from negative

– FC deposit rating: Affirmed at Caa2

– Short-term ratings: Affirmed at Not Prime

National Bank of Pakistan

– BFSR: Affirmed at E with stable outlook, mapping to a caa1 baseline credit assessment (BCA)

– LC deposit rating: Affirmed at B3, outlook changed to stable, from negative

– FC deposit rating: Affirmed at Caa2

– Short-term ratings: Affirmed at Not Prime

United Bank Ltd

– BFSR: Affirmed at E with stable outlook, mapping to a caa1 baseline credit assessment (BCA)

– LC deposit rating: Affirmed at B3, outlook changed to stable, from negative

– FC deposit rating: Affirmed at Caa2

– Short-term ratings: Affirmed at Not Prime

The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Regulatory disclosures

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings of rated entities Habib Bank Ltd., United Bank Ltd. and National Bank of Pakistan were initiated by Moody’s and were not requested by these rated entities.

Rated entities Habib Bank Ltd., United Bank Ltd. and National Bank of Pakistan or their agent(s) participated in the rating process. These rated entities or their agent(s), if any, provided Moody’s – access to the books, records and other relevant internal documents of the rated entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Source: Moody’s

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