ISLAMABAD: Moody’s Investors Service on Tuesday placed on review for downgrade both local and foreign currency deposits highlighting the government’s weakening capacity to support banks in case of need.

In a statement, the New York-based rating agency said it placed the B3 long-term local-currency deposit ratings of the Allied Bank Ltd (ABL), Habib Bank Ltd. (HBL), MCB Bank Ltd (MCB), National Bank of Pakistan (NBP) and United Bank Ltd (UBL) on review.

It said the banks’ foreign currency deposit ratings and baseline credit assessments were also placed on review for downgrade. The rating actions follow Moody’s decision to place the Pakistan’s B3 issuer and senior unsecured ratings on review for downgrade on May 14.

It said the sovereign action is driven by Moody’s expectation that the government will request bilateral official sector debt service relief under the recently announced G20 initiative, and rating agency’s need to assess whether Pakistan’s participation in the initiative would entail a default on private sector debt.

The bank rating action reflects Moody’s view that the government’s potentially weakening creditworthiness will weigh on the stand alone credit profile of the banks given the high credit linkages between their balance sheets and sovereign credit risk and the risk of a further weakening in the government’s capacity to support banks in case of need.

The rating agency said that during the review period, it will assess two factors: impact of the government’s potentially weakening creditworthiness on the stand alone credit profile of the banks given the high credit linkages between their balance sheets and sovereign credit risk.

According to rated banks’ latest financial statements, their direct exposure to government securities stood at around 7.6x of Tier-1 capital for ABL, 8.1x for HBL, 6.0x for MCB, 8.7x for NBP and 6.5x for UBL. The high direct exposure to government credit risk, renders the banks susceptible to event risk at the sovereign level and constrains their baseline credit assessments at the government rating.

Moody’s will also assess the impact of the coronavirus pandemic on economic and business activity and on the financial performance of Pakistani banks, especially on their asset quality and profitability. The agency regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety.

The second factor driving the downgrade is the potential deterioration of the government’s capacity to extend support to banks in case of need. The local currency deposit ratings of two rated banks, the NBP and HBL, incorporate one notch of support uplift from their Caa1 baseline credit assessments.

The agency said the upward pressure on the banks’ ratings was limited, as indicated by the review for downgrade. However, the ratings would likely be confirmed if Pakistan’s B3 sovereign rating is confirmed. This is also conditioned by no material deterioration in banks’ standalone fundamentals throughout the pandemic.

Conversely, downward pressure on banks’ ratings would develop following a downgrade of the sovereign rating, reflecting the high inter linkages between banks’ credit profile and that of the government, and signaling a reduction in government’s capacity to extend financial support to banks in case of need.

Downward pressure on the baseline credit assessments of individual banks could also develop from a greater-than expected deterioration in operating conditions from the coronavirus spread, weakening their asset quality, profitability, and capital adequacy.

Published in Dawn, May 20th, 2020