Moody’s takes action on Pakistani banks’ deposit ratings

Moody's Investors Service has downgraded the long-term local currency deposit ratings of all four rated Pakistani banks — National Bank of Pakistan, Habib Bank Ltd, United Bank Ltd and MCB Bank Ltd — to Ba2 following the downgrade of the country's local currency deposit ceiling to Ba2 from Baa2 on Tuesday. The short-term local currency deposit ratings of two of the banks have also been downgraded to Not Prime.
Moody's has also placed the B3 long-term foreign currency deposit ratings of the four banks on review for possible downgrade, in line with a similar rating action on Pakistan's B3 foreign currency deposit ceiling, as this ceiling acts as a constraint on these deposit ratings.
All four banks' current bank financial strength ratings (BFSRs) are unaffected.
Moody's downgrade decision reflects the risk that, in the currently difficult economic circumstances, the government's ability to support the country's banks in case of emergency has diminished. The decision to place Pakistan's B3 foreign currency bank deposit ceiling on review for possible downgrade followed a downgrade of the government's bond rating to B3 from B2, reflecting the substantial erosion in the country's external liquidity position.
However, Moody's cautions that, in the event of a possible prolonged economic deterioration or increased difficulties faced by the government in servicing its debt, the BFSRs, which reflect their intrinsic financial position, could also potentially be adversely affected going forward.
"In particular, a potential failure by the Pakistani government to refinance its domestic debt obligations and a possible rescheduling of any such debt held by the banking system, could lead to significant losses for the rated banks that would likely have adverse implications for their BFSRs. In addition, a deterioration in asset quality that is more severe than currently anticipated could place increased pressure on the banks' earnings through higher credit costs and could also exert significant downward pressure on their BFSRs," cautioned Nondas Nicolaides, lead analyst at Moody's for Pakistani banks.
For the time being, however, Moody's continues to regard Pakistani banks overall as displaying satisfactory financial fundamentals and solid franchises.
"Although challenging financial market conditions during the second and third quarters of 2008 had an impact on the liquidity position and performance of the rated Pakistani banks, their overall financial standing remains adequate in terms of both business growth and profitability at their currently low BFSR levels," Nicolaides added.
The outlook on the long-term local currency ratings is now stable. As all four banks' short-term local and foreign currency deposit ratings are now rated Not Prime, the outlook on these ratings is also stable.