Moody’s cuts Pakistan bank ratings, negative outlook

Moody's Investors Service has downgraded by one notch the global local-currency (GLC) deposit ratings and standalone bank financial strength ratings (BFSRs) of five Pakistani banks: Allied Bank, Habib Bank, MCB Bank, National Bank of Pakistan and United Bank.
At the same time, the agency affirmed the foreign-currency deposit ratings assigned to these banks at B3/Not Prime (stable outlook). The foreign-currency deposit ratings remain constrained by Pakistan's B3 (stable outlook) country ceiling for foreign-currency deposits.
Moody's noted that the downgrades were primarily driven by the banks' growing exposure to (B3 rated) Pakistan government securities and government-related lending, as a consequence of limited private sector lending opportunities within the country's deteriorating macroeconomic conditions. Moody's estimated that as of end-June 2010, the rated Pakistani banks' total exposure to sovereign-related risk assets had reached 38% of their total assets, from 24% in 2008, representing a material exposure concentration and raising the banking system's susceptibility to event risk at the B3 sovereign level.
While the financial fundamentals of Pakistani banks have shown relative resilience during adverse conditions in previous years, their inability to curb their rising overall exposure to the government sector highlights the limitations in depth and diversification of the country's banking system.
Although Moody's considers Pakistani rated banks' capitalisation levels as currently adequate, the high, and growing, exposure concentration to the B3-rated sovereign — in conjunction with the prevailing weak macroeconomic conditions — could challenge solvency levels. Driven by these considerations, Moody's has narrowed the gap between the Pakistani banks' ratings and the government rating (B3/stable).
As a result of the heavy flooding in Pakistan earlier this year, Moody's expects low economic growth and subdued loan demand from the private sector to prevail, leading to a further rise in banks' sovereign-related exposures, primarily in the form of T-Bills. At the same time, the sovereign structural subsidy-related debt arrears, mainly in the utility and commodity sectors, are unlikely to be settled in the near term, and such arrears will continue to exert further pressure on the corporate sector and, as a result, on the Pakistani banking system's asset quality.
Despite these growing challenges, Moody's believes that certain factors continue to support Pakistani banks' ratings being positioned at a higher level than the government rating. That said, the decision to maintain the negative outlook on the banks' standalone and long-term local-currency deposit ratings reflects the Pakistani banking sector's still growing exposure concentration to the sovereign and on-going vulnerability to macroeconomic deterioration, which could negatively impact both the sovereign and the country's banking system.