KARACHI: Moody’s Investors Service has put top five Pakistani banks under watch for possible downgrading of their long-term local and foreign deposit and credit ratings, suspecting Islamabad may default on repayment of debt to global “private-sector creditors” which would also weaken the banks’ ability to operate.

“Moody’s has placed on review for downgrade the B3 long-term local-currency deposit ratings of Allied Bank Limited (ABL), Habib Bank Ltd (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP) and United Bank Ltd (UBL). The banks’ foreign currency deposit ratings and baseline credit assessments were also placed on review for downgrade,” the US-based credit rating agency said on Tuesday.

Last week, it had put Pakistan under watch to possibly downgrade its long-term local and foreign credit ratings from stable to ‘B3’ at present.

It suspected that the anticipated contraction in the domestic economy in the wake of coronavirus pandemic which may lead Islamabad to default on paying off debt to the global private-sector creditors.

“The bank rating actions reflect Moody’s view that the government’s potentially weakening creditworthiness will weigh on the standalone 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 the banks in case of need.”

Moody’s will also assess the impact of the coronavirus pandemic on economic and business activity and the financial performance of Pakistani banks, especially on their asset quality and profitability.

The second factor driving the reviews for the downgrade is the potential deterioration of the Pakistani government’s capacity to extend support to banks in case of need, it said.

Upward pressure on the banks’ ratings is 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 this coronavirus crisis. 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 signalling a reduction in the 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, Moody’s said.

Published in The Express Tribune, May 20th, 2020.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.