Moody’s Upgrades Long-Term Deposit Ratings of Five Major Pakistani Banks Following Sovereign Rating Upgrade
Moody’s Investors Service has upgraded the long-term deposit ratings of five leading Pakistani banks—Allied Bank Limited (ABL), Habib Bank Limited (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP), and United Bank Limited (UBL)—from Caa3 to Caa2. This rating action reflects the improved creditworthiness of Pakistan, following the recent upgrade of the country’s sovereign rating to Caa2 from Caa3.
The ratings agency also upgraded the Baseline Credit Assessments (BCAs) of ABL, HBL, MCB, and UBL to caa2 from caa3, while NBP’s BCA has been affirmed at caa3. Additionally, the outlook on all five banks’ long-term deposit ratings has been revised to positive from stable.
Key Drivers Behind the Upgrade
The upgrade of these banks’ ratings follows Moody’s decision to raise Pakistan’s sovereign credit rating due to improving macroeconomic conditions and moderately better government liquidity and external positions. Moody’s noted that these developments are beneficial for Pakistani banks, given their substantial holdings of sovereign debt securities and the high level of interconnection between the banks’ credit profiles and that of the government.
For NBP, the rating upgrade is also attributed to the government’s enhanced capacity to provide support in times of need, given the bank’s significant size within the banking system and the government’s 75% ownership through the Pakistan Sovereign Wealth Fund (PSWF).
Bank-Specific Analysis
- National Bank of Pakistan (NBP): Moody’s upgraded NBP’s long-term deposit ratings to Caa2 from Caa3, driven by the sovereign rating upgrade. However, the BCA remains at caa3, balancing NBP’s strong funding and liquidity profile with the expected weakening of its capital ratios. The latter is a result of a Supreme Court ruling related to a pension litigation case, which could cost the bank approximately PKR 98 billion, or around 25% of its shareholders’ equity.
- Habib Bank Limited (HBL): HBL’s BCA and long-term deposit ratings have been upgraded to caa2 from caa3. The upgrade reflects HBL’s strong liquidity buffers, robust deposit-funded profile, and solid earnings-generating capacity, although these strengths are balanced by elevated nonperforming loans and modest adjusted capital buffers.
- United Bank Limited (UBL): UBL’s BCA and long-term deposit ratings were upgraded to caa2 from caa3. This decision reflects UBL’s stable deposit base, strong liquid buffers, and moderating profitability. However, UBL also faces challenges from higher-than-average nonperforming loans and modest adjusted capitalization.
- MCB Bank Limited (MCB): MCB’s long-term deposit ratings and BCA were upgraded to caa2 from caa3. This upgrade is based on the bank’s strong profitability, stable deposit base, and liquidity buffers. However, MCB’s high asset risks amid a challenging environment and weak adjusted capitalization remain concerns.
- Allied Bank Limited (ABL): ABL’s BCA and long-term deposit ratings have been upgraded to caa2 from caa3, reflecting the bank’s relatively low level of problem loans, stable deposit-based funding, and ample liquid buffers. However, ABL’s modest adjusted capital buffers in a challenging operating context also influenced the rating.
Positive Outlook and Future Implications
The positive outlook on all five banks’ long-term deposit ratings aligns with the positive outlook on Pakistan’s sovereign rating. Moody’s believes that further improvements in Pakistan’s operating environment, particularly in macroeconomic stability, could lead to additional upgrades in these banks’ ratings. Conversely, any stabilization of the sovereign rating could stabilize the outlook on the banks’ ratings, especially if there is a deterioration in their financial metrics, including asset quality, profitability, and capital adequacy.
The recent upgrades reflect a cautiously optimistic view of the Pakistani banking sector, driven by the country’s improving macroeconomic conditions and the government’s enhanced capacity to support its financial institutions.
