Moody’s has placed Pakistan top 5 Banks(HBL, NBP, UBL, MCB, & ABL) on review for downgrade the B3 long-term local-currency deposit ratings, foreign currency deposit ratings and baseline credit assessments.

The rating actions were followed by Moody’s decision to place the Government of Pakistan’s B3 issuer and senior unsecured ratings on review for downgrade on 14 May 2020. Moody’s expects that the Pakistani government will request bilateral official sector debt service relief under the recently announced G20 initiative, and it has to assess whether Pakistan’s participation in the initiative would entail a default on private sector debt.

Moody’s views that the GoP’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. The banks under review have around 87% of their investment parked in government securities. A look at company-wise data suggests the industry’s 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. This renders the banks susceptible to event risk at the sovereign level and constrains their baseline credit assessments at the government rating.

The SBP, however, has clarified that while “Moody’s has placed Pakistan’s sovereign rating under review, this review is not in any way because of Pakistan’s fundamentals, policy settings or outlook, all of which are viewed in very complimentary terms by Moody’s. The only driver is Moody’s global approach of placing all countries that are expected to participate in the G20 debt relief initiative under review.” The risk of actual deterioration in quality of the sovereign securities is very low.

Moreover, the rating agency 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 second factor that is calling the review for downgrade is the potential deterioration of the Pakistani government’s capacity to extend support to banks in case of need.