Moody's upgrades 5 banks' ratings to ‘Caa1'

Business Recorder

15 hours ago

ISLAMABAD: Moody's Ratings has upgraded to Caa1 from Caa2 the local and foreign-currency long-term deposit ratings of five Pakistani banks: Allied Bank Limited (ABL), Habib Bank Ltd (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP) and United Bank Ltd (UBL).
The rating agency also upgraded the Baseline Credit Assessments (BCAs) and Adjusted BCAs for ABL, HBL, MCB and UBL to caa1 from caa2, and of NBP to caa2 from caa3. The outlook on the long-term deposit ratings of all banks has been changed to stable from positive.
Rating actions follow Moody's decision to upgrade the government of Pakistan's local and foreign currency issuer and senior unsecured debt ratings to Caa1 from Caa2, to reflect Pakistan's improving external position, supported by its progress in reform implementation under the IMF Extended Fund Facility (EFF) programme.
'Our decision to upgrade Pakistani banks' ratings reflects (1) the country's improving operating environment, as captured by our raising of its Macro Profile for Pakistan to 'Very Weak+' from 'Very Weak'; (2) the Government of Pakistan's improved capacity to support the banks in case of need, as indicated by the sovereign rating upgrade; and (3) banks' own resilient financial performance', said the rating agency.
The revised Macro Profile score for Pakistan is underpinned by Pakistan's improving external position, supported by its progress in reform implementation under the IMF Extended Fund Facility (EFF) programme. Nonetheless, Pakistan's external position remains fragile. Its foreign exchange reserves remain well below what is required to meet its external debt obligations, underscoring the importance of steady progress with the IMF programme to continually unlock financing.
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Improvements to Pakistan's external position contribute to a stable macroeconomic environment, which has a positive impact on Pakistani banks that are significantly exposed to the sovereign through their large holdings of government securities – these account for around half of total banking assets – as well as through their local banking operations and exposure to Pakistani corporates, businesses and retail consumers, it added.
Moody's said that Pakistani banks are also displaying a resilient financial performance, as reflected by their stable, deposit based, funding profile; high liquidity buffers and generally good earnings generating capacity. The decline in inflation from 30.8 per cent for 2023 to 12.6 per cent for 2024 and State Bank of Pakistan (SBP)'s series of rate cuts from the peak of 22 per cent as of May 2024 to 11per cent as of May 2025 will also support a drop in problem loans, reduce borrowing costs and stimulate credit demand, particularly in the SME and consumer segments. Nonetheless, profitability will face some downward pressure on the back of compressed net interest margins driven by the rate cuts, while asset risks remain elevated as – despite the improvements – operating conditions remain fragile given the government's high liquidity and external vulnerability risks.
The stable outlook on all banks' long-term deposit ratings is in line with the stable outlook on Pakistan's government and partly also reflecting solid loan loss provisions and capital buffers. The stable outlook also reflects continued improvements in the operating environment following a steady disinflation process with moderating profitability and adequate levels of liquidity, although encumbered government securities form significant part of this.
Moody's upgraded NBP's BCA and Adjusted BCA to caa2 from caa3, as well as the bank's long-term deposit ratings to Caa1 from Caa2.The NBP's BCA captures the improving operating conditions, and the bank's strong deposit-funded profile and enhanced earnings generation capacity with net income making 1.3 per cent of tangible assets during the first quarter of 2025, despite previous challenges from one-off litigation expenses. However, the bank's adjusted capital buffers remain modest—particularly when Pakistani government securities are risk-weighted at 150per cent. Its significant exposure to the sovereign also underscores the bank's elevated asset risk, as reflected in its reported NPLs, which stood at 14.2per cent as of March 2025—significantly above the sector average.
Moody's upgraded the BCA and Adjusted BCA of HBL to caa1 from caa2, as well as the bank's long-term deposit ratings to Caa1 from Caa2.HBL's BCA captures the improving operating conditions, the bank's good liquidity buffers, strong deposit-funded profile and solid asset quality position, reflected by its 5.3per cent reported NPLs as of March 2025; but also the high asset risks, given the bank's high exposure to government securities that links its credit profile to that of the government, as well as its modest adjusted capital buffers, with tangible common equity representing 5.7per cent of adjusted risk weighted assets as of March 2025.
Moody's upgraded UBL's BCA and Adjusted BCA to caa1 from caa2, and the long-term deposit ratings to Caa1 from Caa2.
UBL's ratings capture the improving operating conditions, as well as the bank's stable deposit base, strong liquid buffers and moderate profitability. These strengths are balanced against the high nonperforming loans (14.7per cent of gross loans as of March 2025) following the acquisition of Silk Bank, but which remain fully covered by loan loss provisions; weak adjusted capitalisation levels; and its very high exposure to government securities that links its credit profile to that of the government.
Moody's upgraded the BCA and the Adjusted BCA of MCB to caa1 from caa2 and the long-term deposit ratings to Caa1 from Caa2.
MCB's ratings capture the improving operating environment, the bank's strong profitability with a return on assets of 1.7per cent during the first quarter of 2025, stable deposit base and good liquidity buffers; but also its high asset risks, modest adjusted capitalisation metrics with tangible common equity representing 5.7per cent of the adjusted risk weighted assets as of March 2025, and its high exposure to government securities that links its credit profile to that of the government.
Moody's upgraded the BCA and Adjusted BCA of ABL to caa1 from caa2 and the long-term deposit ratings to Caa1 from Caa2.
The ABL's ratings capture the improving operating environment, the bank's relatively low stock of problem loans reflected by the 1.6per cent reported NPLs as of March 2025, well below the system average, stable deposit-based funding and ample liquid buffers; but also its modest adjusted capital buffers, and its high exposure to government securities that links its credit profile to that of the government. Pakistani banks' ratings could be upgraded following a material strengthening of the operating environment and in the government's credit profile, and provided that the banks maintain their resilient financial performance.
Pakistani banks' ratings could be downgraded if (1) Pakistan's sovereign rating of Caa1 is downgraded; and/or (2) there is a deterioration in the banks' financial performance, specifically asset quality, profitability and capital adequacy, the report added.
Copyright Business Recorder, 2025