Moody’s upgrades five Pakistani banks to B3; outlook revised to stable

Limassol, June 17, 2015 — Moody’s Investors Service has today upgraded the local-currency deposit ratings of five Pakistani banks to B3/Not-Prime from Caa1/Not-Prime and their foreign-currency deposit ratings to Caa1/Not-Prime from Caa2/Not-Prime. The affected banks are Allied Bank Limited, Habib Bank Ltd., MCB Bank Limited, National Bank of Pakistan and United Bank Ltd. The long-term local-currency deposit ratings have a stable outlook.

At the same time, Moody’s upgraded the baseline credit assessments (BCAs) of Allied Bank, Habib Bank, MCB Bank and United Bank to b3 from caa1, and affirmed National Bank of Pakistan’s BCA at caa1.

The rating actions principally reflect the following considerations: (1) Moody’s revised assessment of Pakistan’s (B3 stable) macro profile to “Very Weak+” from “Very Weak”; (2) Moody’s expectation that the improved economic outlook and government credit profile will lead to further improvements in the banks’ financial profiles; and (3) the government’s still-limited, albeit slightly strengthened, capacity to support the banks.

Today’s rating actions also follow Moody’s upgrade of Pakistan’s foreign-currency issuer and senior unsecured bond ratings to B3 from Caa1 (see “Moody’s upgrades Pakistan’s bond ratings to B3 with a stable outlook,” published on 11 June 2015).

The rating agency has also assigned long and short-term Counterparty Risk (CR) Assessments of B2(cr)/NP(cr) to Allied Bank, Habib Bank, MCB Bank and United Bank and a B3(cr)/NP(cr) to National Bank of Pakistan, in line with its revised methodology (see “Banks,” published on 16 March 2015).

Please click this link for Moody’s new banks rating methodology: http://www.moodys.com/viewresearchdoc.aspx?docid=PR_320662

Please see the end of this press release for a list of affected ratings.

RATING RATIONALE

(1) THE CHANGE IN THE MACRO PROFILE TO “VERY WEAK+”

Moody’s revision of Pakistan’s macro profile to “Very Weak+” from “Very Weak” reflects the anticipated improvement in the country’s credit conditions as a result of measures recently initiated by the government to strengthen the banking system.

The government has submitted to parliament revised legislation governing credit bureaus as part of its National Financial Inclusion Strategy. The rating agency expects this legislation to improve banks’ access to information and encourage bank credit to broader sections of society.

The government is also proposing changes to the legislative framework to support the rehabilitation of weak but viable companies, which in turn will improve banks’ work-outs of troubled loans and recoveries. The authorities are reforming the bankruptcy framework by introducing two legislative measures: (1) the Corporate Rehabilitation Act, which will provide a mechanism for the re-organisation and rehabilitation of distressed companies; and (2) the Corporate Restructuring Companies Act, which aims to set up private corporate restructuring companies to take over the assets of bankrupt companies. In addition, Alternative Dispute Resolution (ADR) mechanisms have been established in Karachi and Lahore, which will speed-up dispute resolution.

Moody’s assessment of Pakistan’s Very Weak+ macro profile also takes into account the low levels of credit relative to the size of the economy, the country’s low per-capita income, weak competitiveness and narrowly diversified economy, the country’s poor institutional framework, weak governance and rule of law, as well as geopolitical risks that render the country highly susceptible to event risk.

(2) IMPROVED FINANCIAL PROFILES OF ALLIED BANK, HABIB BANK, MCB BANK AND UNITED BANK

Moody’s BCA upgrades for Allied Bank, Habib Bank, MCB Bank and United Bank follow the improving economic environment and government credit-risk profile, and reflect the rating agency’s expectation of sustained improvement in the banks’ financial profiles. Moody’s expects 4.7% GDP growth for Pakistan for the fiscal-year ending June 2016 from 4.2% in FY2015. The rating agency also anticipates growing business opportunities for the banks once projects related to the China-Pakistan Economic Corridor advance and as the authorities make further progress in tackling the country’s continued energy shortfall. Furthermore, Moody’s notes that the strengthening in the government’s credit-risk profile will improve the quality of the banks’ liquid assets and increase their Moody’s-adjusted capital buffers.

— UPGRADE OF ALLIED BANK LIMITED’S BCA

Moody’s expects Allied Bank’s financial performance to continue to improve, benefiting from the improvement in the operating environment. For 2014, the bank reported a relatively high 1.9% return on tangible banking, while in Q1 2015 net profit grew by 30% compared with Q1 2014. Asset quality has also stabilised, as the ratio of non-performing loans (NPLs) to gross loans equalled 7.1% as of March 2015. However, concentration on the bank’s balance sheet remains high, which mainly results from its large exposure to government securities. As of December 2014, investment in Pakistani government securities accounted for 46% of assets and 8x Common Equity Tier 1 (CET 1) capital. Furthermore, although improved, the Moody’s-adjusted CET 1 ratio stood at a modest 8.0% as of December 2014 (after assigning 100% risk weight to the bank’s holdings in Pakistan government securities).

— UPGRADE OF HABIB BANK LTD’S BCA

The rating agency expects the financial performance of the country’s largest bank to continue to improve owing both to the improved operating environment and the bank’s recent focus on alternative banking channels that will support low-cost deposit growth. At December 2014, the return on tangible banking assets improved to 1.7% from 1.4% at year-end 2013. In Q1 2015, net profit grew by 63% compared with Q1 2014. Asset quality has also stabilized, with a 12.4% ratio of NPLs to gross loans as of March 2015. However, despite Habib Bank’s operations in 25 countries accounting for 13% of assets, the rating agency believes that concentration on the bank’s balance sheet remains high with investments in Pakistani government securities accounting for 43% of assets and over 7x CET 1 capital as of December 2014. Although improved, the Moody’s-adjusted CET 1 ratio stood at a modest 7.3% as of December 2014 (after assigning 100% risk weight to the bank’s holdings in Pakistan government securities).

— UPGRADE OF MCB BANK LIMITED’S BCA

MCB’s profitability benefits from its strong service quality and franchise that results in a high funding reliance in low-cost current and saving deposits. For 2014, the bank reported a return on tangible banking assets of 2.65%, while in Q1 2015 net profit grew by 42% compared with Q1 2014. As of March 2015, current account and saving deposits accounted for 91% of total deposits. Asset quality has also stabilized, with a 6.7% ratio of NPLs to gross loans as of March 2015, while the Moody’s-adjusted CET 1 ratio improved to 10.0% as of December 2014 (after assigning 100% risk weight to the bank’s holdings in Pakistan government securities). Nevertheless, concentration on the bank’s balance sheet remains high, which mainly results from its large exposure to Pakistani government securities. As of December 2014, investment in government securities accounted for 50% of assets and over 5x CET 1 capital, linking the bank’s solvency with the sovereign’s credit-risk profile.

— UPGRADE OF UNITED BANK LTD’S BCA

The rating agency expects United Bank’s financial performance to continue to improve as the bank capitalizes on the improved domestic operating environment and retains its foreign operations, mainly in the GCC, targeting mid-tier corporate entities. As of December 2014, return on tangible banking assets improved to 2.0% from 1.8% at year-end 2013, while in Q1 2015, net profit grew by 39% compared with Q1 2014. Also United Bank’s asset quality has stabilized, with a 11.4% ratio of NPLs to gross loans as of March 2015. However, despite foreign operations accounting for 24% of assets (mainly in the GCC), Moody’s believes that concentration on the bank’s balance sheet remains high, with investments in Pakistani government securities accounting for 34% of assets and over 7x CET 1 capital as of December 2014. Although improved, the Moody’s-adjusted CET 1 ratio stood at a modest 6.8% as of December 2014 (after assigning 100% risk weight to the bank’s holdings in Pakistan government securities).

— AFFIRMATION OF NATIONAL BANK OF PAKISTAN’S BCA

The affirmation of National Bank of Pakistan’s caa1 BCA reflects the continued asset-quality deterioration that the bank has been facing in the last two years, which offsets the improvement in capital and in the quality of its liquid assets.

The rating agency expects National Bank of Pakistan’s asset quality pressures to ease-off towards the end of the year, but notes that the bank’s asset-quality metrics are significantly worse than those of its peers. As of March 2015, the ratio of NPLs to gross loans increased to 18.3%, while the 80% ratio of loan loss reserves to NPLs lagged those of its domestic peers. Additionally, the bank’s credit costs are high, at about 1.7% of gross loans during Q1 2015, weighing on its profitability with a return on tangible banking assets of 1.1% as of December 2014. Although lower than its domestic peers, the bank also maintains high exposure to Pakistani government securities. As of December 2014, the bank’s investments in government securities accounted for 28% of assets and over 7x CET 1 capital.

The credit negatives mentioned above offset the improvement in the quality of the bank’s liquid assets and its Moody’s-adjusted capital levels, with the Moody’s-adjusted CET 1 ratio improving to 7.8% as of December 2014.

(3) GOVERNMENT SUPPORT

Moody’s rates Allied Bank, Habib Bank, MCB Bank and United Bank’s on a standalone basis at the same level as the government. Their deposit ratings do not benefit from support uplift, even though Moody’s also assumes a High or Very High probability of support. This is because the rating agency believes that the government’s capacity to support banks is limited at the B3 rating level.

The upgrade of National Bank of Pakistan’s deposit ratings to B3 from Caa1 reflects the government’s improved capacity to support the bank. Moody’s assumes a Very High probability of support for National Bank of Pakistan, given its majority 75% government ownership and its systemic importance (based on its 12% market share in deposits). As a result, the bank’s deposit ratings benefit from one notch of government-support uplift.

WHAT COULD CHANGE THE RATING UP/DOWN

The banks’ ratings could come under upward pressure as a result of further improvements in the operating environment and in the sovereign’s credit-risk profile. Moody’s could also upgrade National Bank of Pakistan’s standalone BCA following improvements in its asset-quality metrics.

All five banks’ ratings could come under pressure if credit losses significantly increase, weakening their capital levels, and/or if they experience outflows that weaken their funding and liquidity positions. A weakening in the government’s creditworthiness would also have negative rating implications, even though Moody’s does not consider it likely, given the recent upgrade with a stable outlook.

RATIONALE FOR THE CR ASSESSMENT

As part of today’s action, Moody’s has assigned long and short-term CR Assessments of B2(cr)/NP(cr) to Allied Bank, Habib Bank, MCB Bank and United Bank and B3(cr)/NP(cr) to National Bank of Pakistan.

CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than expected loss; and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank’s covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

The CR Assessment takes into account the issuer’s standalone strength as well as the likelihood of affiliate and government support in the event of need, reflecting the anticipated seniority of these obligations in the liabilities hierarchy. The CR Assessment also incorporates other steps authorities can take to preserve the key operations of a bank, should it enter a resolution.

For Pakistani banks, the CR Assessment is positioned one notch above the Adjusted BCA and therefore above the deposit ratings, reflecting Moody’s view that its probability of default is lower than that of deposits. Moody’s believe that senior obligations represented by the CR Assessment will be more likely preserved in order to limit contagion, minimize losses and avoid disruption of critical functions.

The CR Assessments do not benefit from any additional notches government support uplift. According to Moody’s methodology, CR Assessments are capped by the lower of: (1) the local-currency deposit ceiling, or (2a) the local government bond rating plus one notch or (2b) the local government bond rating plus two notches where the adjusted BCA itself is already above the local government bond rating. As a result CR Assessments of Pakistani banks are capped at the local government bond rating of B3 plus one notch, given that no bank has an adjusted BCA in excess of the government bond rating.

For National Bank of Pakistan, the bank’s CR Assessment of B3(cr) is aligned with the government bond rating and does not benefit from government-support uplift.

LIST OF AFFECTED RATINGS

Issuer: Allied Bank Ltd

…. Counterparty Risk Assessment, Assigned NP(cr)

…. Counterparty Risk Assessment, Assigned B2(cr)

….Adjusted Baseline Credit Assessment, Upgraded to b3 from caa1

….Baseline Credit Assessment, Upgraded to b3 from caa1

….Local-Currency Deposit Rating, Upgraded to B3 Stable from Caa1 Positive

….Foreign-Currency Deposit Rating, Upgraded to Caa1 from Caa2

….Short Term Deposit Ratings, Affirmed NP

….Outlook, Stable

Issuer: Habib Bank Ltd

…. Counterparty Risk Assessment, Assigned NP(cr)

…. Counterparty Risk Assessment, Assigned B2(cr)

….Adjusted Baseline Credit Assessment, Upgraded to b3 from caa1

….Baseline Credit Assessment, Upgraded to b3 from caa1

….Local-Currency Deposit Rating, Upgraded to B3 Stable from Caa1 Positive

….Foreign-Currency Deposit Rating, Upgraded to Caa1 from Caa2

….Short Term Deposit Rating, Affirmed NP

….Outlook, Stable

Issuer: MCB Bank Ltd

…. Counterparty Risk Assessment, Assigned NP(cr)

…. Counterparty Risk Assessment, Assigned B2(cr)

….Adjusted Baseline Credit Assessment, Upgraded to b3 from caa1

….Baseline Credit Assessment, Upgraded to b3 from caa1

….Local-Currency Deposit Rating, Upgraded to B3 Stable from Caa1 Positive

….Foreign-Currency Deposit Rating, Upgraded to Caa1 from Caa2

….Short Term Deposit Rating, Affirmed NP

….Outlook, Stable

Issuer: United Bank Ltd

…. Counterparty Risk Assessment, Assigned NP(cr)

…. Counterparty Risk Assessment, Assigned B2(cr)

….Adjusted Baseline Credit Assessment, Upgraded to b3 from caa1

….Baseline Credit Assessment, Upgraded to b3 from caa1

….Local-Currency Deposit Rating, Upgraded to B3 Stable from Caa1 Positive

….Foreign-Currency Deposit Rating, Upgraded to Caa1 from Caa2

….Short Term Deposit Rating, Affirmed NP

….Outlook, Stable

Issuer: National Bank of Pakistan

…. Counterparty Risk Assessment, Assigned NP(cr)

…. Counterparty Risk Assessment, Assigned B3(cr)

….Adjusted Baseline Credit Assessment, Affirmed caa1

….Baseline Credit Assessment, Affirmed caa1

….Local-Currency Deposit Rating, Upgraded to B3 Stable from Caa1 Positive

….Foreign-Currency Deposit Rating, Upgraded to Caa1 from Caa2

….Short Term Deposit Rating, Affirmed NP

….Outlook, Stable

The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings of rated entities United Bank Ltd., Habib Bank Ltd. and National Bank of Pakistan were initiated by Moody’s and were not requested by these rated entities.

Rated entities United Bank Ltd., Habib Bank Ltd. and National Bank of Pakistan or their agent(s) participated in the rating process. These rated entities or their agent(s), if any, provided Moody’s – access to the books, records and other relevant internal documents of the rated entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.