Moody's Investors Service Thursday downgraded ?the global local currency (GLC) deposit ratings of Habib Bank Ltd and ?United Bank Ltd to Ba3/NP from Ba2/NP in light of its global review of ?systemic support indicators for banking systems, thus concluding the ?review for possible downgrade of the ratings initiated on May 28, 2009.?? Earlier this month, Moody's published a Special Comment on its global?review of the capacity of governments and central banks to support their?banking systems entitled: “Financial Crisis More Closely Aligns Bank ?Credit Risk and Government Ratings in Non-Aaa Countries”, available on ?moodys.com.?? Consistent with the analytical criteria specified in the Special Comment?and given Pakistan's current situation and future prospects, Moody's has ?changed the systemic support input for Pakistani banks' ratings to B2 ?from the Ba2 local currency deposit ceiling (LCDC). The new B2 systemic ?support anchor for Pakistani banks is one notch above the B3 local ?currency government debt rating. Accordingly, the ratings of Habib Bank ?and United Bank, which had previously received a one-notch uplift from ?their respective Ba3 baseline credit assessments (BCAs) as a result of ?such support, have been affected. National Bank of Pakistan and MCB Bank ?Ltd have not been affected, despite Moody's assessment of a high ?probability of systemic support, since their Ba2 BCAs are at the same level as the Ba2 LCDC.? ?In the Special Comment, Moody's noted that the appropriate reference?rating for the capacity of a national government to provide support to?banks in a prolonged and widespread crisis would be aligned with or ?constrained by the government's own debt rating. However, Moody's also?believes that this rating could be adjusted, usually positively, to ?reflect the non-fiscally-dependent measures that many central banks and ?governments can deploy to support banks.??In deciding whether the local currency-denominated deposits of a bank can ?be rated higher than the local currency-denominated debt issued by the ?national government due to systemic support, Moody's considers a number ?of factors for each banking system. These are: the size of the banking ?sector relative to the government's resources; the level of stress in the ?banking system and in the economy; the foreign currency obligations of ?the banking system relative to the government's own foreign currency ?resources; political and historical patterns; and the possibility of any ?drastic shift in government priorities.?? Moody's regards the Pakistani banking system as having a dominant role in ?the country's financial market (despite the moderate ratio of banking ?system assets as a percentage of GDP). Moreover, the proportion of ?remittances that are channelled through formal banking channels has ?increased significantly over the past few years due to the crackdown on ?unofficial money transfers.?? The level of stress in the banking system and the economy has increased?during the worldwide recession and the sovereign position has ?deteriorated, as reflected by Moody's change in the credit outlook to ?negative from stable in Dec. 2008, indicating the likely weakening of ?the economic and credit environment. Security threats are also a ?challenge to the country's stability, particularly from militants inside?Pakistan.??Moody's expects slower economic growth in Pakistan to lead to ?deterioration in the credit environment, with adverse asset quality and ?profitability implications for the rated banks. Despite an improving ?trend over the past few years, asset quality has traditionally been a ?problem for the rated banks, weighing on their balance sheets and ?restricting rating upgrades. Furthermore, the expected slowdown in ?profitability, in conjunction with possible further market-to-market losses ?from the investment portfolio, could adversely affect the banks'?currently adequate capital levels.??
