Moody's reviews HBL, UBL Ba2 for downgrade

[Naveed Yaseen]

LIMASSOL (May 29 2009): Moody's Investors Service has Thursday placed on review for possible downgrade the Ba2 global local currency (GLC) deposit ratings of Habib Bank Ltd and United Bank Ltd in light of its global review of systemic support indicators for the banking systems. Moody's previously used the local currency deposit ceiling (LCDC) as the main input for its assessment of the ability of a national government to support its banks.

Although anchoring the probability of support at the LCDC is appropriate in many circumstances - regarding the provision of liquidity to a selected number of institutions over a short period of time - this might overestimate the capacity of a central bank to support financial institutions in the event of a banking crisis becoming both truly systemic and protracted. This approach is outlined in the Special Comment entitled "Financial Crisis More Closely Aligns Bank Credit Risk and Government Ratings in Non-Aaa Countries", which was published in May 2009.

The review of the local currency deposit ratings will look at the extent to which Pakistan's ability to provide support to its banking system, if needed, is converging with the government's own debt capacity as a result of the ongoing global economic and credit crisis. Moody's will refine its assessment of systemic support available from the Pakistani state to capture the impact of the erosion of the local economy's underlying credit fundamentals and the reduced fiscal policy flexibility on the government's ability to support the banking sector.

Factors that Moody's will consider in its assessment of systemic support include the size of the banking system in relation to government resources, the level of stress in the banking system, the foreign currency obligations of the banking system relative to the government's own foreign exchange resources and changes to the government's political patterns.

Moody's took the following rating actions:

(i) Habib Bank's Ba2/NP GLC deposit ratings were placed on review for downgrade. The D- BFSR (mapping to a Ba3 BCA) remains unchanged with a stable outlook. The B3/NP foreign currency deposit ratings (constrained by the foreign currency deposit sovereign ceiling) are also unchanged, with a negative outlook.

(ii) United Bank's Ba2/NP GLC deposit ratings were placed on review for downgrade. The D- BFSR (Ba3 BCA) remains unchanged with a stable outlook. The B3/NP foreign currency deposit ratings (constrained by the foreign currency deposit sovereign ceiling) are also unchanged, with a negative outlook.

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