ISLAMABAD: Moody’s Ratings on Tuesday upgraded to Caa1 from Caa2 the local and foreign-currency long-term deposit ratings of five leading Pakistani banks, following its decision to raise the country’s sovereign rating.

The upgraded banks include Allied Bank Limited (ABL), Habib Bank Ltd (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP) and United Bank Ltd (UBL). “We have 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 rating agency said, adding that the outlook on the long-term deposit ratings of all banks had been revised to stable from positive.

Moody’s said the upgrades reflected Pakistan’s improving operating environment, the government’s enhanced capacity to support banks if required, and the banks’ own resilient financial performance.

It said improvements in Pakistan’s external position were contributing to a more stable macroeconomic environment, benefiting banks that are heavily exposed to the sovereign through large holdings of government securities — accounting for around half of total banking assets — as well as through their local operations and exposure to corporates, businesses and retail customers.

Pakistani banks are also showing resilient performance, supported by a stable deposit-based funding profile, high liquidity buffers, and solid earnings capacity. The decline in inflation from 30.8 per cent in 2023 to 12.6pc in 2024, along with the State Bank of Pakistan’s series of rate cuts — from the peak of 22pc in May 2024 to 11pc in May 2025 — will also help reduce problem loans, lower borrowing costs, and boost credit demand, particularly in the SME and consumer segments.

However, Moody’s noted that profitability could come under pressure due to compressed net interest margins from rate cuts, while asset risks remain elevated as operating conditions are still fragile, given the government’s high liquidity and external vulnerability risks.

It said the stable outlook on all banks’ long-term deposit ratings was consistent with Pakistan’s sovereign outlook and also reflected solid loan-loss provisions and capital buffers. The stable outlook also signalled continued improvement in the operating environment, supported by disinflation, moderating profitability, and adequate liquidity, although a significant share remains tied up in encumbered government securities.

Moody’s said Pakistani banks’ ratings could be upgraded further if there is a material strengthening in the operating environment and the government’s credit profile, along with sustained resilient bank performance. Conversely, ratings could be downgraded if Pakistan’s sovereign rating of Caa1 is cut, or if banks’ asset quality, profitability or capital adequacy deteriorate, it concluded.

Published in Dawn, August 20th, 2025