Pakistan’s banking sector outlook is upgraded by Moody’s from “negative” to “stable”

Moody Investors Service improved Pakistan’s banking sector outlook from “negative” to “stable,” noting a reduction in macroeconomic problems and strain on the country’s budget.

The agency emphasized in its assessment that banks’ strong profitability and steady funding served as a safeguard against the nation’s political unpredictability and macroeconomic difficulties.

According to the estimate, Pakistan’s GDP would grow by a moderate 2% in 2024, while inflation is expected to drop from 29% to around 23% from the previous year. It did, however, issue a warning that inflation and high interest rates would still impede investment and expenditure by the private sector.

Moody’s claims that Pakistani banks are mostly funding the government’s budgetary deficits, which restricts their ability to lend to the actual economy. Initiatives to help important industries and advance financial inclusion should somewhat increase loan demand, but overall lending conditions are still tight.

Moody’s observed that Pakistani banks own substantial amounts of government securities, which make up around half of all banking assets, indicating their high level of exposure to the government. Their credit strength is exposed to that of the sovereign due to this relationship.

The rating agency also pointed out that the performance of the loan portfolios of Pakistani banks can be somewhat impacted by outside influences in addition to a difficult operating environment.

Moody’s anticipates that the banking industry will continue to be profitable despite these obstacles because to high net interest margins. However, because of the muted company growth, higher finance expenses, and higher taxes, profitability may drop from 2023 peaks.

According to Moody’s, if Pakistan’s government is effective in reducing external and liquidity issues, its rating may be raised. It anticipates that despite large dividend distributions, Pakistani banks’ capital ratios would stay steady due to their robust profitability.

Moody’s assigned a baseline credit assessment of Caa3 to the top five banks in Pakistan, which are the Allied Bank Limited, HBL, UBL, MCB, and the National Bank of Pakistan (NBP). The organization emphasized how crucial steady deposit-based funding is to maintaining the banking industry’s financial stability.