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Thursday, May 23, 2024

Moody’s Upgrades Pakistan’s Banking Sector Outlook

Moody's upgrades Pakistan's banking sector outlook to 'stable', citing improved macroeconomic conditions and fiscal pressures, with resilient profitability and stable funding.

Moody’s Investors Service (Moody’s) has revised the outlook of Pakistan’s banking sector, shifting from ‘negative’ to ‘stable,’ citing improvements in macroeconomic conditions and fiscal pressures. The agency highlighted the resilience of banks amidst challenges, emphasizing their solid profitability and stable funding, which serve as a robust buffer against economic uncertainties.

According to Moody’s, the forecast indicates a modest growth rate of 2% for Pakistan’s economy in 2024, accompanied by a projected decrease in inflation from 29% to approximately 23% compared to the previous year. However, challenges persist, with high-interest rates and inflation continuing to restrain private-sector spending and investment.

Challenges and Resilience

Despite the forecasted growth, Moody’s points out that Pakistani banks are primarily financing the government’s fiscal deficits, limiting their capacity to lend to the real economy. While initiatives to promote financial inclusion and support key sectors may boost credit demand partially, overall lending remains constrained.

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The report underscores the significant exposure of Pakistani banks to the government through substantial holdings of government securities, constituting approximately half of total banking assets. This close linkage exposes their credit strength to sovereign risk, posing potential challenges.

Profitability and Stability

Despite challenges, Moody’s expects the banking sector’s profitability to remain strong, supported by wide net interest margins. However, profitability may decline from the peaks of 2023 due to subdued business growth, increased funding costs, and elevated taxes.

Moody’s indicated the importance of stable deposit-based funding in supporting financial stability within the banking sector. Additionally, the agency expects Pakistani banks’ modest capital ratios to remain stable, buoyed by strong earnings despite high dividend payouts.

Moody’s emphasized the need for continued vigilance and proactive measures to mitigate external pressures and enhance liquidity resilience. The agency highlighted the importance of stable capital ratios and robust funding structures to navigate evolving economic challenges effectively.

The top five largest banks in Pakistan, including the National Bank of Pakistan (NBP), HBL, UBL, MCB, and Allied Bank Limited, received a baseline credit assessment of Caa3 from Moody’s. As Pakistan moves forward, addressing these challenges while leveraging strengths will be essential to sustain banking sector resilience and support economic growth.