Moody’s Upgrades Outlook of Pakistan’s Banking Sector to Stable

Moody’s Investors Service (Moody’s) has upgraded the outlook of Pakistan’s banking sector to ‘stable’ from negative, citing easing macro challenges and fiscal pressures.

According to the report, the banks’ solid profitability and stable funding and liquidity provide an adequate buffer to withstand the country’s macroeconomic challenges and political turmoil.

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Moody’s forecasts modest growth of 2% for the Pakistani economy in 2024, following subdued activity in 2023, with inflation expected to decrease to around 23% from 29% last year.

However, high interest rates and inflation are expected to continue curbing private-sector spending and investment, with banks primarily financing the sovereign’s wide fiscal deficits, leaving limited space for lending to the real economy.

The report notes that Pakistani banks remain highly exposed to the government via large holdings of government securities, which account for around half of total banking assets, linking their credit strength to that of the sovereign.

Moody’s expects the banking sector’s profitability to remain strong due to wide net interest margins (NIMs), but to decline from 2023 peaks due to subdued business growth, increased funding costs, and elevated taxes.

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While operating expenses are likely to stabilize in line with easing inflation and cost-control efforts, persistently high tax rates and potentially higher loan-loss provisions may weigh on banks’ bottom-line profitability.

Moody’s also anticipates Pakistani banks’ modest capital ratios to remain stable, supported by strong earnings offsetting high dividend payouts, with stable deposit-based funding continuing to support financial stability.

The top five largest banks in Pakistan, including National Bank of Pakistan (NBP), HBL, UBL, MCB, and Allied Bank Limited, receive a baseline credit assessment of Caa3 from Moody’s.