Moody’s Changes Pakistan Banking Sector Outlook

On Thursday, Moody’s Investors Service modified its assessment of Pakistan’s banking sector, shifting the outlook from “negative” to “stable.” The change was attributed to the sector’s robust profitability, steady funding, and liquidity, providing a sufficient buffer against the country’s macroeconomic challenges and political uncertainties.

Moody’s highlighted that the banking sector’s resilience stems from solid financial performance, stable funding, and liquidity, which collectively equip it to navigate economic challenges and political unrest. The rating agency expressed optimism about the country’s economic prospects, anticipating a return to 2% growth in 2024 following subdued activity in 2023. Additionally, Moody’s predicted a decrease in inflation from 29% to 23%.

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Despite these positive indicators, the report underscored the banking sector’s significant exposure to the government, with large holdings of government securities constituting approximately half of total banking assets. This linkage to the sovereign’s credit strength remains a key consideration.

While acknowledging ongoing economic challenges, including high-interest rates and inflation, the report emphasized the banking sector’s role in financing the government’s fiscal deficits, limiting its capacity to lend to the real economy. Initiatives aimed at enhancing financial inclusion and supporting key sectors were identified as only partial solutions to boosting credit demand.

Moody’s highlighted the banking sector’s asset risk, primarily tied to extensive exposure to government securities, which account for 51% of total assets. The report anticipated problem loans to stabilize at around 9% of gross loans due to banks’ cautious lending practices amid challenging economic conditions.

The report concluded that capital levels are expected to remain generally stable, with subdued growth and solid earnings offsetting dividend payouts. Moody’s indicated that profitability might gradually decline to normalized levels, with interest revenue moderating in 2024 as monetary policy eases and inflation rates recede from 2023 peaks.

Stable funding and liquidity were identified as key strengths for Pakistan, supported by increasing financial inclusion and remittances contributing to domestic deposit inflows. Overall, Moody’s revised outlook reflects a cautious optimism for Pakistan’s banking sector amid the evolving economic landscape.