Moody’s Investors Service revised its perspective on Pakistan’s banking sector to stable from negative. The update is attributed to strong profitability, consistent funding, and liquidity which serve as a cushion against the nation’s economic and political challenges.
The agency anticipates the country’s economy will grow by 2% in 2024 following a period of lower activity in 2023, with inflation expected to decrease from 29% to 23%.
Despite the positive outlook, Pakistani banks’ significant exposure to government securities, constituting about half of their total assets, links their creditworthiness closely to the national government’s financial health.
The economic backdrop remains challenging with high government liquidity risk and external vulnerabilities. Yet, the aftermath of the 2022 floods and low base effects are likely to foster a modest economic revival. Nonetheless, elevated interest rates and inflation are projected to limit private-sector spending and investment.
The banking sector faces asset risk due to substantial government securities holdings, making up 51% of total assets. Problem loans are forecasted to stabilize at around 9% of gross loans, due in part to cautious lending practices.
Bank capital is expected to remain stable, with reported Tier 1 capital ratios indicating robustness well above regulatory requirements. However, profitability is predicted to normalize in 2024, with interest income and non-interest income remaining subdued. Operating expenses should stabilize, benefiting from easing inflation and cost-control measures.
The sector benefits from stable funding and liquidity, with an increase in domestic deposits aided by financial inclusion efforts and remittances. The reliance on deposit funding is high, with a gradual shift observed towards interest-bearing deposits due to rising interest rates.
While the outlook for Pakistan’s banking sector improves, Moody’s has downgraded its outlook for the banking sectors of several European countries, citing deteriorating economic conditions and higher borrowing costs affecting credit growth and loan performance.
