Moody's upgrades Pakistan's banking sector outlook to stable from negative

Source: The Nation

ISLAMABAD - Moody's Investors Service (Moody's) on Thursday up­graded the outlook of Pakistan's banking sector to 'stable' from 'negative' as macro challenges and fiscal pressures ease.

"The banks' solid profitability and stable funding and liquidity provide an adequate buffer to withstand the country's macro­economic challenges and politi­cal turmoil," the international rating agency noted.

"We forecast the Pakistani economy will return to modest growth of 2% in 2024 after sub­dued activity in 2023, and infla­tion to fall to around 23% from 29% last year," it said.

"However, high interest rates and inflation will continue to curb private-sector spending and investment. Furthermore, banks are financing the sov­ereign's wide fiscal deficits, leaving little space to lend to the real economy. Initiatives to deepen financial inclusion and assistance for key sectors will only partly support credit de­mand," it said. Moody's noted that Pakistani banks remain highly exposed to the govern­ment via large holdings of gov­ernment securities that amount to around half of total banking assets, which links their credit strength to that of the sovereign.

"Persistent external pres­sures against a challenging operating backdrop will weigh slightly on the performance of Pakistani banks' loan portfo­lios," it added. The credit rat­ing agency forecasted that the banking sector's profitabil­ity will remain strong because of wide net interest margins (NIMs), but decline from 2023 peaks because of subdued busi­ness growth, increased fund­ing costs on the back of higher rates, and elevated taxes.

"Operating expenses will likely stabilise in line with eas­ing inflation and banks' cost-control efforts. Persistently el­evated tax rates and potentially higher loan-loss provisions will weigh on banks' bottom-line profitability, with the return on average assets hovering around 3%," said Moody's.

The rating agency expects Pakistani banks' modest capi­tal ratios to remain stable, as strong earnings offset high dividend payouts. "Banks' sta­ble deposit-based funding will continue to support financial stability." Moody's gives a base­line credit assessment of Caa3 to the top five largest banks in Pakistan i.e. National Bank of Pakistan (NBP), HBL, UBL, MCB and Allied Bank Limited.