Moody’s upgrades Pakistani banking sector outlook to stable despite economic challenges

KARACHI: A leading global credit rating, research and risk analysis firm on Thursday upgraded the outlook of the banking sector in Pakistan, saying they were strong enough to withstand political and economic challenges in the country.
Moody’s Investors Service periodically issues assessment reports to help its clients protect themselves against economic and financial risks.
Its recent banking sector report on Pakistan improves the outlook from negative to stable.
“The banks’ solid profitability and stable funding and liquidity provide an adequate buffer to withstand the country’s macroeconomic challenges and political turmoil,” it said. “Economic and fiscal pressures are easing, and we forecast the Pakistani economy will return to modest growth of 2 percent in 2024 after subdued activity in 2023, and inflation to fall to around 23 percent from 29 percent last year.”
However, Moody’s noted that Pakistani banks were highly exposed to the government via large holdings of its 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 continued. “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.”
The assessment said Moody’s expected the 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,” it added.

Moody’s upgrades Pakistani banking sector outlook to stable despite economic challenges