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.
