In a noteworthy development for Pakistan’s economy, Moody’s Investors Service (Moody’s) has revised its outlook on the country’s banking sector to ‘stable’ from ‘negative’. This upgrade is a testament to the easing of macroeconomic challenges and fiscal pressures that have previously burdened the sector.

FOUNDATION OF STABILITY: PROFITABILITY AND LIQUIDITY

The driving forces behind this optimistic shift are the banks’ robust profitability, along with stable funding and liquidity. These factors collectively form a resilient buffer against the macroeconomic difficulties and political unrest faced by the country. Moody’s highlights the banking sector’s capability to navigate through these tumultuous times without wavering in performance.

ECONOMIC GROWTH AND INFLATION PROJECTIONS

Looking ahead, Moody’s projects a return to modest economic growth for Pakistan, anticipating a 2% increase in 2024 following a period of subdued activity this year. Additionally, the forecast suggests a significant reduction in inflation rates, dropping to approximately 23% from the previous 29%. This anticipated decrease in inflation, however, will not immediately resolve the challenges of high interest rates and inflation that restrict private-sector expenditure and investments.

FINANCIAL INCLUSION AND CREDIT DEMAND

The report acknowledges the constraints on lending to the real economy due to banks financing the government’s extensive fiscal deficits. Despite initiatives aimed at deepening financial inclusion and providing assistance to key sectors, Moody’s expects these measures to only partially bolster credit demand.

GOVERNMENT SECURITIES AND BANKS’ CREDIT STRENGTH

A noteworthy point of concern is the significant exposure of Pakistani banks to the government, with a substantial portion of their assets tied up in government securities. This connection implies that the banks’ credit strengths are closely intertwined with the sovereign’s financial health.

LOAN PORTFOLIO PERFORMANCE AND PROFITABILITY OUTLOOK

Moody’s anticipates a slight impact on the performance of Pakistani banks’ loan portfolios due to ongoing external pressures. Despite expecting a strong profitability from wide net interest margins (NIMs), a slight decline is predicted due to several factors, including subdued business growth and increasing funding costs.

BANKS’ FINANCIAL STABILITY AND CAPITAL RATIOS

The report concludes with a positive outlook on the banks’ financial stability, supported by stable deposit-based funding. Additionally, Moody’s projects that the modest capital ratios of the top five largest banks in Pakistan will remain stable, balancing strong earnings against high dividend payouts.

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