Moody’s Investors Service upgraded Pakistan’s banking sector outlook from “negative” to “stable,” highlighting strong profitability, stable funding, and liquidity. This resilience is seen as crucial amid macroeconomic challenges and political uncertainties.
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The international rating agency forecasts a 2% economic growth rate for Pakistan in 2024, following subdued activity in 2023, with an expected decline in inflation from 29% to 23%.
However, Pakistani banks’ heavy exposure to government securities—making up around half of total banking assets—ties their credit strength closely to the sovereign’s performance.
While the banking sector faces challenges like high government liquidity risk and external vulnerability, recovery efforts from past disasters are anticipated to support modest economic growth.
Despite initiatives to promote financial inclusion and aid key sectors, banks are primarily financing the government’s fiscal deficits, limiting lending to the real economy.
Asset risks in the banking sector are elevated due to significant exposure to government securities, with problem loans expected to stabilize around 9% of gross loans.
Capital remains stable with a reported Tier 1 capital ratio of 15.3% of risk-weighted assets, comfortably above regulatory requirements. However, the tangible common equity ratio is relatively low due to the high risk weighting for government securities.
Profitability is expected to gradually decline to normalized levels, with interest revenue moderating and operating expenses stabilizing alongside easing inflation.
Stable funding and liquidity are seen as strengths for Pakistan’s banking sector, supported by increasing financial inclusion and remittances.
Despite the positive outlook for Pakistan’s banking sector, Moody’s downgraded the outlook for several European countries’ banking sectors, citing a deteriorating operating environment with low economic growth and high borrowing costs.
