ISLAMABAD: Moody’s, a global credit rating agency, has upgraded Pakistan’s banking sector outlook from stable to positive, citing improved financial performance and economic recovery from last year’s downturn.
The agency attributed the change to stronger financial performance and a recovery in macroeconomic conditions from last year’s downturn.
“We have changed our outlook on Pakistan’s banking system to positive from stable to reflect the banks’ resilient financial performance as well as improving macroeconomic conditions from very weak levels a year ago,” it said in the latest report.
“The positive outlook on the sector also mirrors the Government of Pakistan’s (Caa2 positive) positive outlook, with Pakistani banks having significant exposure to the sovereign through their large holdings of government securities, which account for around half of total banking assets.
“However, Pakistan’s long-term debt sustainability remains a key risk, with its still very weak fiscal position, high liquidity, and external vulnerability risks,” it noted.
The credit rating agency said it expects “the Pakistani economy to expand by 3% in 2025, compared with 2.5% in 2024 and -0.2% in 2023”.
“Inflation is also significantly easing, which we estimated at around 8% for 2025 from an average of 23% in 2024,” it added.
Moody’s stated that the formation of problem loans will slow as borrowing costs and inflation decrease, although net interest margins will narrow due to interest rate cuts.
“Banks will maintain adequate capital buffers, supported by subdued loan growth and solid cash generation, despite dividend payouts remaining high.”
Moody’s said that the outlook was changed to positive from stable on account of a better operating environment.
“Pakistan’s economic outlook is improving from very weak levels, with enhanced government liquidity and external positions compared to 2024.”
“We forecast GDP growth of 3% in 2025 and 4% in 2026, up from 2.5% in 2024, further driven by a 10-percentage point cut in interest rates since the start of the monetary policy easing cycle in June 2024.”
“We expect inflation to slow sharply to around 8% in 2025, from an average of 23.4% in 2024. We expect that lower inflation and policy rate cuts will spur private-sector spending and investment in Pakistan from current low levels.”
In its report, the rating agency said that high exposure to government securities raises asset risk.
“As of September 2024, government securities accounted for 55% of banks’ total assets. This significant exposure links banks’ credit strength to that of the sovereign, which is improving from very weak levels.
“Although problem loans have deteriorated to 8.4% of total loans as of September 2024 from 7.6% in the prior year, overall loans account for only 23% of banks’ total assets,” it said.
Moody’s said that following recent interest rate cuts that have reduced the policy rate to 12%, margins will narrow as Pakistani banks derive the bulk of their earnings from the interest they receive on large investments in government securities, which are yielding lower returns compared with last year.
In November last year, Moody’s said interest costs in Pakistan will account for close to 40% of total spending in 2025, up from around a quarter in 2021.
