Key Points
- Moody’s revises Pakistan’s banking sector outlook to stable
- Real GDP growth projected at about 3.5% in 2026
- Banking profits expected to remain steady despite asset quality pressures
- Strong capital buffers and rising credit demand support sector stability
ISLAMABAD: Global credit rating agency Moody’s has revised Pakistan’s banking sector outlook to stable, citing a gradual economic recovery, improving fiscal indicators, and a strengthening external position.
In its latest assessment issued on Monday, Moody’s stated the operating environment for banks is recovering at a measured pace, supported by easing inflation, improved confidence, and ongoing economic reforms. The outlook change aligns with the sovereign outlook for Pakistan, reflecting banks’ significant exposure to government securities, which make up around half of total banking assets.
“We have changed our outlook on Pakistan’s banking system to stable from positive,” Moody’s said, noting that banks are expected to maintain stable financial performance over the next 12 to 18 months despite ongoing challenges related to asset quality and profitability.
Moody’s forecasts Pakistan’s real gross domestic product growth at around 3.5% in 2026, an improvement from an estimated 3.1per cent in 2025. The agency attributed the outlook to reforms that are gradually strengthening economic activity and restoring confidence.
Inflation eased sharply to about 4.5 per cent in 2025 after reaching elevated levels the previous year. Moody’s expects inflation to rise moderately to around 7.5 per cent in 2026, partly due to base effects.
The decline in inflation has contributed to lower policy interest rates in supporting credit demand across the economy.
Lower borrowing costs are expected to encourage lending and help keep problem loan ratios broadly stable. Moody’s stated that margins may remain under pressure following interest rate cuts, but still higher business volumes, stable costs, and non-interest income should support profitability and protect capital buffers.
The agency noted that non-performing loan ratios rose earlier in 2025, after changes to tax policy led banks to reduce lending. Loans accounted for about 23 per cent of total banking assets as of September 2025. Credit growth is expected to return to double-digit levels in 2026 as macroeconomic conditions improve.
Moody’s also highlighted sector-specific risks, particularly in agriculture and energy, where borrower stress is likely to persist. Recent floods may dampen agricultural output, though industrial and services activity is expected to remain resilient.
Pakistan’s banking sector remains well capitalised. As of September 2025, tier-1 capital stood at 18 per cent and total capital at 22.1 per cent of risk-weighted assets, comfortably above regulatory requirements. Continued investment in government securities, which carry no risk weighting, is expected to support capital strength.
Despite higher dividend payouts, retained earnings should be sufficient to fund balance sheet growth and maintain strong capital ratios, while reinforcing overall sector stability, the agency maintained.
