Credit Growth in Pakistan’s Banking Sector to Slow Down as NPLs Rise: Fitch

Fitch Solutions, in its latest report, has said that the rapid pace of credit growth in the banking sector is expected to slow down in coming months as the effect of central bank’s tightening control in 2018 begins to trickle in.

The research agency has projected loan growth at 13% in 2018, down from a forecast of 15% in 2018.

“Together with higher oil prices, this could create a downward cycle of lower loan growth, weaker asset quality, and reduced profitability and capitalization,” said the report.

It has maintained its outlook for the broad economy and the industries within Pakistan to deteriorate over coming quarters.

“There will likely be a delayed negative effect as the government continues to postpone much-needed fiscal austerity and economic rebalancing with unconventional methods,” says the report.

Nevertheless, credit growth is set to slow over the coming months as the effect of the SBP’s monetary tightening begins to feed through.

The research agency believes the country’s external woes aren’t over yet and financial assistance in some shape should help avert a destabilizing currency collapse and an outright recession in the near-term.

It said this would potentially contribute to an increase in NPL as corporate profitability shrinks, especially in the import-dependent sectors.

According to Fitch Solutions, headline metrics across the country’s banking sector continue to look solid, however, it was pushing back their expectations for a decline in profitability and asset quality.

It said the current Pakistan Tehreek-e-Insaf (PTI) government is continuing seeking unconventional sources of funding to avoid a balance of payment crisis.

It added this would normally need a sharp fall in imports and be accompanied by a slowdown in economic activity.

“However, that is just kicking the can down the road in our view, which would create larger economic distortions and greater pain in the future,” noted the research agency.

Meanwhile, Finance Minister Asad Umar announced on January 13 that Pakistan will not approach the IMF for a new bailout package and is considering alternative options to tide over its economic crisis.

Fitch Solutions said this suggests that the government continues to have little appetite for austerity and necessary economic reforms, which would prolong the current upcycle.

The worst-case scenario of a balance of payment crisis appears likely to be avoided in the near-term with foreign bilateral assistance.

“Islamabad has secured $3 billion in foreign loans from the UAE and is eyeing further assistance in the form of deferred oil payments,” said the report.

Moreover, it highlighted the government had procured an additional $2 billion from Beijing, although the details of the agreement remain murky, it looks to be a part of the larger China-Pakistan Economic Corridor (CPEC) framework.

“It seems likely that the latest round of Chinese largesse has given Islamabad the confidence to snub the IMF’s more stringent requirements for obtaining funds. However, should Pakistan experience acute signs of a currency crisis over the coming months, we would not be surprised to see talks between Pakistan and the IMF resume,” said Fitch Solutions.

Fitch Solutions said the banking sector appears to be in a sweet spot for now, since loan growth to the private sector continued to surge in November, touching a fresh multi-year high of 21.4% year-on-year (YoY).

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