Moody’s Investors Service (Moody’s) has changed its outlook on the banking sector of Pakistan (Caa3 stable) to stable from negative.
Moody’s said that the banks’ solid profitability and stable funding and liquidity provide an adequate buffer to withstand the country’s macroeconomic challenges and political turmoil.
It further said that economic and fiscal pressures are easing, and it forecasts the Pakistani economy will return to modest growth of 2% in 2024 after subdued activity in 2023, and inflation to fall to around 23 percent from 29 percent last year.
Pakistani banks remain highly exposed to the government via large holdings of government securities that amount to around half of total banking assets, which links their credit strength to that of the sovereign, it added.
Persistent external pressures against a challenging operating backdrop will weigh slightly on the performance of Pakistani banks’ loan portfolios. Profitability will remain strong because of wide net interest margins (NIMs), but decline from 2023 peaks because of subdued business growth, increased funding costs on the back of higher rates, and elevated taxes.
“We expect the banks’ modest capital ratios to remain stable, as strong earnings offset high dividend payouts. Banks’ stable deposit-based funding will continue to support financial stability,” it added.
