Moody’s Revises Pakistan Banking Sector Outlook to Stable

Moody’s Investors Service on Monday revised Pakistan’s banking sector outlook to stable from positive, citing a slow but steady economic recovery and improvements in the country’s fiscal and external positions.

The global rating agency noted that while the operating environment is gradually improving, banks continue to face asset quality and profitability challenges. The sector’s outlook aligns with that of the Government of Pakistan (Caa1 stable), given that government securities make up roughly half of total banking assets, Moody’s said.

“Although the operating environment continues to recover, banks’ financial performance will be stable over the next 12–18 months,” the agency said. It flagged Pakistan’s long-term debt sustainability as uncertain due to a weak fiscal position and lingering liquidity and external vulnerabilities.

Moody’s forecasts Pakistan’s real GDP growth at around 3.5% in 2026, up from 3.1% in 2025, driven by ongoing reforms that are gradually strengthening economic activity. Headline inflation, which fell to 4.5% in 2025 from 23% in 2024, is expected to rise to about 7.5% in 2026, partly due to base effects.

The report said easing monetary policy and lower borrowing costs will support credit growth, keep problem loan ratios broadly stable at around 8%, and safeguard capital buffers, despite persistent delinquencies in vulnerable sectors such as agriculture and energy.

Moody’s highlighted that Tier 1 and total capital to risk-weighted assets (RWA) ratios stood at 18% and 22.1% as of September 2025, up from 17% and 21.5% a year earlier, well above regulatory minimums. Banks are expected to continue holding government securities and maintain high dividend payouts, while retained earnings should remain sufficient to fund balance sheet growth.

The agency also noted that recent floods may weigh on agricultural output, but industrial and services sector activity is expected to remain robust.