Moody's upgrades Pakistan's banking sector outlook to
"stable”
Moody's has revised Pakistan's banking sector outlook to
"stable," citing solid profitability, stable funding, and liquidity
among banks, providing a robust defense against macroeconomic challenges,
according to a report by The News.
The credit rating agency emphasized the resilience of
Pakistani banks amid political turmoil and challenging operating conditions.
Despite persistent external pressures, the report highlighted the banks'
capacity to withstand macroeconomic challenges due to their strong
profitability and stable funding and liquidity.
Moody’s
downgrades long-term ratings of five Pakistani banks
Moody's anticipates a return to modest economic growth of 2%
in 2024, following subdued activity in the previous year. Additionally,
inflation is expected to decrease to around 23% from 29% the previous year.
However, the report noted that Pakistani banks remain
significantly exposed to the government through substantial holdings of
government securities, constituting approximately half of total banking assets.
This exposure links their credit strength closely to that of the sovereign.
While profitability is expected to remain strong, Moody's
predicts a slight decline from peak levels observed in 2023 due to subdued
business growth, increased funding costs, and elevated taxes.
Despite these challenges, Moody's expects the banks' modest
capital ratios to remain stable, supported by strong earnings offsetting high
dividend payouts. Stable deposit-based funding is also projected to continue
supporting financial stability.
Pakistani
banks witness record Rs163 billion profit in third quarter of 2023
Nevertheless, high-interest rates and inflation are likely
to constrain private-sector spending and investment. Moreover, banks' financing
of the government's fiscal deficits may limit lending to the real economy.
The report highlighted a rise in the problem loan ratio of
Pakistani banks, reaching 8.5% as of September 2023, up from 7.3% in December
2022. Moody's expects problem loans to stabilize at around 9% of gross loans,
partly due to banks' cautious lending stance.
Central
Bank assesses performance of banks in mid-year assessment
Overall, Moody's underscored stable funding and liquidity as
strengths for Pakistani banks, with deepening financial inclusion and
remittances from non-resident Pakistanis contributing to domestic deposit
inflows. However, rising funding costs pose a moderate challenge, driven by
shifts from non-interest-bearing to interest-bearing deposits.
Despite the introduction of a Treasury Single Account and
encumbered government securities holdings, banks maintain sufficient liquidity
buffers, with limited reliance on dollar funding and generally matched currency
positions.
Source: Geo TV