Moody’s upgrades Pakistan’s banking sector outlook from ‘negative’ to ‘stable’

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Moody's upgrades Pakistan’s banking sector outlook from ‘negative’ to ‘stable’

Moody’s Investors Service improved Pakistan’s banking sector outlook from “negative” to “stable,” citing a decrease in financial issues and pressure on the country’s budget.

The agency emphasized in its assessment that banks’ strong profitability and steady funding served as a safeguard against the nation’s political unpredictability and macroeconomic difficulties.

According to the estimate, Pakistan’s GDP will grow by a moderate 2% in 2024, while inflation is expected to drop from 29% to roughly 23% from the previous year.

 It did, however, issue a warning that inflation and high interest rates would still hinder investment and expenditure by the private sector.
Moody says that Pakistani banks mostly fund the government’s financial deficits, which restricts their capacity to lend to the economy.

The overall lending situation is still restricted even though programs that promote financial inclusion and assist important industries may partially boost demand for credit.

Moody’s observed that Pakistani banks hold significant quantities of government securities, which make up around half of all banking assets, suggesting their high level of exposure to the government. This relationship exposes Their credit strength to that of the sovereign.

The rating agency also pointed out that the performance of the loan portfolios in Pakistani banks can be somewhat impacted by outside influences and a difficult operating environment.

Moody’s predicts that the banking sector is going to continue to be profitable despite these obstacles thanks to high net interest margins. However, because of the muted business growth, higher funding expenses, and higher taxes, profitability may drop from the 2023 peaks.

According to Moody’s, if Pakistan’s government is effective in reducing external and liquidity issues, its rating might be raised. It predicts that despite large dividend payouts, Pakistani banks’ capital ratios will stay steady due to their robust earnings.

Moody’s assigned a baseline credit assessment of Caa3 to the top five banks in Pakistan, which are Allied Bank Limited, HBL, UBL, MCB, and the National Bank of Pakistan (NBP). The organization emphasized the importance that steady deposit-based funding to maintain the banking industry’s financial stability.

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