Moody’s has revised the outlook for Pakistan’s banking sector from “negative” to “stable”. This positive shift is attributed to the easing of macro challenges and fiscal pressures, as noted in a recent Moody’s report. The rating agency highlighted the banks’ profitability and stable funding, which act as a solid defense against national macroeconomic challenges and political uncertainties. Looking ahead, the latest report projects a modest 2 percent growth in Pakistan’s economy in 2024.

Moreover, it projects a drop in inflation from 29 percent to around 23 percent compared to the previous year. However, the report also sounded a note of caution, stressing that persistently high-interest rates and inflation will continue to hold back private sector spending and investment. Moody’s pointed out that Pakistani banks primarily finance the government’s fiscal deficits, which limits their ability to lend to the real economy.

Despite initiatives to strengthen financial inclusion and support key sectors, the overall credit environment is expected to remain constrained. Moody’s highlighted the significant exposure of Pakistani banks to the government through their significant holdings of government securities, which account for roughly half of total banking assets. This linkage exposes their credit strength to the performance of the sovereign.

Moody’s also highlighted that external pressures along with a challenging operating environment may slightly affect the performance of Pakistani banks’ loan portfolios. However, the rating agency expects banking sector profitability to remain strong, supported by broad net interest margins. However, it forecasts a potential drop in profitability from peaks in 2023 due to subdued business growth, increased funding costs, and increased taxes.

Moody’s outlined that Pakistan’s rating could improve if the government successfully addresses external and liquidity risks. The report expects the capital ratios of Pakistani banks to remain stable, supported by strong earnings despite high dividend payouts.