MOODY’S REPORT PAINTS A POSITIVE PICTURE FOR PAKISTAN’S ECONOMY

On Thursday, a prominent international credit rating, research, and risk analysis firm
enhanced the assessment of the banking sector in Pakistan, stating that its
resilience was sufficient to endure the political and economic turmoil that beset the
nation. Assessment reports are issued on a periodic basis by Moody’s Investors
Service in order to assist its clients in mitigating economic and financial risks. The
recent banking sector report on Pakistan alters the bleak prognosis to one of
stability. Significantly, Moody’s Investors Service (Moody’s) upgraded the banking
sector outlook of Pakistan (Caa3 stable) from negative to stable in its most recent
report, which was released on Thursday.
As indicated by Moody’s, Pakistani banks maintain substantial exposure to the
government through substantial holdings of its securities, which account for
approximately half of their total banking assets. This exposes the banks’ credit
strength to that of the sovereign.In light of persistent external pressures and a
difficult operating environment, the loan portfolio performance of Pakistani banks will
be marginally impacted. Wide net interest margins (NIMs) will sustain profitability, but
it will decline from its zenith in 2023 due to sluggish business expansion, increased
funding expenses attributable to higher interest rates, and increased taxes. The
robust profitability, consistent financing, and liquid assets of the banks furnish a
sufficient safeguard against the macroeconomic and political upheavals that the
nation may encounter. They anticipated the Pakistani economy to rebound to
moderate growth of 2 percent in 2024, following a period of stagnant activity in 2023,
as economic and fiscal pressures ease. Furthermore, they also anticipated inflation
to decline to approximately 23 percent from 29 percent in 2023.
Moody’s acknowledged the historical practice of Pakistani authorities providing
assistance to troubled banks, during which no depositor losses were documented. In
light of the banks’ significant reliance on government financing, the authorities
continue to be inclined to extend such support.
Nevertheless, the fiscal challenges that underpin the Caa3 rating of the government
impede its ability to offer assistance. Consequently, the deposit ratings of Pakistani
institutions are also restricted to this level. However, approximately 94% of individual
depositors and 15% of institutions’ total deposits are protected by deposit insurance
of Rs500,000 per depositor.
The agency emphasized that negative risks still exist, especially those related to
political unpredictability and difficult government finances, which raise the possibility
that sovereign debt relief may affect commercial banks. For credit evaluation, it
typically covers the following five major banks: Allied Bank Limited, United Bank
Limited, Habib Bank Limited, MCB Bank, and the National Bank of Pakistan. The five
Pakistani banks’ problem loan ratio increased from 7.3 percent in December 2022 to
8.5 percent in September 2023 as a result of significant shocks that slowed
economic growth and because historically high interest rates and inflation weakened
borrowers’ ability to make their loan payments.
As dividend payments are compensated by banks’ steady earnings growth and
restrained expansion, capital will mostly stay unchanged. As of September 2023, the
rated Pakistani banks’ reported Tier-1 capital ratio was 15.3 percent of risk-weighted
assets, up from 14.4 percent in 2022 and much higher than the minimum required by
regulations. The low ratio of 5.2 percent for tangible common stock to adjusted riskweighted assets, as calculated by Moody’s, reflects the 150 percent risk weighting
assigned to government securities. Since interest revenue is the main source of
operating income for these banks, it will gradually reduce to normalised but still
robust levels in 2024. Monetary policy will also start to ease as inflation and interest
rates gradually fall from their 2023 peaks.
According to the report, domestic deposit inflows were being widened by growing
financial inclusion and remittances from Pakistanis living abroad. Given their
restricted access to foreign debt markets, banks rely mostly on deposits—58 percent
of total assets as of September 2023 were customer deposits—and have relatively
little reliance on more erratic market funding—5.6 percent of tangible assets as of
December 2022. The movement from non-interest-bearing deposits, which
decreased to 7% of total system deposits by the end of 2023 from 75.2 % the year
before, to interest-bearing deposits, however, has resulted in a moderate increase in
the cost of funds. Deposit outflows will be minimally impacted by the implementation
of a Treasury Single Account, which mandates that government deposits be kept at
the State Bank of Pakistan.
Moody’s has reduced its outlook for the banking sectors of numerous European
countries, citing worsening economic conditions and rising borrowing costs that
impact credit growth and loan performance, while improving the outlook for
Pakistan’s banking industry. Banks are considered back bone of economy. These
indicators expressed by independent and credible research institute suggest that
Pakistan is moving ahead on the right track from where, through consistency only,
the country can reap maximum benefits to its populace.