Banks have been under a lot of scrutiny lately for lending out to the government more than what should ideally be lent. The resultant lack of coordination between the contractionary policy of the central bank versus the expansionary fiscal stance has been alleged to be hindering the efforts for controlling inflationary pressures.
Moodys Investors Service has also identified this shortcoming of the banking sector in Pakistan, as is evident from the downgrading of the global local-currency (GLC) deposit ratings and stand-alone bank financial strength ratings (BFSRs) of the big five Pakistani banks.
Moodys has based the revision of the banks ratings mainly on the fact that the banks sovereign-related exposures may not bode very well for the sector, particularly in the low economic growth environment post-floods.
However, the downgrading has been rendered primarily for foreign investors, and the percentage of those in Pakistans local currency deposits is almost negligible, according to industry experts. The downgrading is not believed to affect the banking industry locally, because local depositors will continue to park their funds with these banks.
In fact, Moodys has admitted to this being a positive aspect of the sector since these banks "display stable customer deposit-funded profiles that have shown a degree of stability during previous shocks or crises that Pakistan has experienced."
Besides, with the high interest rates environment, banking spreads are also likely to keep the profitability of banks buoyed up, so the demoted ratings have not quaked investor sentiments at the local bourse.
Since the banks deposits are also fuelled by remittances to a great extent, which swelled to $4.43 billion in the first five months of FY11, a 15.5 percent increase year-on-year, the outlook remains positive for the industry, according to Muhammed Imran, analyst at Arif Habib Securities.
With the subdued economic environment, government securities also appear to be a less risky and more profitable investment avenue for banks. "As far as earnings are concerned, government securities are the only suitable option banks have, especially bearing in mind the high interest rate environment", says Mustufa Bilwani, analyst at JS Global Capital
The downgrading by Moodys was primarily based on the overall economic outlook. But that might not necessarily put a hex on the banking sector locally. The local banking sector stands strong, indeed.
Comments
Comments are closed for this article.