Wednesday, 25 November 2015
Moody's Investors Service recently changed the outlook for Pakistan's banking system to stable from negative, reflecting the improvement in the country's economic growth, driven in turn by the government's commitment to economic reforms under the EFF arrangement with the IMF. According to Moody's projections, the country's GDP will expand by 4.0 percent ending June 2016 compared to a sluggish average growth of 2.8 percent during 2008-13, mainly driven by higher spending on infrastructure projects as the government aims to ease energy shortages and execute projects related to the China-Pakistan Economic Corridor (CPEC). With the strengthening of the economy together with the central bank's accommodative monetary policy, credit growth will be stimulated which would support the banking sector's loan performance over the next 12 to 18 months. The credit rating agency expects that problem loans will decline to around 12 percent of total loans by the end of 2016 compared with 12.4 percent at the end of June, 2015. Nonetheless, banks would remain heavily exposed to the low-rated Pakistan sovereign due to linkage of the banks' creditworthiness to that of the sovereign. Banks' earnings will also ease slightly over the outlook period, mainly because of the lower coupon rate on government securities in a declining interest rate environment and as the market's perception of Pakistan's risk profile eases. Besides, the rating agency expects that Pakistani banks would maintain ample liquidity and continue to benefit from large volumes of low-cost and stable consumer deposits. Moody's Assistant Vice President, Elena Panayiotou, said: "the Pakistani banks' deposit-based funding structure remains a credit strength. We expect inflows of remittances from migrant workers will continue to drive the growth in bank deposits and support banks' funding bases." While banks will use part of their liquid assets to fund lending, Moody's expects the sector to maintain strong liquidity buffers, with core liquid assets - defined as cash and bank placements - at 12 percent of total assets and liquid securities, more broadly defined, at 41 percent of total assets.