Moody assigns 'stable outlook' for Pakistan banking system

• “Operating conditions for Pakistan banks, although gradually improving, remain difficult amid tight monetary conditions,” says IMF.
• Capital remains modest, while profits will stay below historical levels despite some improvement.

The US based bond credit rating agency, Moody Investor Services in its latest report has given stable outlook for the Pakistan banking system over the next 12-18 months, on back of robust funding and liquidity and close links with the sovereign.

Moody in its report anticipates that the government will remain willing to support at least the systematically important banks in case of need, but its ability to do so is limited by fiscal challenges reflected by its B3 rating.

"The sovereign credit profile has improved in recent months, benefiting the banks through their high exposure to government securities, which account for around 40pc of their assets," says Constantinos Kypreos, a Moody's Senior Vice President.

As per Moody, in terms of operating environment, economic activity in Pakistan will also be supported by ongoing infrastructure projects and improvements in power generation and domestic security. In addition, terms of trade gains and the rupee depreciation will likely raise private investment from low levels.

"Operating conditions for Pakistan banks, although gradually improving, remain difficult amid tight monetary conditions – with the policy rate at 13.25pc – and large government borrowing needs crowding out funding for the private sector," adds Kypreos.

The agency added that meanwhile economic growth will still remain subdued, the exchange rate has stabilized since June 2019 and markets expect the State Bank of Pakistan to lower policy rates over the next few years.

Stable customers deposits and high liquidity also remain key strengths, providing banks with ample low-cost funding. Capital levels will remain broadly stable, but Moody's considers these modest relative to peers. Profits will increase slightly but remain below historical levels.