ISLAMABAD: Moody’s, the global rating agency, has changed its outlook on Pakistan’s banking system to stable from positive, while stating that the operating environment is recovering only gradually.
The rating agency also forecast Pakistan’s real GDP growth of around 3.5 percent for 2026, up from 3.1 percent in 2025, while stating that it is supported by ongoing reforms that are improving confidence and gradually strengthening economic activity.
The operating environment continues to recover, but gradually, supported by the country’s slowly improving economic and fiscal outlook, and strengthening external position.
However, banks’ financial performance will be stable over the next 12-18 months as they continue to face asset quality and profitability challenges.
The sector outlook also aligns with that of the government of Pakistan (Caa1 stable), given banks’ substantial holdings of government securities, which account for around half of total banking assets.
Pakistan’s long-term debt sustainability remains uncertain, because of its still weak fiscal position, high liquidity and external vulnerability risk, it added.
“We forecast real GDP growth of around 3.5 percent for 2026, up from 3.1 percent in 2025, supported by ongoing reforms that are improving confidence and gradually strengthening economic activity”, Moody’s added.
The improving economic outlook and lower inflation have contributed to easing monetary policy rates. Lower borrowing costs will boost credit demand and keep problem loan ratios broadly unchanged.
At the same time, margins will remain steady after a decline following rate cuts, but higher business volumes, non-interest income and stable costs will support profits and safeguard capital buffers, it added.
The rating agency stated that continued gradual economic recovery underpins the improving macro backdrop. ‘Economic activity is recovering gradually and we expect GDP growth to rise to 3.5 percent in 2026 from 3.1 percent in 2025 and 2.6 percent in 2024, supported by ongoing reforms that are improving confidence and gradually strengthening economic activity”, it added.
The recent floods are likely to weigh on agricultural output, but activity in the industrial and services sectors should remain robust.
The improving economic outlook and lower inflation have contributed to easing monetary policy rates. Headline inflation fell to 4.5 percent in 2025 from 23 percent during 2024. We expect inflation to rise to around 7.5 percent in 2026, in part due to base effects.
The rating agency further stated that exposure to government securities amounts to around half of banks’ total assets and around 9.4 times their equity, which links their credit strength to that of the Caa1-rated sovereign.
Sector wise nonperforming loan ratios spiked at the beginning of 2025 following the removal of the advances-to-deposits ratio (ADR) tax, which led banks to reduce their loan books. Although loans accounted for only 23 percent of banks’ total assets as of September 2025, we expect double digit credit growth in 2026, supported by improving macroeconomic conditions.
Borrower delinquencies will persist nonetheless, particularly in more vulnerable sectors such as agriculture and energy, but lower borrowing costs and higher credit demand will maintain broadly stable problem loan ratios, measured by Moody’s as Stage 3 loans over gross loans, at around 8 percent for the Pakistani banks we rate.
As of September 2025, the system’s Tier 1 and total capital to risk-weighted assets (RWAs) ratios stood at 18 percent and 22.1 percent, respectively, up from 17 percent and 21.5 percent a year earlier and well above the regulatory minimum.
Moody’s stated; “our capital metric, tangible common equity to adjusted RWAs ratio, was stable at 16.6 percent for rated banks.
Although financing growth will rise in 2026 on the back of lower rates, Pakistani banks will continue to increase their holdings of government securities, which do not carry any risk-weighting, further supporting capital metrics”.
“We expect banks to maintain high dividend payout ratios, but retained earnings — despite slight margin compression — will be sufficient to fund balance sheet growth and maintain capital ratios”, said the rating agency, adding that problem loans are fully covered by loan loss reserves (115 percent coverage for rated banks), providing additional capital protection.
Copyright Business Recorder, 2026
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