Moody’s keeps Pakistan’s banking system outlook stable

F.P. Report

KARACHI: Moody’s Investors Service – a leading global agency – on Thursday stated that Pakistan’s banking system would have a stable outlook for the next 12-18 months.

Citing robust funding and liquidity and close links with the sovereign underpin as reasons for its reinforcements, Moody’s said that the credit profile has improved in the past months.

“The sovereign credit profile has improved in recent months, benefiting the banks through their high exposure to government securities, which account for around 40% of their assets,” Moody’s Senior Vice President Constantinos Kypreos was quoted as saying.

The latest report further reinforced that 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.

It also added that the terms of trade gains and the rupee depreciation will likely raise private investment from low levels.

The report, however, warned that operating conditions for banks still remain difficult.

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

It lauded Pakistan’s efforts in managing to keep the exchange rate stable since June 2019, with markets expecting the State Bank of Pakistan to lower policy rates over the next few years.

Moody’s mentioned that despite subdued economic growth, customers’ deposits and high liquidity 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,” the report said.

The agency further stated that it expected the incumbent government to 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.