Moody’s keeps Pakistan's banking system outlook stable

Moody’s Investors Service – a leading global agency – on Wednesday stated that Pakistan’s banking system would have a stable outlook due to ongoing reforms and increasing policy effectiveness.

The Moody’s in a report released today says, “Despite a difficult environment, the government’s credit profile is stable due to ongoing reforms and increasing policy effectiveness – a positive for the banks given their outsized holdings of Pakistani government debt link their credit profiles to that of the government.”

The report said that a stable outlook for Pakistan’s banking system reflects banks’ solid funding and liquidity, although a challenging – but improving – operating environment will weigh on asset quality and profitability.

The agency also observed that banks’ slow economic recovery to affect loan quality, with nonperforming loans (NPLs) expected to rise over the coming months from a sector-wide level of 9.9% of gross loans in September 2020.

“Banks’ foreign operations, export-oriented industries and companies reliant on government payments and subsidies will be hit hardest, but loan repayment holidays and other government support measures should help contain some risks,” the report said.

The report however said, “Banks’ profitability, which has materially increased during 2020, will come under pressure on lowered margins, higher loan-loss provisions given the challenging operating environment, and subdued business generation.”

“Still, Pakistan’s economy should return to a modest 1.5% growth in fiscal 2021, while government and central bank responses and reforms will partially soften the pandemic’s impact,” it further added.