Moody’s Investors Service (Moody’s) has changed its outlook on the banking sector of Pakistan (Caa3 stable) to “stable” from “negative”, according to a report released on Monday, March 8, 2024. The report said that the change in outlook reflects the easing of macroeconomic and fiscal pressures in the country, which have reduced the risks for the banks.
The report said that the banks’ solid profitability and stable funding and liquidity provide an adequate buffer to withstand the country’s macroeconomic challenges and political turmoil. The report also said that the banks’ large exposure to the government via holdings of government securities, which amount to around half of total banking assets, links their credit strength to that of the sovereign.
Moody’s expects the Pakistani economy to return to modest growth of 2 percent in 2024, after subdued activity in 2023, and inflation to fall to around 23 percent from 29 percent last year. The rating agency also expects the government to continue its engagement with the International Monetary Fund (IMF) and other multilateral and bilateral partners, which will support its external and fiscal positions.
The banks’ profitability will remain strong, but decline from 2023 peaks
The report said that the banks’ profitability will remain strong, but decline from 2023 peaks, due to subdued business growth, increased funding costs, and elevated taxes. The report said that the banks’ net interest margins (NIMs), which are among the highest in Moody’s-rated banking systems, will narrow slightly, as the central bank has cut its policy rate by 600 basis points since March 2023, to 7 percent as of February 2024.
The report also said that the banks’ asset quality will deteriorate slightly, as the economic slowdown and the coronavirus pandemic have affected some sectors, such as tourism, hospitality, and textiles. The report said that the banks’ non-performing loans (NPLs) ratio will increase to around 10 percent by the end of 2024, from 9.3 percent as of September 2023, but will remain below the historical peak of 15.3 percent in 2011.
The report said that the banks’ capital ratios will remain stable, as strong earnings will offset high dividend payouts. The report said that the banks’ Tier 1 capital ratio will stay at around 14 percent by the end of 2024, well above the regulatory minimum of 6 percent. The report also said that the banks’ leverage ratio, which measures the ratio of equity to total assets, will remain low at around 6 percent, reflecting their high exposure to low-risk government securities.
The banks’ funding and liquidity will remain stable, supported by deposit-based funding
The report said that the banks’ funding and liquidity will remain stable, supported by deposit-based funding, which accounts for around 90 percent of total funding. The report said that the banks’ deposit growth will moderate to around 10 percent in 2024, from 17 percent in 2023, as the economic recovery and lower interest rates will reduce the attractiveness of saving deposits.
The report also said that the banks’ liquidity ratio, which measures the ratio of liquid assets to total assets, will remain high at around 50 percent by the end of 2024, well above the regulatory minimum of 10 percent. The report said that the banks’ liquid assets mainly consist of government securities, which can be easily converted into cash or used as collateral for borrowing from the central bank.
The report said that the banks’ external vulnerability risk will remain low, as their foreign currency (FC) assets exceed their FC liabilities by a comfortable margin. The report said that the banks’ FC assets amount to around 20 percent of total assets, while their FC liabilities amount to around 15 percent of total liabilities. The report also said that the banks’ FC assets are mostly in the form of government securities or loans to the government, which are backed by the sovereign’s FC reserves.
