KARACHI: Moody’s Investor Service has maintained a stable outlook for Pakistan’s banking sector, citing that sustainable growth and increase in financial inclusion are boosting lending opportunities.
“We continue to maintain a stable outlook for the banking sector in Pakistan (B3 stable),” the ratings agency said in a statement on Monday.
“This balances good economic momentum and growing financial inclusion that are boosting lending opportunities against political uncertainty in Pakistan and higher inflationary pressures due to the Russia-Ukraine military conflict.”
Moody’s expected real GDP growth of 3-4% for fiscal year 2021-22 in Pakistan and 4-5% for fiscal year 2022-23, with credit growth surpassing 12%.
Citing that Pakistani banks successfully navigated the pandemic, it projected non-performing loans (NPLs) would remain high but broadly stable at around 9% of gross loans.
“Profitability will rise moderately, with return on assets around 1% to 1.1%, supported by new business generation and gradually recovering net interest margins,” it said. “Investment gains are likely to be lower, however.”
Moody’s forecast dividend payouts would rise this year, adding that earnings should be sufficient to keep capital at current, rather modest, levels.
Pakistani banks will remain deposit-funded and liquid. These are credit strengths, but their high exposure to Pakistan government securities means their credit profiles are anchored to the low-rated sovereign.
Factors behind stable outlook
According to Moody’s, the stable outlook is underpinned by an expanding economy and banks’ resilient financial metrics.
“Operating conditions will be supportive for banks, despite new pressures. The Russia-Ukraine military conflict will place pressure on Pakistan’s current account deficit via higher oil prices, while rising inflation will weaken private sector spending,” it said.
Sharp increases in interest rates will also weigh on private sector investment.
Another factor, according to Moody’s, is that asset risk is mainly linked to the banks’ high exposure to government securities.
Pakistani banks’ exposure to government securities account for 45% of their total assets and around seven times their equity, one of the highest levels among the rated banks globally. This exposure links their credit profiles to the sovereign’s.
After a moderate rise in problem loans during the pandemic, the ratings agency expected these to stay around 9% of gross loans for the rated banks. Loans to sugar, textile, leather and electronics sectors will be the most vulnerable.
It pointed out that capital buffers would be stable, but modest. “Profitability will rise moderately. We expect Pakistani banks to deliver an average return on assets of around 1% to 1.1% in 2022,” it said.