- Upgrade credited strong macroeconomic indicators.
- Moody’s still warns the sustainability of long -term debt a risk.
- The rating agency expects the economy to be expanded by 3% by 2025.
Moody’s Ratings has revised its prospects in Pakistan’s banking sector to positive from stable, referring to improved operating conditions and resilient financial results, it said Wednesday.
The shift corresponds to the government’s (CAA2 -positive) improved prospects, supported by the banks’ significant exposure to superb debt, the assessment company added.
“We have changed our view of Pakistan’s banking system to positive from stacking to reflect the banks’ resilient financial results and improve macroeconomic conditions from very weak levels a year ago,” according to Moody’s statement.
Moody’s last downgraded Pakistan’s banking sector on March 3, 2023, lowering the long-term deposit assessments from five large bank-allied bank Limited (ABL), Habib Bank Ltd. (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP) and United Bank Ltd. (UBL)-to CAA3 from CAA1.
“The positive view of the sector also reflects the Government for Pakistan’s (CAA2 Positive) positive prospects, where Pakistani banks have significant exposure to the sovereign through their large holdings of state securities accounting for about half of the total bank assets.
“However, the sustainability of Pakistan’s long -term debt is still a key risk, with its still very weak tax position, high liquidity and external vulnerability risks,” according to the report.
The Credit Rating Agency expects Pakistan’s economy to be expanded by 3% by 2025 compared to 2.5% in 2024 and -0.2% by 2023.
“Inflation also facilitates significantly, which we estimated to approx. 8% for 2025 from an average of 23% in 2024, “said it, adding,” Formation of problem loans will slower when borrowing costs and inflation are reduced, although net -interest margins will narrow on the back of the interest rates. “
“Banks will maintain adequate capital buffers, supported by muted loan growth and solid cash generation, despite the fact that dividend payments remain high.”
Moody’s said the Outlook revision to positive from stable reflects a better operating environment. “Pakistan’s economic outlook improves from very weak levels of improved government’s liquidity and external positions compared to 2024.”
Moody has noticed that Pakistan’s $ 7 billion, 37-month IMF program approved in September 2024, provides a credible external source of financing for the coming years.
“We predict GDP growth of 3% in 2025 and 4% in 2026, up from 2.5% in 2024, further driven by a 10 percentage point cut in interest rates since the start of the monetary policy easing cycle in June 2024.”
“We expect inflation to slowly be strong for approx. 8% in 2025, from an average of 23.4% in 2024. We expect lower inflation and cuts of political rates to spur for the cost of private sector and investment in Pakistan from the current low levels. “
However, Moody’s warned that Banks’ high exposure to state securities is increasing the asset risk.
“From September 2024, state securities accounted for 55% of banks’ total assets. This significant exposure connects the credit strength of the banks to the sovereign, which is improved from very weak levels.
“Although problem loan has worsened to 8.4% of the total loans from September 2024 from 7.6% in the previous year, the total loans take out only 23% of the banks’ total assets,” it said.
Moody’s said the removal of the ADR tax for 2025 was expected to facilitate the pressure on banks to expand lending while demand remains muted despite lower loan costs.
It also noted that the ADR-bound tax incentive required the banks to reach a ratio between 50% advance and landfill with the end-20124, with non-compliance with an additional 10-15% income tax.
After the recent cuts in the interest rate that have reduced the political interest rate to 12%, the margins will narrow when local banks get the majority of their earnings from the interest rate they receive on large investments in state securities, which yield lower returns compared to last year, it added.
“At the same time, the praise of downward assets is offset only partially outweighs lower financing costs, while growth in business activity and non-interest income will not fully counter-margin compression. “We expect Bankers’ return on assets to moderate to approx. 0.9% -1.0% in 2025, ”it said.
The provider of financial services said that Pakistan’s currency (e.g.) risks was reduced in response to an increase in SBPS eg reserves since the lock of the IMF program.
In his report published last November, Moody’s mentioned interest costs in Pakistan would take into account almost 40% of the total expenses in 2025, up from a quarter of a quarter of 2021.
Last month, Fitch Ratings said, “Pakistan has continued to move on to restore financial stability and rebuild external buffers.”
It said progress with difficult structural reforms would be the key to upcoming International Monetary Fund (IMF) program reviews and continued financing from multilateral and bilateral lenders.
It wrote that rapid disinflation reflected fading basic effects from previous subsidiary reforms and exchange rate stability, supported by a tight monetary attitude that dampened domestic demand and external financing needs.
Economic activity now benefits from stability and falling interest rates, after absorbing tighter political settings, Fitch added.
It expects real value growth of 3.0% in FY25, noting that credit growth in the private sector turned positive in real terms in October 2024 for the first time since June 2022.
