4 hours Ago By Imran Ali Kundi
ISLAMABAD - Moody’s Ratings has revised its outlook on Pakistan’s banking sector to positive from stable, citing improved operating conditions and resilient financial performance. “We have changed our outlook on Pakistan’s banking system to positive from stable to reflect the banks’ resilient financial performance as well as improving macroeconomic conditions from very weak levels a year ago,” it said. “The positive outlook on the sector also mirrors the Government of Pakistan’s (Caa2 positive) positive outlook, with Pakistani banks having significant exposure to the sovereign through their large holdings of government securities, which account for around half of total banking assets.
However, Pakistan’s long-term debt sustainability remains a key risk, with its still very weak fiscal position, high liquidity and external vulnerability risks,” it noted. Pakistan, Oman strengthen economic ties with focus on trade, investment, regional connectivity It said it expects “the Pakistani economy to expand by 3 percent in 2025, compared with 2.5 percent in 2024 and -0.
2 percent in 2023”. “Inflation is also significantly easing, which we estimated at around 8% for 2025 from an average of 23 percent in 2024,” it added. Moody’s said that problem loan formation will slow as borrowing costs and inflation reduce, although net interest margins will narrow on the back of interest rate cuts.
“Banks will maintain adequate capital buffers, supported by subdued loan growth and solid cash generation, despite dividend payouts remaining high.” Moody’s highlighted that the outlook was changed to positive from stable on account of a better operating environment. “Pakistan’s economic outlook is improving from very weak levels, with enhanced government liquidity and external positions compared to 2024.
” Govt imposes off the grid levy on captive power plants on IMF demand It said that the sovereign’s 37-month $7 billion IMF Extended Fund Facility approved in September 2024 provides a credible source of external financing for Pakistan for the next few years. “We forecast GDP growth of 3 percent in 2025 and 4 percent in 2026, up from 2.5 percent 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 slow sharply to around 8 percent in 2025, from an average of 23.4 percent in 2024. We expect that lower inflation and policy rate cuts will spur private-sector spending and investment in Pakistan from current low levels.
” In its report, the rating agency said that high exposure to government securities raises asset risk. “As of September 2024, government securities accounted for 55 percent of banks’ total assets. This significant exposure links banks’ credit strength to that of the sovereign, which is improving from very weak levels.
” Sui gas consumers face 0.42pc RLNG price hike in March “Although problem loans have deteriorated to 8.4 percent of total loans as of September 2024 from 7.
6 percent in the prior year, overall loans account for only 23 percent of banks’ total assets,” it said. The report was of the view that with the removal of ADR tax for 2025, “we expect lower pressure on banks to increase financing, while demand remains relatively subdued despite lower borrowing costs”. The ADR-linked tax incentive introduced by the government required banks to achieve a 50 percent advance-to-deposit ratio (ADR) by the end of 2024, with noncompliance resulting in an additional income tax ranging from 10 percent to 15 percent.
Moody’s said that following recent interest rate cuts that have reduced the policy rate to 12 percent, margins will narrow as Pakistani banks derive the bulk of their earnings from the interest they receive on large investments in government securities, which are yielding lower returns compared with last year. Govt considers raw sugar imports to stabilise market prices Concurrently, downward asset repricing will only be partly offset by lower funding costs, while growth in business activity and non-interest income will not fully counterbalance margin compression. “We expect banks’ return on assets to moderate to around 0.
9 percent -1.0 percent in 2025,” it said. Moody’s noted that Pakistan’s foreign exchange (FX) risks have reduced in response to a rise in SBP’s FX reserves since the unlocking of the IMF programme.
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