- Upgrade credited to strong macroeconomic indicators.
- Moody’s warns the sustainability of long -term debt always a risk.
- The rating agency provides that the economy is developing 3% in 2025.
Moody’s Ratings revised its prospects in the Pakistani banking sector to stable, citing improved operating conditions and resilient financial performance, he said on Wednesday.
The change corresponds to the improvement of the government’s improved prospects (positive) of the government, supported by a significant exposure of banks to sovereign debt.
“We have changed our vision of the Pakistan banking system to a stable positive to reflect the resilient financial performance of banks as well as the improvement of macroeconomic conditions from very low levels a year ago,” according to Moody’s declaration.
The latest banking sector in Pakistan of Moody’s demolished on March 3, 2023, reducing the long -term deposit ratings of five major banks – Allied Bank Limited (ABL), Habib Bank Ltd. (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP), and United Bank Ltd. (UBL) – CAA3 from CAA1.
“The positive prospects in the sector also reflect the positive prospects of the Pakistani government (positive CAA2), the Pakistani banks with significant exposure to the sovereign thanks to their great assets of government titles, which represent about half of total banking assets.
“However, the sustainability of the long -term debt of Pakistan remains a key risk, with its still very low budgetary position, its risks of high liquidity and external vulnerability”, according to the report.
The credit rating agency provides that the Pakistan economy extends from 3% in 2025, compared to 2.5% in 2024 and -0.2% in 2023.
“Inflation is also tackling considerably, which we estimated at around 8% for 2025, against an average of 23% in 2024,” he said, “the problem loan training will slow down as the borrowing costs and inflation reduce, although the clear margins of interest will shrink on the back of interest drops.”
“Banks will maintain adequate capital stamps, supported by the growth of moderate loans and the solid generation of cash, despite the dividend payments that remain high.”
Moody’s said that the revision of stable positive perspectives reflects a better operating environment. “Pakistan’s economic prospects are improving very low levels, with increased government liquidity and external positions compared to 2024.”
Moody’s noted that the IMF program of $ 7 billion in Pakistan and 37 months, approved in September 2024, provides a credible external source of financing for the years to come.
“We are planning GDP growth of 3% in 2025 and 4% in 2026, compared to 2.5% in 2024, more from a drop of 10 percentage points in interest rates since the start of the monetary policy softening in June 2024.”
“We expect inflation to slow down to around 8% in 2025, against an average of 23.4% in 2024. We expect a drop in reductions in inflation and policy rate will stimulate private sector spending and investment in Pakistan from low current levels.”
Moody’s, however, warned that the strong exposure of banks to government securities increases the risk of assets.
“In September 2024, government titles represented 55% of the total banks’ assets. This important exhibition connects the credit force of banks to that of the sovereign, which improves very low levels.
“Although problem loans deteriorated to 8.4% of the total loans in September 2024, against 7.6% the previous year, global loans represent only 23% of the total banks’ assets,” he said.
Moody’s said that the abolition of the Avaire / Dépôt ratio (ADR) for 2025 should reduce the pressure on banks to extend loans, while demand remains moderate despite a drop in loan costs.
He also noted that the tax incentive linked to the ADR forced banks to reach a ratio in advance / deposit of 50% by the end of 2024, non-compliance triggering an additional tax of 10 to 15%.
After recent interest rate reductions that have reduced the policy rate to 12%, the margins will shrink while local banks hold most of their profits from the interest they receive on significant investments in state securities, which give lower yields compared to last year, he added.
“At the same time, the replay of downward assets will only be partially offset by lower financing costs, while the growth of commercial activity and non -interest income will not fully counterbalance the compression of margins. “We expect the yield of the assets of banks to be moderated at around 0.9% to 1.0% in 2025,” he said.
The financial service provider said that Pakistan exchange risks (FX) had decreased in response to an increase in exchange reserves of the Pakistan State Bank since unlocking the IMF program.
In his report published in November of last year, Moody’s said that interest in Pakistan would represent almost 40% of total spending in 2025, compared to approximately a quarter in 2021.
Last month, Fitch Ratings said: “Pakistan continued to progress in the restoration of economic stability and the reconstruction of external stamps.”
He said that progress in difficult structural reforms would be essential to the next exams of the International Monetary Fund (IMF) program and continuous funding for multilateral and bilateral lenders.
He wrote that rapid disinflation reflected the discoloration of the basic effects of grant reforms and the stability of previous exchange rates, supported by a tight monetary position which has controlled domestic demand and external financing needs.
Economic activity now benefits from the stability and the decrease in interest rates, after having absorbed stricter policy parameters, added Fitch.
It provides for real value added growth of 3.0% during the 2010 financial year, noting that credit growth in the private sector has become positive in real terms in October 2024 for the first time since June 2022.