Moody’s shifts Pakistan's banking outlook to 'Stable'

February 09, 2026 (MLN): Moody’s Ratings revised Pakistan’s banking system outlook to stable from positive, citing a slow and uneven recovery in the operating environment despite improving macroeconomic indicators.

The ratings firm said banks’ financial performance is expected to remain stable rather than improve over the next 12 to 18 months.

Outlook shifts to 'Stable' from 'Positive'

Moody’s said the operating environment continues to recover only gradually from weak levels, supported by a slowly improving economic and fiscal outlook and a strengthening external position.

However, the agency noted that Pakistan’s long-term debt sustainability remains uncertain, given a weak fiscal position and elevated liquidity and external vulnerability risks.

The sector outlook also aligns with the government’s Caa1 stable rating, as banks hold substantial government securities accounting for around half of total banking assets

Continued gradual economic recovery

Moody’s forecast real GDP growth of around 3.5% in 2026, up from 3.1% in 2025 and 2.6% in 2024, supported by ongoing reforms that are gradually strengthening economic activity.

While recent floods are expected to weigh on agricultural output, the agency said activity in the industrial and services sectors should remain resilient.

Inflation eased sharply to 4.5% in 2025 from 23% in 2024, though it is expected to rise to around 7.5% in 2026 due to base effects.

Banks’ high exposure to govt securities remains a key risk

Moody’s highlighted banks’ elevated exposure to government securities, which stands at around nine times equity, linking banks’ credit strength closely to that of the sovereign.

Sector-wide nonperforming loans rose in early 2025 following the removal of the advances-to-deposits ratio (ADR) tax, which led banks to shrink loan books.

Despite this, Moody’s expects double-digit credit growth in 2026, supported by improving macroeconomic conditions and lower borrowing costs.

Problem loan ratios, measured as Stage 3 loans, are expected to remain broadly stable at around 8%, though borrower stress is likely to persist in vulnerable sectors such as agriculture and energy

Solid capital buffers will be maintained

The agency said Pakistani banks continue to maintain strong capital buffers, with Tier 1 and total capital ratios at 18% and 22.1%, respectively, as of September 2025, well above regulatory minimums.

Problem loans are fully covered by provisions, offering additional protection against asset quality deterioration. Continued investment in government securities, which carry zero risk weightings, is expected to further support capital metrics.

Lending volumes, non-interest income to offset margin pressure

Moody’s expects modest margin compression as interest rates decline, but said higher lending volumes, increased non-interest income, and stable costs should offset pressure on net interest margins.

The agency forecast an average return on assets of around 1.1% in 2026, even as elevated taxes continue to weigh on bottom-line profitability

Funding, liquidity to remain sound

Pakistani banks remain predominantly deposit-funded, with customer deposits accounting for 63% of total assets as of September 2025, supported by financial inclusion initiatives, strong remittance inflows and digitalisation.

Although competition for low-cost deposits has increased, banks’ reliance on market funding remains limited, and liquidity levels are high, with liquid assets accounting for more than a third of total assets.

Govt support willing, but capacity limited

Moody’s said the government has historically demonstrated a willingness to support banks in distress, with no depositor losses recorded to date.

However, the agency cautioned that fiscal constraints limit the government’s capacity to provide support, which continues to cap bank ratings at the sovereign level.

Earlier in August 2025, the Rating Agency upgraded the local and foreign-currency long-term deposit ratings of five leading Pakistani banks to Caa1 from Caa2, following its decision to raise the country’s sovereign rating.

The upgraded banks include Allied Bank Limited (ABL), Habib Bank Ltd (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP) and United Bank Ltd (UBL).

“We have also upgraded the Baseline Credit Assessments (BCAs) and Adjusted BCAs for ABL, HBL, MCB and UBL to Caa1 from Caa2, and of NBP to Caa2 from Caa3,” the rating agency said.

The upgrades reflected Pakistan’s improving operating environment, the government’s enhanced capacity to support banks if required, and the banks’ own resilient financial performance.

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