Dark Clouds Still On the Horizon For Pakistani Banks: Fitch Solutions

January 17, 2019 (MLN): Fitch Solutions Macro Research has maintained its outlook for the broad economy and the industries within Pakistan to deteriorate over coming quarters, having acknowledged that the Pakistani banking sectors appears to be on sound footing.

“There will likely be a delayed negative effect as the government continues to postpone much-needed fiscal austerity and economic rebalancing with unconventional methods,” says the report

Nevertheless, credit growth is set to slow over the coming months as the effect of the SBP’s monetary tightening begins to feed through.

As Fitch considered the headline metrics across Pakistan’s banking sector, the research house pushed back its expectations for a decline in profitability and asset quality. Loans to the private sector has continued to increase as a share of total credit, coming in at 41% in November, the highest level since 2013.

With profitability on loans to the private sector much higher than loans to the government, Fitch Solutions believes that the banking sector’s profitability is likely to rebound over the coming quarters after seeing a slump in Q118. Taken together with the added tailwind of lower oil prices (since Q418) helping to boost consumer purchasing power and corporate margins, Fitch Solutions expects asset quality and capitalization to remain healthy in the near-term.

However, the report suggests that the rapid pace of credit growth looks set to slow over the coming months as the impact of significant tightening by the central bank in 2018 begins to feed through, informing Fitch’s loan growth forecast of 13.0% in 2019, down from an estimated 15.0% in 2018.  

With tighter monetary conditions, Fitch expects refinancing risks to rise and negatively impact asset quality of banks.

“Together with higher oil prices, this could create a downward cycle of lower loan growth, weaker asset quality, and reduced profitability and capitalization.”

In addition to this, Fitch Solutions went on to highlight that Finance Minister Asad Umar announced on January 13 that Pakistan will not approach the IMF for a new bailout package and is considering alternative options to tide over its economic crisis.

In Fitch’s opinion, this suggests that the administration continues to have little appetite for austerity and painful and necessary economic reforms, which would prolong the current upcycle.

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