Stable outlook for Pakistan banks on robust funding and strong government links: Moody's

February 6, 2020: Moody's Investors Service says in a new report that robust funding and liquidity and close links with the sovereign underpin its stable outlook for the Pakistan banking system over the next 12-18 months.

"The sovereign credit profile has improved in recent months, benefiting the banks through their high exposure to government securities, which account for around 40% of their assets," says Constantinos Kypreos, a Moody's Senior Vice President.

In terms of operating environment, economic activity in Pakistan will also be supported by ongoing infrastructure projects and improvements in power generation and domestic security. In addition, terms of trade gains and the rupee depreciation will likely raise private investment from low levels.

"Operating conditions for Pakistan banks, although gradually improving, remain difficult amid tight monetary conditions – with the policy rate at 13.25% – and large government borrowing needs crowding out funding for the private sector," adds Kypreos.

But while economic growth will still remain subdued, the exchange rate has stabilized since June 2019 and markets expect the State Bank of Pakistan to lower policy rates over the next few years.

Stable customers’ deposits and high liquidity also remain key strengths, providing banks with ample low-cost funding. Capital levels will remain broadly stable, but Moody's considers these modest relative to peers. Profits will increase slightly but remain below historical levels.

Moody's expects the government will remain willing to support at least the systematically important banks in case of need, but its ability to do so is limited by fiscal challenges reflected by its B3 rating.