Financial Resilience and Macroeconomic Recovery Drive Rating Boost
Moody’s Ratings has revised its outlook on Pakistan’s banking sector from stable to positive, citing improved economic conditions and resilient financial performance, according to a report published on Wednesday.
Signage is seen outside the Moody's Corporation headquarters in Manhattan, New York, US, November 12, 2021.— Reuters
The credit rating agency highlighted that the shift aligns with the government’s improved credit rating (Caa2 positive), with banks holding significant exposure to sovereign debt.
"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," Moody’s stated.
Banking Sector Rebounds After Previous Downgrade
Moody’s had previously downgraded Pakistan’s banking sector on March 3, 2023, lowering 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)
- United Bank Ltd. (UBL)
The positive revision now mirrors the government’s improved credit standing, as banks continue to maintain large holdings of government securities, making up around half of total banking assets.
Challenges Remain: Debt Sustainability Still a Risk
Despite this economic recovery, Pakistan’s long-term debt sustainability remains a key concern due to its weak fiscal position and high liquidity and external vulnerability risks, Moody’s warned.
The agency projects Pakistan’s economy to grow by 3% in 2025, compared to 2.5% in 2024 and a contraction of -0.2% in 2023.
"Inflation is significantly easing, estimated at around 8% for 2025, down from an average of 23% in 2024," Moody’s noted.
Banking Performance Outlook: Key Insights
- Problem loan formation will slow as borrowing costs and inflation decline.
- Net interest margins will narrow due to interest rate cuts.
- Banks will maintain adequate capital buffers, backed by strong cash generation.
Moody’s emphasized that the banking sector’s outlook improvement reflects a better operating environment. The IMF’s $7 billion, 37-month program (approved in September 2024) is expected to provide stable external financing over the next few years.
"We forecast GDP growth of 3% in 2025 and 4% in 2026, driven by a 10 percentage point cut in interest rates since June 2024," the agency added.
Foreign Exchange & Interest Rate Impact
Pakistan’s foreign exchange (FX) reserves have improved following the IMF program, reducing FX risks. Additionally, recent interest rate cuts (now at 12%) have impacted banking profitability, with margins expected to tighten due to lower returns on government securities investments.
Moody’s also noted that the removal of the Advance-to-Deposit Ratio (ADR) tax for 2025 will ease pressure on banks to expand lending, while demand remains subdued despite lower borrowing costs.
Fitch Ratings: Pakistan Making Economic Progress
Last month, Fitch Ratings acknowledged Pakistan’s progress in restoring economic stability and rebuilding external buffers. It emphasized that continued structural reforms will be critical for upcoming IMF program reviews and future financial support from multilateral and bilateral lenders.
Fitch also reported that private sector credit growth turned positive in real terms in October 2024 for the first time since June 2022, reflecting economic stability and easing inflation.
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