Moody's changes Pakistan's banking system outlook to 'stable'

International credit rating agency says Pakistan’s GDP will expand by 4 per cent during current fiscal year

The international credit rating agency Moody’s has upgraded the outlook for Pakistan’s banking system to stable from negative, reflecting the improvement in the country’s economic growth prospects, a press release issued by the agency’s investors service said on Wednesday.

"We expect the strengthening economy, together with the central bank's accommodative monetary policy, to stimulate lending growth and support the banking sector's loan performance over the next 12-18 months," said Elena Panayiotou, a Moody's Assistant Vice President and lead analyst for Pakistani banks.



According to the Moody’s Investors Service, the economic growth prospects have increased due to the government’s commitment to economic reforms under its International Monetary Fund (IMF) program.

Pakistan’s gross domestic product (GDP) is expected to expand by 4.0 per cent in the current fiscal year which will be in stark contrast to a sluggish 2.8 per cent during 2008 to 2013, the agency said.

The international credit rating agency further maintained that the positive change is mainly driven by higher spending on infrastructure projects as the government aims to ease energy shortages and execute projects associated with the China-Pakistan Economic Corridor (CPEC).



“The rating agency notes that the strengthening of the domestic economy will contribute to the improvement in Pakistani banks' asset quality,” the rating agency said, however, it also noted that the level of credit risk will remain high as banks are heavily exposed to the country’s holdings of securities and government-related loans.

"We expect problem loans will decline to around 12% of total loans by the end of 2016 compared with 12.4% for the end of June 2015. Banks, however, will remain heavily exposed to the low-rated Pakistan sovereign, linking the banks' creditworthiness to that of the sovereign,'' said Panayiotou.

Further, the rating agency expects in the area of capital buffers will come under pressure due to moderate asset growth and lower internal capital generation – a result of weaker profitability.



The statement went on to say that the Pakistani banks will maintain ample liquidity and continue to benefit from large volumes of low-cost and stable customer deposits. "The Pakistani banks' deposit-based funding structure remains a credit strength. We expect inflows of remittances from migrant workers will continue to drive the growth in bank deposits and support banks' funding bases,'' said the AVP.