Pakistan's banking system forecasted to be 'stable' for 12-18 months: Moody's

Pakistan's banking system has a 'stable' forecast for the 12-18 months, Moody's Investors Service said in a new report released on Thursday.

According to Moody's Senior Vice President Constantinos Kypreos, the country's "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".

One of the leading credit rating agencies, it stressed that the economic activity in the country would be supported by the "ongoing infrastructure projects and improvements in power generation and domestic security". The government’s decision to depreciate the rupee and trade gains may raise private investment from the current low levels in the country, it added.

"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," Kypreos said.

The agency further noted that economic growth would continue to "remain subdued" but clarified that the exchange rate had stabilised since June 2019. It also said markets expected Pakistan's central bank "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," the press release read.

Moody's added that the government could support the "systematically important banks in case of need" but clarified that the nation's ability would become limited due to the fiscal challenges it faces.

In December last year, Moody's had revised upwards Pakistan's outlook from 'Negative' to 'Stable'. In its Dec 2 report, it had affirmed a B3 rating and confirmed that the economy's future looked stable as opposed to negative earlier.