Pakistani banks poised to benefit from economic growth, CPEC: Moody’s

KARACHI: Pakistani banks, with stable deposit-based funding structure, are poised to benefit during the current and next year from a spurt in loan growth fuelled by the economic stimulus measures of the present government and China-funded infrastructure projects, rating firm Moody’s said.

 “The rating agency's view that their (banks) earnings will benefit from the country's economic growth over the next 12 to 18 months,” Moody’s said in a statement issued late Wednesday. The ratings agency has a stable outlook for Pakistani banks as a whole.

"Accelerating economic growth, boosted by progress in structural reforms and China-funded infrastructure projects, will stimulate lending growth at the country's banks and support loan performance," said Constantinos Kypreos, Moody's vice president in a report ‘Banking System Outlook -- Pakistan: Accelerating Economy, Resilient Earnings and Stable Funding Drive Stable Outlook.’   

“The outlook expresses Moody's expectation of how bank creditworthiness will evolve in this system over the next 12 to 18 months.” Kypreos, however, warned that the banking system will remain “challenged by its heavy exposure to the low-rated Pakistan government (B3 stable), as well as the banks' only modest capital levels.”

Moody's expects Pakistan’s real GDP to expand by 4.9 percent and 5.0 percent in the fiscal years ending June 2017 and 2018, and “the China-Pakistan Economic Corridor (CPEC) project will continue to support manufacturing and construction activities, and will be a key driver of growth.”

Accordingly, the rating agency expects bank lending to expand by between 12 percent and 14 percent during 2017-18. “At the same time, the economic recovery remains fragile due to the risks from potential political instability, deterioration in domestic security, or disruption of the government's reform agenda,” it added.

"The biggest challenge facing the banking system is their high level of government exposures; holdings of government securities stood at an estimated Rs7.0 trillion ($66 billion) at the end of September 2016, up 14 percent year-on-year," said Corina Moustra, associate analyst at Moody’s.

"The amount is equivalent to around 46% of total assets, or 7.2 times the system's Tier 1 capital as of September 2016, and this caps banks' ratings at that of the sovereign." The rating agency said asset risks for Pakistan's banks will remain high partly due to high credit concentrations, but problem loans are likely to decline overall as economic conditions improve, easing to around 10 percent of total loans over our outlook horizon from 11.3 percent at the end of September 2016.

Capital buffers will also remain modest, and Moody's expects the system's reported Tier 1 ratio to remain broadly stable at around 13.6 percent. “However, when applying a 100 percent risk weight to sovereign securities, in line with the rating agency's global standards, the system's Tier 1 ratio declines to 6.9 percent, pointing to its capital vulnerability, which is also illustrated by Moody's forward-looking solvency analysis,” it said.

Profitability is strong and compares well against emerging market peers. Furthermore, faster lending growth and moderate provisioning requirements will support profitability over the outlook horizon, mitigating pressures stemming from lower yields on government securities and thinning margins.

“Large volumes of low-cost customer deposits are a credit strength for the system, and the banks' reliance on costly and confidence-sensitive market funding will remain low,” Moody’s said. “Remittances from workers overseas will drive deposit growth, while the banks will continue to maintain good liquidity buffers.”