KARACHI: Rating agency Moody’s sees Pakistani banks to keep insulating themselves from coronavirus effects as the central bank relaxed regulations for the banking sector to ease pressure of lower interest rates on their earnings.
Moody’s Investors Service on Thursday said the lower rates would reduce net interest margins and diminish banks’ earnings. But, reducing the capital conservation buffer to 1.5 percent would free up Rs800 billion of capital, or 10 percent, of outstanding loans, Moody’s said, citing the State Bank of Pakistan’s (SBP) estimate. “The lower CCB will support banks’ lending activities, but creates potential asset-quality pressure.”
Last month, the SBP cut its policy rate by 225 basis points to 11 percent, reduced banks’ capital conservation buffers 100 basis points to 1.5 percent, relaxed terms for new and existing loans and announced other forbearance measures to increase banks’ cushion against the economic effects of coronavirus.
“We expect the measures to mitigate banks’ asset-quality deterioration amid less business generation and loan growth in an economic slowdown,” it said. Additionally, the banks – Habib Bank Limited (B3 stable, caa11 ), National Bank of Pakistan (B3 stable, caa1), United Bank Ltd. (B3 stable, b3), MCB Bank Limited (B3 stable, b3) and Allied Bank Limited (B3 stable, b3) – benefit from high or very high levels of government support, “which will shield their credit profiles from impairment of their standalone credit assessments.”
Moody’s expected the country’s real GDP growth to slow to 2 to 2.5 percent for the current fiscal year of 2019/20, lower than its earlier forecast of 2.9 percent, reflecting the impact of the coronavirus pandemic. “Consumption of services, which has underpinned growth in recent years, will be adversely affected by the movement restrictions.”
The growth has already decelerated to 3.3 percent in the last fiscal year of 2018/19 from 5.5 percent a year earlier.
The textile sector, the country’s key manufacturing sector which accounts for around 60 percent of exports, has also been hit by supply-chain disruptions and a decline or postponement of orders.
Moody’s said manufacturing loans (mainly to the textile and food sectors) accounted for 62 percent of private-sector loans as of 29 February 2020. The policy rate reduction to 11 percent is expected to help maintain credit growth, “which we expect will remain below nominal GDP growth”. “Lower interest rates on loans will also improve borrowers’ repayment capacity,” it said.
The SBP has offered cash-flow relief through loan refinancing schemes and loan payment holidays to borrowers such as exporters and manufacturers affected by the coronavirus disruptions. The central bank is allowing delayed principal payments – but not interest – for up to one year at the discretion of the lender, but application for the delays must be by 30 June 2020.
The grace period lowers the risk of asset impairment and supports the value of securitised assets over the longer term. The central bank is allowing banks to classify restructured loans as performing unless the borrower has taken no action for 180 days after the originally scheduled payment date.
It has also postponed for two months until 30 August 2020 the preparation of pro forma accounts based on an international financial reporting standard (No. 9), requiring full implementation by 1 January, 2021.
The delay supports capital ratios that would be adversely affected by higher provisions if the international financial reporting standard were to have taken effect earlier. “These measures will hide risks that, if prolonged, will reduce the transparency of loan underwriting and asset quality,” Moody’s said.
