Moody’s terms remittances growth credit positive for Pakistan’s banks

KARACHI: Ratings agency Moody’s expects remittance inflows into Pakistan to increase in coming years, albeit not with the current growth pace, as it says the central bank’s measures are attracting inflows from official channels.

“We do not expect such high remittance growth levels to persist, but believe remittances have the potential to increase in coming years, supported by the Pakistan Remittances Initiative and technical advances that materially reduce transaction costs, particularly for remittances through electronic and official channels,” Moody’s said in a latest report, referring to 24 percent surge in remittances to $16.5 billion in the July-January period of FY2021.

“The increase is credit positive for Pakistan’s banks. The increase is also contrary to our expectation that the pandemic would keep remittances flat and the World Bank's forecast of a sharp decline in global remittances.”

Moody’s said increased remittances are credit positive for particularly United Bank, which had a leading market share of around 24 percent of remittances as of 30 September 2020.

“Increased remittances and resulting higher household incomes are also likely to facilitate increased mortgage, small and midsize enterprise and agricultural lending, which are important components of the government’s financial inclusion targets,” it said.

Moody’s said higher household incomes because of remittances also create new lending opportunities for banks and support households’ debt repayment capabilities. “Increased remittances contribute to higher domestic deposits, providing banks with stable and low-cost funding while enhancing their foreign-currency liquidity. The deposit inflows will also mitigate the effect of government deposit outflows once the treasury single account, which requires federal government deposits to be placed with the central bank rather than commercial banks, is fully operational.”

Remittances from overseas Pakistanis residing in the Gulf states accounted for around 60 percent of the total inflows, followed by the 13pc from the UK, 9pc from the European Union and 9pc from the US. According to World Bank estimates, Pakistan was the seventh-largest recipient of remittances globally in 2020, with remittance inflows comprising approximately 9 percent of GDP.

Moody’s further said the increased remittances support Pakistani households’ disposable income and borrowers’ repayment capacity, reducing the potential for nonperforming loans (NPLs). Pakistani banks' consumer lending has historically outperformed lending to companies, and consumer loan NPLs accounted for 4.9 percent of gross loans as of 31 December 2020, compared with 9.4 percent for corporate loans, it said.

Moody’s said greater use of digital channels, combined with the Pakistan remittances initiative, which facilitates faster and cheaper remittance flows, fuelled increased remittances in recent years, while pandemic-related limitations on travel, including reduced travel to Saudi Arabia for the annual Hajj pilgrimage, have aided the sharp increase in remittances in recent months. Overseas Pakistani workers have saved more money and traveled less to Pakistan, increasing their capacity to remit via official sources. Similarly, overseas job losses as a result of the pandemic have led to increased repatriations.