Moody’s reviews the prospects of Pakistani banks in positive, reporting durability

• The upgrade is credited to strong macroeconomic indicators.
• Moody’s warns that long -term debt viability is still a risk.
• The Evaluation Agency expects the economy to expand by 3% in 2025.

Moody’s ratings reviewed his prospects in the Pakistan banking sector in place positively, reporting improved operating conditions and durable financial performance, he said Wednesday.

The displacement corresponds to the improved prospects of the government (CAA2 positive), backed by the significant banks’ exposure to the dominant debt.

“We have changed our prospects in the Pakistan banking system to a positive from the stable to reflect banks’ durable financial performance as well as to improve macroeconomic conditions from very weak levels a year ago,” according to Moody’s statement.

Moody’s latest underground banking sector on March 3, 2023, reducing the long-term deposits of the five major banks-Unbar Bank Limited (ABL), Habib Bank Ltd. (HBL), MCB Bank Limited (MCB), the National Bank of Pakistan (NBP) and United Bank Ltd.

“The positive prospects for the sector also reflect the government of the positive prospects of the Pakistan (positive) positive perspectives, with Pakistani banks having a significant exposure to the dominant through major state -owned holdings, which represent about half of the total banking assets.

“However, the long -term viability of Pakistan’s debt remains a key danger, with his still very weak budgetary position, high liquidity and the risks of external vulnerability,” according to the report.

The credit rating agency expects that the Pakistanic economy will extend by 3% in 2025, compared to 2.5% in 2024 and -0.2% in 2023.

“Inflation is also significant relaxation, which we estimated about 8% for 2025 by an average of 23% in 2024,” he said, adding that “the formation of problems loans will slow down as borrowing costs and inflation are reduced, although net scope will limit the rear.”

“Banks will maintain adequate capital buffers, backed by the sluggish loan increase and the production of fixed cash, despite payments that remain high.”

Moody’s said Outlook reviewing a positive from the stable reflects a better operating environment. “Pakistan’s financial prospects improve from very weak levels, with increased liquidity and external positions compared to 2024.”

Moody’s noted that the Pakistani program of 7 billion, 37 -month -old IMF, approved in September 2024, provides a reliable external funding source for the coming years.

“We predict GDP increase by 3% in 2025 and 4% in 2026, from 2.5% in 2024, is further driven by 10 percentage points of interest rates since the start of the monetary policy relaxation cycle in June 2024.”

“We expect inflation to slow down at about 8% in 2025, on average 23.4% in 2024. We expect that lower inflation and policy cuts will push private sector spending and investment in Pakistan from current low levels.”

However, Moody’s warned that the high exposure of banks to government securities increases the risk of assets.

“Since September 2024, government securities have represented 55% of the total banks’ total assets. This important report links the credit power of banks to that of the ruler, which improves from very weak levels.

“Although problematic loans have deteriorated at 8.4% of total loans from 7.6% in September 2024 in the previous year, total loans account for only 23% of banks’ total assets,” he said.

Moody’s said the removal of the collapse tax (ADR) for 2025 is expected to reduce pressure on banks to expand lending, while demand remains sluggish despite the lower borrowing costs.

He also noted that the tax incentive associated with ADR demanded banks to reach a 50% advance at the end of 2024, with non-compliance causing an additional 10-15% income tax.

Following recent cuts in interest rates that reduced the policy interest rate to 12%, the margins will be reduced as local banks draw most of their profits from their interest in major government securities, which pay lower returns than last year.

“At the same time, the upgrading of assets will only be offset in part by the lowest funding costs, while increasing business and non -interest income will not fully compensate for the marginal compression.” We expect that the return of banks’ assets to approximately about 0.9%. “

The financial services provider said that the risks of foreign foreign exchange (FX) had decreased in response to an increase in the state bank of Pakistan’s foreign exchange after the IMF program was released.

In its report released last November, Moody’s interest costs in Pakistan will represent nearly 40% of total costs in 2025, from about a quarter in 2021.

Last month, Fitch Ratings said: “Pakistan continued to restore economic stability and rebuild external stocks.”

He said progress in difficult structural reforms would be the key to the upcoming revisions of programs of the International Monetary Fund (IMF) and ongoing funding from multilateral and bilateral lenders.

He wrote that rapid deflation was reflected the faded basic effects from previous subsidy reforms and the stability of foreign exchange rates, backed by a narrow monetary attitude submitted by domestic demand and external funding needs.

Economic activity is now benefiting from stability and falling interest rates, having absorbed stricter policy arrangements, Fitch added.

It expects that the actual increase in added value by 3.0% FY25, noting that the credit raising of the private sector has become positive in real terms in October 2024 for the first time since June 2022.