Global rating agency Moody’s has revised Pakistan’s banking sector outlook from stable to positive, citing resilient financial performance and improving macroeconomic conditions following a challenging year.
“We have changed our outlook on Pakistan’s banking system to positive from stable to reflect the banks’ resilient financial performance as well as improving macroeconomic conditions from very weak levels a year ago,” Moody’s stated in its latest assessment.
The agency noted that this positive outlook aligns with the Government of Pakistan’s own improved rating (Caa2 positive), though it cautioned that Pakistani banks maintain significant exposure to sovereign risk through their substantial holdings of government securities, which represent approximately half of total banking assets.
Economic projections show encouraging signs of recovery, with Moody’s forecasting 3% growth in 2025, improving from 2.5% in 2024 and a contraction of 0.2% in 2023. Inflation is expected to moderate dramatically to around 8% in 2025, down from an average of 23% in 2024.
The report predicts that problem loan formation will slow as borrowing costs and inflation decrease, though net interest margins will narrow following interest rate cuts. Banks are expected to maintain adequate capital buffers despite high dividend payouts, supported by modest loan growth and solid cash generation.
A key factor in the improved outlook is Pakistan’s 37-month $7 billion IMF Extended Fund Facility approved in September 2024, which Moody’s describes as “a credible source of external financing for Pakistan for the next few years.”
Looking ahead, the agency projects GDP growth to reach 4% in 2026, partly attributed to the 10 percentage point reduction in interest rates since monetary policy easing began in June 2024. “Lower inflation and policy rate cuts will spur private-sector spending and investment in Pakistan from current low levels,” Moody’s predicted.
The report highlights that government securities accounted for 55% of banks’ total assets as of September 2024, creating a significant link between banks’ credit strength and sovereign performance. Problem loans have increased to 8.4% of total loans from 7.6% a year earlier, though overall loans represent only 23% of banks’ total assets.
With the removal of the ADR tax for 2025, Moody’s anticipates reduced pressure on banks to increase financing. The ADR-linked tax incentive had required banks to achieve a 50% advance-to-deposit ratio by the end of 2024, with noncompliance resulting in additional income tax of 10% to 15%.
Following recent interest rate cuts that have reduced the policy rate to 12%, margins are expected to narrow as Pakistani banks derive most of their earnings from interest on government securities, which are now yielding lower returns. “We expect banks’ return on assets to moderate to around 0.9%-1.0% in 2025,” the report stated.
Moody’s also noted that Pakistan’s foreign exchange risks have decreased following an increase in the State Bank of Pakistan’s foreign exchange reserves since the IMF program was secured.
This positive outlook comes despite Moody’s November assessment that interest costs in Pakistan would consume nearly 40% of total government spending in 2025, up from approximately 25% in 2021.
