Moody’s has upgraded the outlook of Pakistan’s banking sector to ‘stable’ from ‘negative’ as macro challenges and fiscal pressures ease, 24NewsHD TV channel reported on Thursday.

“The banks’ solid profitability and stable funding and liquidity provide an adequate buffer to withstand the country’s macroeconomic challenges and political turmoil,” reports  the credit rating agency

It added: “We forecast the Pakistani economy will return to modest growth of 2% in 2024 after subdued activity in 2023, and inflation to fall to around 23% from 29% last year.

 “However, high-interest rates and inflation will continue to curb private-sector spending and investment. Furthermore, banks are financing the sovereign’s wide fiscal deficits, leaving little space to lend to the real economy. Initiatives to deepen financial inclusion and assistance for key sectors will only partly support credit demand.

It gives a baseline credit assessment of Caa3 to the top five largest banks in Pakistan – NBP, HBL, UBL, MCB and ABL.

The US-based rating agency said: “Pakistani banks remain highly exposed to the government via large holdings of government securities that amount to around half of total banking assets, which links their credit strength to that of the sovereign.

“Persistent external pressures against a challenging operating backdrop will weigh slightly on the performance of Pakistani banks’ loan portfolios.”

Moody’s forecast the banking sector’s profitability will remain strong because of wide net interest margins (NIMs), but decline from 2023 peaks because of subdued business growth, increased funding costs on the back of higher rates, and elevated taxes.

It added: “Operating expenses will likely stabilise in line with easing inflation and banks’ cost-control efforts. Persistently elevated tax rates and potentially higher loan-loss provisions will weigh on banks’ bottom-line profitability, with the return on average assets hovering around 3 per cent

 “Banks’ stable deposit-based funding will continue to support financial stability.”