ISLAMABAD: Moody’s Ratings has changed its outlook on Pakistan’s banking system from positive to stable, saying that the recovery in operating conditions is progressing only gradually despite a slowly improving economy.
The agency said the banking sector’s outlook now aligns with Pakistan’s sovereign rating of Caa1 (stable), mainly because banks hold a large share of government securities, which make up around half of their total assets. Moody’s warned that Pakistan’s long-term debt sustainability remains uncertain due to its weak fiscal position and external vulnerabilities.
Moody’s estimates real GDP growth at around 3.5 percent in 2026, compared with 3.1 percent in 2025, supported by ongoing reforms that are gradually strengthening economic activity and investor confidence. Inflation is expected to rise to about 7.5 percent in 2026, partly due to base effects.
The agency highlighted banks’ high exposure to government securities as a key risk, noting that these holdings are about 9.4 times their equity, closely linking banks’ credit strength to that of the government.
Moody’s observed that non-performing loans rose earlier in 2025 after the removal of the advances-to-deposit ratio tax, prompting banks to slow lending. However, credit growth could reach double digits in 2026 as macroeconomic conditions improve. Problem loans are likely to persist in vulnerable sectors such as agriculture and energy, but lower borrowing costs should help keep overall loan performance broadly stable.
Lower interest rates are expected to boost lending, while banks will likely continue increasing their holdings of government securities, which carry no risk-weighting and help support capital ratios. Despite slight pressure on margins, banks are expected to maintain strong capital buffers and high dividend payouts.
Moody’s projects that Pakistani banks will achieve an average return on assets of around 1.1 percent in 2026, supported by higher lending volumes and non-interest income. While competition for deposits has increased funding costs, banks remain largely deposit-funded, with customer deposits accounting for 63 percent of total assets.
Overall, Moody’s concluded that Pakistan’s banking system remains resilient, with sound liquidity and stable funding, although challenges related to asset quality and exposure to government debt continue to pose risks.
