Expects economy to return to 1.5% growth in 2021
Moody’s Investors Service expects Pakistan banks to face slow economic recovery but solid funding and liquidity underpin a stable outlook for the sector.
“Economic activity will remain below pre-outbreak levels, although the economy should return to modest 1.5% growth in fiscal 2021,” Moody’s said in its report. “Long-term credit growth potential is strong, given Pakistan’s large unbanked population.”
Last year, Pakistan’s economy contracted for the first time in 68 year.
“Despite a difficult environment, the government’s credit profile is stable due to ongoing reforms and increasing policy effectiveness – a positive for the banks given their outsized holdings of Pakistani government debt link their credit profiles to that of the government,” Moody’s Senior Vice-President Constantinos Kypreos said.
The credit rating agency expects the slow economic recovery to affect loan quality, with nonperforming loans (NPLs) likely to rise over the coming months from a sector-wide level of 9.9% of gross loans in September 2020.
Foreign operations of banks, export-oriented industries and companies reliant on government payments and subsidies will be hit hardest, but loan repayment holidays and other government support measures should help contain some risks.
Bank profitability, which has materially increased during 2020, will come under pressure on lower margins, higher loan-loss provisions given the challenging operating environment and subdued business generation.
Still, Pakistan’s economy should return to a modest 1.5% growth in fiscal year 2021, while government and central bank responses and the reforms will partially soften the pandemic’s impact, according to the report.
“Deposit-based funding and good liquidity buffers also remain strengths, while the probability of government support in a crisis is high, even if its ability to do so is limited by fiscal challenges,” Kypreos added.