In its latest report, Moody’s Investors Service hopes the Pakistani banks will continue to benefit from a stable deposit base, high liquidity buffers and an accelerating economic growth under the extended facility program of the International Monetary Fund within the next one and half years. The rating agency, maintaining its stable outlook of the Pakistani banking system, expects the economy will consolidated while the central bank’s monetary easing will provide banks with plenty of business opportunities and will stimulate loan growth to around 12 percent over the next one and half years.The country’s gross domestic product will grow by 4.9 percent in the current fiscal year ending in June 2017, which would hopefully be the fastest rate since 2008.Pakistan has completed a three-year extended facility programme of the fund for the first time after receiving last tranche from the donor agency and is implementing the infrastructure projects under the China-Pakistan Economic Corridor.The agency expects problem loans will come down to around 10 percent of the total loans by the end of 2017 compared with 11.1percent at the end of June 2016.However, the banks are likely to remain exposed to the low-rated sovereign, as the country’s current rating is B3 which shows that the economy is stable.
The consolidation of the economy will improve the quality of banks assets, but the level of credit risks will remain high. However, buffers will come under pressure in terms of capital as the weakening profitability and loan growth could reduce the ability of banks to absorb shocks. The report says that the pressure on profitability will stem from declining yields on the government securities and lower interest rates and it could erode net interest margins. However, higher lending growth and lower provisional requirements would offset this pressure partially. The agency also foresees the banks will maintain liquidity and will continue to benefit from large volumes of low-cost customer deposits. Though inflows of remittances from the Pakistani expatriates will grow a lowering pace but will continue to drive the growth in bank deposits and support funding bases of the banks.Moody’s expects that the sector will also maintain strong liquidity buffers with cash and interbank placements at 9 percent of the total assets and liquid securitiesat another 47 percent of the total assets. The report has not announced a credit rating action.
The banking system of the country has already been under pressure for the last one year after imposition of 0.6 withholding tax on the banking transactions. This action of the government to improve revenue collections from non-filers backfired and most of the members of the business community have started using non-banking financial transactions.
