Moody’s Changes Pakistan Banking Outlook to Stable Despite Economic Challenges
Moody’s Ratings has revised the outlook for Pakistan’s banking sector from positive to stable, citing a gradual recovery in the operating environment alongside persistent structural and fiscal challenges. The international credit rating agency noted that while macroeconomic conditions in Pakistan are improving, particularly for banks, the pace of recovery remains modest and closely tied to sovereign strength rather than broad-based economic expansion. According to Moody’s Ratings, the change reflects easing volatility rather than the start of a new growth cycle for the financial system.
In its assessment, Moody’s observed that Pakistan’s banking sector has remained resilient despite a challenging environment. Strong profitability, largely driven by elevated interest rates and banks’ heavy investment in government securities, has helped cushion lenders against economic pressures. The agency expects banks’ financial performance to remain broadly stable over the next 12 to 18 months, even as they continue to face asset quality constraints and pressure on margins. It added that although policy rate cuts may reduce margins slightly, easing inflation and borrowing costs should help support credit demand going forward.
Also Read:
- Moody’s Changes Pakistan Banking Outlook to Stable Despite Economic Challenges
- President Zardari Warns of Regional Terror Threats as Pakistan Seeks Global Engagement on Gaza Peace and Security
- Pakistan to Attend First Gaza Board of Peace Meeting in Washington, PM Shehbaz Sharif Likely to Participate
Moody’s forecast that Pakistan’s economic growth will gradually strengthen, projecting GDP growth of around 3.1 percent in 2025, rising to approximately 3.5 percent in 2026. The outlook is supported by moderating inflation, relative exchange rate stability, improved access to external financing and stronger remittance inflows, all of which are expected to bolster deposits, foreign exchange reserves and overall financial stability. However, the agency cautioned that high borrowing costs and credit risk pressures have continued to limit private-sector lending and investment.
A key concern highlighted by Moody’s is the banking sector’s heavy exposure to the sovereign. The agency noted that around half of banks’ total assets are invested in government securities, amounting to roughly 9.4 times their equity, leaving the system highly sensitive to government credit conditions. Weak revenue mobilisation, high public debt levels and continued reliance on external funding were cited as major fiscal risks, while policy implementation challenges and external financing pressures remain potential headwinds for sustained growth.
Economists and analysts described the outlook revision as a signal of steadiness rather than strength. Komal Kenneth Shakeel, an economist and head of partnerships and collaborations at Ignite, said the decision reflects stabilisation without acceleration, arguing that the crisis phase has eased but the recovery remains shallow and dependent on external inflows instead of strong domestic growth. She pointed to persistent structural pressures, including a large fiscal deficit, heavy interest payments relative to revenues and banks’ continued preference for sovereign paper over private-sector lending.
Former finance ministry adviser Dr Khaqan Najeeb echoed this view, saying the shift to a stable outlook points to gradual recovery rather than a clear return to strength. He noted that Pakistan’s banking sector remains structurally tilted toward low-risk balance sheets, which limits broader financial intermediation. While he expects some pickup in credit growth in 2026 due to improving macro conditions and lower borrowing costs following earlier tax-related disruptions, he cautioned that stability is still anchored in capital buffers and sovereign exposure rather than stronger underlying credit fundamentals.
Independent investment and economic analyst AAH Soomro said the sovereign-heavy asset mix means any movement in Pakistan’s sovereign credit profile directly affects local banks. He noted that banks are generally well capitalised with adequate risk-based capital, which supports depositors and borrowers and could, over time, help reduce borrowing costs for both the government and private-sector clients. The outlook revision follows Moody’s sovereign upgrade of Pakistan in August 2025 to Caa1 from Caa2 with a stable outlook, linked to improving financial conditions under an International Monetary Fund programme.
Read all the Breaking News Live on pakistantimes.com and Get Latest English News & Updates from Pakistan Times. Follow us on Whatsapp channel for more.
