NEW YORK (The Thursday Times) — Moody’s Ratings has revised Pakistan’s banking system outlook to stable from positive, framing the shift as a marker of consolidation rather than retreat, as the sector adjusts to a gradually improving economy with strong buffers already in place.
In its assessment, the agency said banks’ financial performance is expected to remain stable over the next 12 to 18 months, reflecting an operating environment that is recovering steadily, if unevenly, from weak levels. The message is that the sector is holding its ground while reforms work through the economy and the external position strengthens.
Moody’s forecast real GDP growth of around 3.5 per cent in 2026, up from 3.1 per cent in 2025 and 2.6 per cent in 2024, citing ongoing reforms that are gradually lifting activity. It acknowledged that recent floods may weigh on agriculture, but said momentum in the industrial and services sectors should remain resilient.
Inflation has already cooled sharply to 4.5 per cent in 2025 from 23 per cent in 2024, according to Moody’s, a shift that has eased pressure on households and businesses and helped to restore predictability for lenders and borrowers. The agency expects inflation to rise to about 7.5 per cent in 2026 due to base effects, still a far more manageable range than the previous year’s surge.
The agency’s key caution is familiar in Pakistan’s banking story: the tight link between banks and the sovereign. Moody’s highlighted banks’ substantial holdings of government securities, which account for around half of total system assets, and said this connection anchors the sector outlook to the government’s Caa1 stable rating. In practical terms, the same linkage that creates concentration risk also reflects the system’s role in financing the state and maintaining liquidity, a structure that has historically helped protect depositors.
On asset quality, Moody’s noted that nonperforming loans rose in early 2025 after changes linked to the advances-to-deposits ratio tax encouraged banks to shrink loan books. Even so, the agency expects double-digit credit growth in 2026, supported by improving macro conditions and lower borrowing costs. Problem loan ratios, measured as Stage 3 loans, are expected to remain broadly stable at around 8 per cent, with stress concentrated in vulnerable areas such as agriculture and energy rather than spreading across the system.
Moody’s was notably firm on the sector’s shock absorbers. It said banks continue to maintain strong capital buffers, with Tier 1 and total capital ratios at 18 per cent and 22.1 per cent, respectively, as of September 2025, and that problem loans are fully covered by provisions. Continued investment in government securities, which carry zero risk weightings, is expected to further support capital metrics.
Profitability, while pressured by a declining rate cycle, is also expected to remain durable. Moody’s said modest margin compression should be offset by higher lending volumes, increased non-interest income and stable costs, forecasting an average return on assets of around 1.1 per cent in 2026, even as elevated taxes continue to weigh on bottom-line earnings.
Liquidity and funding stand out as a core strength. Moody’s said Pakistani banks remain predominantly deposit-funded, with customer deposits at 63 per cent of total assets as of September 2025, supported by financial inclusion efforts, strong remittance inflows and ongoing digitalisation. It added that reliance on market funding remains limited and liquid assets represent more than a third of total assets, keeping the system well positioned to manage shocks.
Moody’s also pointed to Pakistan’s track record of state support, noting that the government has historically shown willingness to back banks in distress and that no depositor losses have been recorded to date, even while it cautioned that fiscal constraints can limit the scale of support. In August 2025, the agency upgraded the long-term deposit ratings of five leading banks following its sovereign move, naming Allied Bank, Habib Bank, MCB Bank, National Bank of Pakistan and United Bank as beneficiaries, alongside upgrades to several baseline credit assessments.
