ISLAMABAD: An international credit rating agency on Monday described the overall outlook of Pakistan's banking system as "stable" despite the prevailing economic challenges and weeks of political uncertainty in the country.
Earlier this month, the US-based firm, Moody's, termed the no-confidence motion against former prime minister Imran Khan as "credit negative" for the country, saying it was casting doubt over policy continuity in Pakistan.
Its recent report on the banking system outlook is not an assessment of the country's overall economy since it only reflects its view of credit fundamentals in the banking sector over the next 12 to 18 months.
"We continue to maintain a stable outlook for the banking sector in Pakistan (B3 stable)," it said at the outset of its report. "This balances good economic momentum and growing financial inclusion that are boosting lending opportunities, against political uncertainty in Pakistan and higher inflationary pressures due to the Russia-Ukraine military conflict."
The US-based firm said it expected the real GDP growth of between three and four percent for fiscal 2022 and between four and five percent for fiscal 2023, with credit growth surpassing 12 percent.
"Pakistani banks successfully navigated the pandemic and we expect nonperforming loans (NPLs) to remain high but broadly stable at around 9% of gross loans," the report continued. "Profitability will rise moderately, with return on assets around 1% to 1.1%, supported by new business generation and gradually recovering net interest margins."
Moody's said it expected dividend payouts to rise during the year, adding that Pakistani banks would remain deposit funded and liquid.
"These are credit strengths," it said, "but their high exposure to Pakistan government securities means their credit profiles are anchored to the low-rated sovereign."
The international firm said the operating conditions were likely to remain supportive for banks despite new pressures such as the Russia-Ukraine war which was putting pressure on the country's current account deficit through high oil prices.
It also highlighted the probability of government support for failing banks, given their role as the main source of financing for the government and the overall need to avoid disruptions to the payments system.