ISLAMABAD: Moody’s In­­ves­tors Service on Thursday maintained its forecast for stable outlook of five leading Pakistani banks over the next 12-18 months.

The rating agency had changed outlook of these banks from negative to stable in December 2019 and had affirmed their B3 long-term local currency deposit ratings.

The banks include Allied Bank Ltd (ABL), Habib Bank Ltd (HBL), MCB Bank (MCB), National Bank of Pakistan (NBP) and United Bank Ltd (UBL), according to an announcement by the New York-based rating agency.

“Our outlook for Pakistan’s banking system is stable” said Moody’s in a statement, adding the inter-linkages with sovereign and robust funding drive stable outlook. It said the operating conditions were improving but would remain difficult.

According to the report, the country’s economic activity will be supported by ongoing infrastructure projects, improvements in power generation and domestic security and by terms of trade gains. In addition, rupee depreciation will likely lift private investment from low levels.

The Moody’s projected that Pakistan’s economic growth will remain subdued primarily due to high interest rates — which currently stand at 13.25 per cent.

The rating agency projected that the government’s heavy borrowing needs would also absorb bank lending at the expense of private sector, hurting business and consumer confidence as well as private-sector debt repayment. Despite the challenges, exchange rate has stabilised since June 2019 and markets expect the State Bank of Pakistan (SBP) to lower policy rates over the next few months.

It said the high exposure to government securities (40pc of assets) link banks’ credit profiles to that of the sovereign. “We expect non-performing loans (NPLs) to rise slightly as a result of high interest rates and banks’ troubled foreign operations,” the statement said.

NPLs stood at a high 8.8pc of gross loans as of September 2019, although risks were mitigated by the fact that banks’ loan portfolios only make up 37pc of total assets. The government is working on laws to improve NPL recovery.

It said the capital was modest and would remain stable. Sector-wide reported Tier-1 capital ratios stood at 14.2pc, but “we adjust these by raising risk weights on government securities to 100pc from 0pc to reflect risks associated with the sovereign’s B3 credit rating.” The adjustment reduces the ratio to a more modest 7pc.

The Moody’s forecast the banks to keep capital ratios steady by reining in dividend payouts, issuing Tier-1 or Tier-2 capital instruments or through other capital optimisation measures. Profits will increase slightly but remain below historical levels. Higher net interest margins (on the back of higher interest rates and government bond yields) and our estimated 10pc credit growth will boost revenue, compensating for rising provisioning needs, ongoing pressures at banks’ overseas operations and higher costs.

Stable customer deposits and ample liquidity will remain key strengths. Customer deposits make up around 69pc of total assets, and the Moody’s expected these to grow by over 12pc this year, providing banks with plentiful low-cost funding.

Cash and bank placements account for around 12pc of total assets, while another 40pc of assets was invested in government securities — with around 64pc in T-bills, which can be repo-ed with the central bank — offering sound liquidity.

Market funding increased to 23pc of assets as of September 2019, mainly in the form of repo facilities, used for “carry trades”, which expose banks to additional credit and interest rate risks. “We expect the government to remain willing to support at least the systemically important banks in case of need, but its ability to do so is limited by fiscal challenges reflected in its B3 rating,” the Moody’s said.

The statement said the macroeconomic policy effectiveness was rising, aided by increased central bank independence that will be enshrined in a new SBP Act. Other reforms include gradually addressing the long-standing problem of circular debt with a goal of eliminating it by the end of 2020.

Published in Dawn, February 7th, 2020