Moody’s Ratings has revised Pakistan’s banking system outlook to stable from positive, stating that the operating environment is improving but only gradually as the economic and fiscal outlook strengthens and the external position improves.
The agency said banks should maintain steady financial performance over the next 12 to 18 months. However, it noted that lenders will still face pressure from weak asset quality trends and profitability constraints. Moody’s added that the update does not represent a credit rating action.
Moody’s also stressed that the sector remains closely tied to sovereign strength because local banks hold a large share of government securities. The agency estimated that government paper accounts for around half of total banking assets, leaving the system highly sensitive to any shifts in Pakistan’s credit conditions.
Economists Highlight Sovereign Exposure and Shallow Growth
Komal Kenneth Shakeel, Head of Partnerships and Collaborations at Ignite, said the outlook change signals reduced volatility rather than a fresh upgrade cycle. She said Moody’s expects bank performance to stay stable, supported by projected real GDP growth of around 3.5% in 2026.
Moody’s forecast growth at 3.5% in 2026, up from 3.1% in 2025, and said easing policy rates and lower inflation should boost credit demand. It also said banks’ margins will likely remain steady after weakening following rate cuts.
Nevertheless, Moody’s identified sovereign exposure as a major vulnerability. It said banks’ holdings of government securities equal about half of total assets and roughly 9.4 times their equity.
Shakeel said the broader macro picture has improved due to falling inflation and stronger remittance inflows, which are supporting deposits, foreign exchange reserves, and overall financial stability. However, she warned that structural weaknesses remain, including a large fiscal deficit, heavy interest payments, and banks’ continued preference for government paper over private-sector lending.
The revision follows Moody’s sovereign upgrade in August 2025 to Caa1 from Caa2 with a stable outlook, linked to improving conditions under an IMF programme.
Independent analyst AAH Soomro said the sovereign-heavy asset mix means any change in government credit strength directly affects lenders. He added that local banks remain well capitalised, which could gradually reduce borrowing costs for both the government and private borrowers.
