Pakistan Banks hit stability alert as Moody’s pulls positive outlook

2026-02-09 - 11:56

ISLAMABAD – Investors and economists Moody’s Ratings downgraded Pakistan’s banking system outlook from positive to stable amid fragile conditions. The agency pointed out that the banking environment is improving but slowly as economic and fiscal conditions strengthen and external accounts recover. The shift is less about growth and more about volatility easing as the sector stabilized without a strong growth push. Moody’s forecasts steady bank performance over one year, despite ongoing challenges in profitability and asset quality. The report shows critical vulnerability as banks hold around half of their assets in government securities, making them highly sensitive to the country’s sovereign credit strength. GDP growth is expected to improve modestly to 3.5% in 2026, up from 3.1% in 2025, supported by easing interest rates and lower inflation, which should stimulate credit demand. Yet margins are likely to remain flat following earlier declines from rate cuts. In recent months, there are improvements in macro stability, including stronger remittances, lower inflation, and bolstered foreign reserves, but structural pressures remain wirth high fiscal deficits, hefty interest payments, and a persistent preference for government securities over private-sector lending. Experts see this shift as a move toward stability rather than strength, noting that the sector remains conservative, relying on low-risk, sovereign-heavy portfolios, which limits private-sector credit growth. Pakistan’s sovereign rating upgrade last year from Caa2 to Caa1 under the IMF program. Commerical Banks’ portfolios are dominated by government securities, strong capital buffers and improved sovereign ratings provide stability and could lower long-term borrowing costs for both the government and private sector. Moody’s boosts Pakistan’s Rating to Caa1 amid Economic Recovery