ISLAMABAD: Moody’s Investors Service has upgraded the outlook for Pakistan’s banking sector from stable to positive, citing gradual economic recovery and growing confidence in the financial system. This revision highlights improving business conditions and the impact of government reforms that have enhanced the sector’s resilience.
According to Moody’s, the positive outlook reflects an improving operational environment for banks in Pakistan. The agency pointed to recent reforms that have bolstered trust, spurred economic growth, and laid a foundation for more consistent financial performance over the next 12 to 18 months.
While challenges remain—including concerns over asset quality and profitability—Moody’s predicts that banks will continue to deliver stable overall performance.
The report also noted that nearly half of the assets within Pakistan’s banking sector are concentrated in government securities, emphasizing a strong correlation between the sector’s health and the country’s fiscal stance. Despite this progress, Moody’s highlighted that uncertainties surrounding Pakistan’s long-term debt sustainability persist, given ongoing fiscal pressures and external vulnerabilities.
In terms of economic indicators, Moody’s projects Pakistan’s real GDP growth to reach 3.5% by 2026, up from 3.1% in 2025. Inflation, which had dropped from 23% in 2024 to 4.5% in 2025, is expected to rise moderately to 7.5% by 2026 due to base effects.
Lower inflation levels have enabled a reduction in policy rates, which Moody’s suggests will drive loan demand. Although narrower margins may pose challenges for banks, factors such as increased business volume, stable operating expenses, and gains from non-interest income are likely to maintain profitability and strengthen capital buffers.
However, the report did raise concerns about potential disruptions in agricultural output following recent flood events. Even so, industrial and service sectors are projected to sustain their growth trajectories.
Non-performing loans (NPLs) saw a rise after the removal of the Advances to Deposits Ratio Tax in early 2025, with loans accounting for 23% of banking assets by September of that year. Despite this, the improving economic environment is expected to generate double-digit credit growth by 2026.
While borrower defaults may continue—particularly in the agriculture and energy sectors—Moody’s anticipates problem loan levels will stabilize around 8%, supported by lower borrowing costs.
As of September 2025, Pakistani banks maintained strong capital positions, with Tier One capital and Total Capital ratios at 18% and 22.1%, respectively—well above regulatory requirements. Moody’s believes these robust reserves will help secure stability as banks face ongoing economic and industrial challenges.
