Moody’s lowers banks outlook to negative

KARACHI: Moody’s Investors Service changed its outlook for the Pakistani banking system to negative from stable as reversal in economic growth is expected to bite government papers-oriented banks.

“The banks’ operating conditions will be difficult, with Pakistan’s real GDP growth slowing to 4.3 percent in the fiscal year ending June 2019, down from 5.8 percent in 2018,” the US-based credit ratings agency said in a report.

“Slower economic growth will contain business opportunities for banks and stall improving trend in problem loans.” Moody’s said banks’ large holdings of government bonds link their credit profiles to the low-rated government.

The negative outlook is based on Moody’s assessment of six drivers, of which operating environment, asset risk and government support are deteriorating, whereas capital, profitability and efficiency and funding and liquidity are stable.

Moody’s rates the five largest banks in Pakistan by assets. Together, these banks account for around 50 percent of system deposits. The central bank projected growth at around four percent.

Banking sector’s profitability continued to remain suppressed despite around 450 basis points increase in interest rates since beginning of the last year. Their annual profits are likely to remain flat in 2018.

The sector’s topline growth is expected to remain contained also due to aggressive re-pricing of liabilities, a phenomenon which undermined net-interest income growth similar to the magnitude of rate hikes throughout the year, forcing the industry to aggressively mobilise low cost funds, according to Taurus Research.

Moody’s Senior Vice President Constantinos Kypreos said over the next 12-18 months banks in Pakistan would see their credit profiles challenged by their high exposure to the country’s low-rated sovereign debt and a slowing economy.

Rupee has depreciated 30 percent versus the US dollar, interest rates rose by 450 basis points between December 2017 and February 2019, and inflation is rising; all factors which affect business and consumer confidence and the private sector’s debt repayment capacities.

Moody's said Pakistan’s banks face the risk of macroeconomic contagion through a range of channels, including their large holdings of government securities, which caps their credit profiles to the sovereign, and from the authorities’ weakening capacity to support the banks in case of need, as evidenced by the negative outlook on the sovereign rating.

“On a more positive note, the banks will continue to benefit from stable customer deposits and high liquidity,” Kypreos added. The State Bank of Pakistan’s data showed that banking deposits rose around nine percent year-on-year to Rs12.741 trillion till November-end as back-to-back rate hikes made the parking of funds into banks attractive.

The rise in deposits was largely driven by the resident deposits, which increased 8.4 percent year-on-year to Rs12.535 trillion, while non-resident deposits increased to Rs206 billion from Rs128 billion a year earlier. Government deposits stood at Rs1.849 trillion in November compared with Rs1.639 trillion. Personal deposits rose to Rs6.240 trillion from Rs5.705 trillion, according to the data breakups.