Supported by an expanding economy and banks' sound finances, Moody’s Investors Service on Monday maintained a stable outlook for the banking sector in Pakistan – with a B3 stable rating.

The rating agency in its report titled ‘Banking-System-Outlook-Pakistan’ stated that the rating balances good economic momentum and growing financial inclusion that are boosting lending opportunities, against political uncertainty in Pakistan and higher inflationary pressures due to the Russia-Ukraine military conflict.

“We expect real GDP growth of between 3% and 4% for fiscal 2022 and between 4% and 5% for fiscal year 2023, with credit growth surpassing 12%,” said Moody’s, which will be achieved on the back of the government's reform agenda and the China-Pakistan Economic Corridor (CPEC).

The report said that Pakistani banks successfully navigated the Covid-19 pandemic, as it expects nonperforming loans (NPLs) to remain high but broadly stable at around 9% of gross loans.

The report said banking sector profitability will rise moderately, with return on assets around 1% to 1.1%, supported by new business generation and gradually recovering net interest margins. However, the investment gains of the banking sector are likely to be lower.

“We expect dividend payouts to rise this year, but earnings should be sufficient to keep capital at current, rather modest, levels,” said Moody’s.

The report said Pakistani banks will remain deposit funded and liquid. “These are credit strengths, but their high exposure to Pakistan government securities means their credit profiles are anchored to the low-rated sovereign,” it added.

Mood’s said that the ongoing Russia-Ukraine military conflict will pressure Pakistan’s current account deficit via higher oil prices, rising inflation will weaken private-sector spending, while sharp increases in interest rates will also weigh on private-sector investment.

Moody’s said that the government initiatives to deepen financial inclusion and government support for specific sectors, such as a subsidy scheme for housing finance, and subsidised interest rates will also boost credit demand.

“Accordingly, we expect credit growth to exceed 12% in 2022.”