Moody’s Investors Service has revised Pakistan’s banking system outlook from positive to stable, citing a slow and uneven recovery in the operating environment despite improvements in key macroeconomic indicators. According to the ratings agency, banks’ financial performance is expected to remain broadly stable over the next 12 to 18 months rather than showing significant improvement, reflecting both external and domestic challenges in the economic landscape.
The agency noted that Pakistan’s operating environment continues to recover gradually from previously weak levels, supported by a slowly improving fiscal and economic outlook, along with a strengthening external position. However, long-term debt sustainability remains uncertain due to the country’s fragile fiscal position, elevated liquidity risks, and persistent external vulnerabilities. The banking sector’s performance remains closely aligned with the government’s Caa1 stable sovereign rating, as banks hold a significant portion of their assets in government securities, accounting for roughly half of total banking assets.
Moody’s expects Pakistan’s real GDP to grow at around 3.5% in 2026, up from 3.1% in 2025, as ongoing structural and fiscal reforms gradually strengthen economic activity. Although recent floods are expected to weigh on agricultural output, the industrial and services sectors are anticipated to remain resilient. Inflation, which eased sharply to 4.5% in 2025 from 23% in 2024, is projected to rise moderately to around 7.5% in 2026 due to base effects.
One of the key risks highlighted by Moody’s is banks’ elevated exposure to government securities, which currently stands at approximately nine times equity. This close linkage ties the credit strength of banks to the sovereign’s financial health. Sector-wide nonperforming loans increased in early 2025 following the removal of the advances-to-deposits ratio tax, prompting some banks to reduce loan book sizes. Despite these challenges, double-digit credit growth is expected in 2026, supported by improved macroeconomic conditions and lower borrowing costs. Problem loans, measured as Stage 3 loans, are projected to remain broadly stable at around 8%, though stress is likely to persist in vulnerable sectors such as agriculture and energy.
The agency emphasized that Pakistani banks continue to maintain solid capital buffers, with Tier 1 and total capital ratios of 18% and 22.1% respectively as of September 2025, well above regulatory minimums. Problem loans are fully provisioned, and ongoing investment in government securities, which carry zero risk weightings, is expected to further support capital metrics.
Moody’s also highlighted that while interest rates are expected to decline, resulting in modest net interest margin compression, higher lending volumes, non-interest income, and controlled costs should offset this pressure. Average return on assets is forecasted at around 1.1% in 2026, despite elevated taxes affecting profitability.
Funding and liquidity remain sound, with customer deposits accounting for 63% of total assets. Strong remittance inflows, financial inclusion initiatives, and digitalization have supported deposit growth. The agency reiterated that although the government has historically provided support to banks in distress, fiscal constraints continue to limit its capacity, effectively capping bank ratings at the sovereign level.
Earlier, in August 2025, Moody’s upgraded local and foreign-currency long-term deposit ratings of leading banks including Allied Bank, Habib Bank, MCB, National Bank of Pakistan, and United Bank, reflecting improved operating conditions, resilient financial performance, and enhanced government support capacity.
Follow the PakBanker Whatsapp Channel for updates across Pakistan’s banking ecosystem.