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Banking system outlook in Pakistan

For a stable and well-organized economic structure in any country, researchers believed that a dynamic financial system is necessary. They have also revealed that a typical financial system comprises financial institutions, financial markets, clearing and settlement houses. Chiefly, banks play a crucial role in progression and development of an economy. In Pakistan banking sector constitutes the core of the financial sector. According to the State Bank of Pakistan (SBP) as growth in the banking sector and the real economy mutually strengthen each other. Presently in the report of banking system outlook – Pakistan, Moody’s revealed that high interest rates, government of Pakistan’s narrow revenue base and heavy debt burden coupled with considerable structural constraints to economic and export competitiveness would weigh on economic growth. Furthermore, Moody’s Investors Service revealed that the robust financing and liquidity and close links with the sovereign underpin stable viewpoint for the Pakistan banking system over the upcoming 12 to 18 months. Statistics also showed that real GDP growth rate would remain below potential at 2.9 percent in this year, with inflation and interest rates remaining high. The Experts predict real GDP growth rate of just 2.9 percent for the fiscal year ending June 2020, down from 3.3 percent during 2019 and 5.5 percent during 2018. Interest rates have risen by 7.5 percentage points since January 2018. Furthermore, economic growth will remain subdued, nonetheless, mainly because of high policy rate which is recorded 13.25 percent. The government of Pakistan’s heavy borrowing needs would also absorb bank lending at the expense of the private sector, hurting business and consumer self-assurance also private-sector debt repayment in Pakistan.

Analysis also revealed that operating situations are enhancing but will remain tough. Economic movement will be supported through present infrastructure projects, improvements in energy generation and local security and through terms of trade gains. Furthermore, rupee depreciation would probable lift private investment from low levels. Moody’s predicts the tight monetary situations to keep economic activity subdued near term. It is also recorded in the report that macroeconomic policy effectiveness is growing aided through increased central bank independence that would be enshrined in a new SBP Act. Other reforms include slowly addressing the long-standing issue of circular debt with a goal of abolishing it by the close of 2020. Pakistan’s narrow revenue base and heavy debt burden limits fiscal flexibility and also hampers development spending. Despite the challenges, the exchange rate has stabilized since June 2019 and markets predict SBP to lower policy rates over the next few years. In the report analysis also registered that high exposure to government securities like 40 percent of assets link banks’ credit profiles to that of the sovereign. It is also predicted that NPLs to increase slightly as a consequence of high interest rates and banks’ troubled foreign operations. Statistics registered that NPLs reached at a high 8.8 percent of gross loans as of September 2019, although risks are mitigated through the fact that banks’ loan portfolios only make up 37 percent of total assets. The government of Pakistan it is mention, is working on laws to enhance NPL recovery.


In addition, capital is modest and will remain stable. Sector-wide recorded Tier 1 capital ratios reached at 14.2 percent, but it adjusts these through increasing risk weights on government securities to 100 percent from zero percent to reflect risks linked with the sovereign’s B3 credit rating. The adjustment declines the ratio to a further modest 7 percent. Moody’s predicts banks to keep capital ratios steady by reining in dividend payouts, issuing Tier I or Tier II capital instruments or by other capital optimization gauges. Profits will rise slowly but remain below historical levels. Higher net interest margins and predicted 10 percent credit growth would also increase revenue, compensating for growing provisioning requirements, ongoing pressures at banks’ overseas operations and higher costs. Analysis also showed that customer deposits make up almost 69 percent of total assets, and it is expected these to increase by over 12 percent in 2020, offering banks with abundant low-cost financing. Cash and bank placements account for almost 12 percent of total assets while another 40 percent of assets are invested in government securities-with almost 64 percent in T-Bills. Market funding rose to 23 percent of assets as of September 2019. Moody’s predicts the government of Pakistan to remain willing to support at least the systemically significant banks in case of need, but its capability to do so is limited by fiscal issues reflected in its B3 rating. Moody’s predicts private-sector lending to increase by almost 10 percent in 2020. High interest rates and banks’ more risk-averse stance would be partly offset through steps to deepen financial inclusion, as per NFIS. Some of the NFIS steps include a targeted 25 percent market share for Islamic banking, with revised Shari’ah government framework and initiatives to facilitate liquidity management. Pakistani banks are very exposed to the B3-rated Pakistan sovereign by holdings of government securities and lending. Furthermore, Pakistani banks hold government securities value Rs 8.7 trillion. Moody’s also predicts net profit to grow in 2020, a consequence of stronger net interest income thanks to higher interest rates and government bond yields. Analysis of the report also expects Pakistani banks to sustain comfortable liquidity buffers, with core liquid assets accounting for 12 percent of assets as of September 2019, complemented through the banks’ investments in government securities such as 40 percent of total assets. Approximately 64 percent of the government securities are Treasury bills, which are agreed through SBP as collateral for repo funding.

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