Moody’s Investors Service has upgraded the outlook of Pakistan’s banking sector from ‘negative’ to ‘stable’, citing easing macro challenges and fiscal pressures. In its report, the agency highlighted the solid profitability and stable funding of banks, which provided a buffer against the country’s macroeconomic challenges and political uncertainties. The report forecasts a modest growth of 2% for the Pakistani economy in 2024, with a projected decrease in inflation from 29% to around 23% compared to the previous year. However, it cautioned that high-interest rates and inflation would continue to hinder private-sector spending and investment. Pakistani banks, according to Moody’s, are primarily financing the government’s fiscal deficits, limiting their capacity to lend to the real economy. While initiatives to promote financial inclusion and support key sectors may partially boost credit demand, the overall lending landscape remains constrained. Moody’s noted the high exposure of Pakistani banks to the government through significant holdings of government securities, which account for around half of total banking assets. This linkage exposes their credit strength to that of the sovereign. The rating agency also highlighted that external pressures, combined with a challenging operating environment, may slightly affect the performance of Pakistani banks’ loan portfolios. Despite these challenges, Moody’s expects the banking sector’s profitability to remain strong, supported by wide net interest margins. However, profitability may decline from 2023 peaks due to subdued business growth, increased funding costs, and elevated taxes. Moody’s indicated that Pakistan’s rating could be upgraded if the government successfully mitigates external and liquidity risks. It expects the capital ratios of Pakistani banks to remain stable, buoyed by strong earnings despite high dividend payouts. The top five largest banks in Pakistan, including the National Bank of Pakistan (NBP), HBL, UBL, MCB, and Allied Bank Limited, received a baseline credit assessment of Caa3 from Moody’s. The agency underscored the importance of stable deposit-based funding in supporting financial stability within the banking sector.