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KARACHI: The outlook for Pakistan’s banking system remains negative, says Moody’s Investors Service in a new report published on Monday, reflecting banks’ large and increasing holdings of Pakistan government bonds, which render their balance sheets vulnerable to sovereign credit risk; and the challenging domestic operating environment, which will continue to pressure asset quality. These negative pressures are only partly mitigated by banks’ low-cost and stable deposit-funded profiles, which support financial stability.
The new report, entitled ‘Banking System Outlook: Pakistan’, is now available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release.
The banks’ high and increasing exposure to Pakistani government debt will remain a major source of credit risk, as the government will continue to run large deficits over the outlook period, which will be financed in large part by the domestic banking sector. This exposure links the banking system’s health directly to the country’s Caa1-rated sovereign credit risk. Moody’s estimates that Pakistani banks’ exposure to government securities and loans to public-sector companies increased to 674 percent of Tier 1 capital as at March 2013 (or 46 percent of total assets), up from 382 percent of Tier 1 as of December 2010.
Operating conditions will also remain challenging over the outlook period, with 2013 gross domestic product growth forecasted at 3.6 percent, well below historical trends. The economy is faced with significant fiscal imbalances, low foreign exchange reserves, a fragile political environment and structural problems, particularly in the energy sector where power outages have depressed manufacturing output and led to a fall in private investment. According to the rating agency, the challenging operating environment will suppress demand for credit and lead to increases in non-performing loans (NPLs), which stood at 14.7 percent as of March 2013. Moreover, Moody’s considers that reported NPL figures understate the full extent of asset-quality deterioration in the banking system, due to the high level of problematic government-guaranteed loans that are not classified as NPLs. reuters