Moody's has revised Pakistan's banking sector outlook from negative to 'stable'.

Moody's Investors Service upgraded Pakistan's banking sector outlook to 'stable' from negative, citing eased macro challenges and fiscal pressures. The banks' solid profitability and stable funding provide resilience against economic uncertainties and political instability. Despite forecasted modest economic growth of 2% in 2024 and a decrease in inflation, high interest rates and inflation will restrain private-sector spending and investment. Banks heavily finance the government's fiscal deficits, limiting lending to the real economy.

However, initiatives for financial inclusion and sectoral support may partially boost credit demand. Moody's highlighted the banks' significant exposure to government securities, tying their credit strength to the sovereign's. Persistent external pressures may slightly affect loan portfolios. While profitability is expected to remain strong due to wide net interest margins, it may decline due to subdued growth and increased costs.

Stable capital ratios are anticipated, supported by strong earnings offsetting high dividend payouts. The top five largest banks in Pakistan, including National Bank of Pakistan (NBP), HBL, UBL, MCB, and Allied Bank Limited, have a baseline credit assessment of Caa3 by Moody's.