Moody's re­port

The Pak Banker - - FRONT PAGE -

The lat­est re­port from US credit rat­ing agency Moody's shows that Pak­istan's fi­nan­cial sys­tem is in good health. Ac­cord­ing to the rat­ing agency, the out­look on Pak­istan's bank­ing sys­tem is "sta­ble". Moody's has main­tained B3 sta­ble rat­ing of Pak­istan's bank­ing sys­tem con­sid­er­ing steady fund in­flows and grow­ing econ­omy, but it said high ex­po­sure to gov­ern­ment se­cu­ri­ties poses 'the big­gest chal­lenge' to the sec­tor. To quote the rat­ing agency, "The out­look for banks in Pak­istan (B3 sta­ble) is sta­ble over the next 1218 months… driven by an ac­cel­er­at­ing econ­omy and sta­ble fund­ing, while also tak­ing into ac­count the banks' large hold­ings of low-rated gov­ern­ment bonds, mod­est cap­i­tal lev­els and high as­set risks".

Moody's has been main­tain­ing a sta­ble out­look on the bank­ing sys­tem since Novem­ber 2015. The agency said the eco­nomic growth - boosted by do­mes­tic de­mand and China-funded in­fra­struc­ture projects - will stim­u­late lend­ing and sup­port a slight im­prove­ment in as­set qual­ity over the next 12-18 months. So, de­spite mar­gin pres­sure, the banks' prof­itabil­ity should re­main flat. Sta­ble fund­ing from cus­tomer de­posits and high liq­uid­ity lev­els rep­re­sent fur­ther strengths. How­ever, the big­gest chal­lenge fac­ing the banks is their large hold­ings of low-rated gov­ern­ment bonds. Mod­est cap­i­tal lev­els and high as­set risks pose ad­di­tional risks.

Sig­nif­i­cantly, the credit rat­ing agency has pro­jected real GDP growth at 5.5 per­cent for the fis­cal year of 2017/18 and 5.6 per­cent for FY2019. Ac­cord­ing to Moody's, in­fra­struc­ture in­vest­ment and solid do­mes­tic de­mand will prove to be the main driv­ers of eco­nomic growth and will fuel lend­ing growth of 12-15 per­cent for 2018. But the econ­omy re­mains sus­cep­ti­ble to po­lit­i­cal in­sta­bil­ity and a de­te­ri­o­ra­tion in do­mes­tic se­cu­rity. Moody's ex­pects as­set qual­ity to im­prove in the cur­rent sup­port­ive macroe­co­nomic en­vi­ron­ment, helped by the banks' di­ver­si­fied loan port­fo­lios and low cor­po­rate debt. Non-per­form­ing loans con­sti­tuted 9.2 per­cent of gross loans as of 30 Septem­ber 2017. As­set risk also re­mains high due to weak­nesses in the le­gal frame­work, in­ef­fi­cient fore­clo­sure pro­cesses and scant in­for­ma­tion for as­sess­ing bor­rower cred­it­wor­thi­ness. In ad­di­tion, the banks' high ex­po­sure to low-rated gov­ern­ment se­cu­ri­ties (44 per­cent of as­sets) con­tin­ues to pose a ma­jor risk.

In Moody's view, the banks' cap­i­tal ra­tios have de­clined, but will re­cover grad­u­ally once higher reg­u­la­tory re­quire­ments kick in this year and the next. Cap­i­tal will be boosted by higher profit re­ten­tion, cap­i­tal in­creases and cap­i­tal op­ti­mi­sa­tion mea­sures. How­ever, based on Moody's ad­justed tier 1 ra­tio, the banks' cap­i­tal buf­fers are mod­est. The credit rat­ing agency is of the opinion that the banks' prof­itabil­ity will re­main flat, de­spite mar­gin pres­sure. The prof­its will be sup­ported by strong lend­ing growth, a fo­cus on low-cost cur­rent ac­counts and mod­er­ate pro­vi­sion­ing needs, de­spite in­ter­est mar­gin com­pres­sion. The in­ter­est mar­gins should level off to­wards the end of 2018, once pres­sure from the rein­vest­ing of legacy high-yield­ing Pak­istan in­vest­ment bonds re­duces, as the re­main­ing of th­ese ma­ture.

Ac­cord­ing to Moody's, sta­ble cus­tomer de­posits and high liq­uid­ity lev­els will re­main the banks' key strengths. Cus­tomer de­posits make up around 70 per­cent of to­tal as­sets and they are ex­pected to grow by 12-15 per­cent this year, pro­vid­ing plenty of low-cost fund­ing. But the sit­u­a­tion is not with­out its neg­a­tive as­pect. Prob­lems will mul­ti­ply if the trend to­wards pri­vate-sec­tor lend­ing is to con­tinue. For one, do­mes­tic banks are still wait­ing for their slice of CPEC ac­tion. Moody's says that as growth picks up and CPEC-re­lated in­vest­ments gather mo­men­tum, the banks are likely to find more op­por­tu­ni­ties in the pri­vate sec­tor.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.