LAHORE: Moody’s Investors Service has revised Pakistan’s banking sector outlook from "Positive" to "Stable," citing slow economic recovery and improving financial conditions.

“We have changed our outlook on Pakistan’s banking system to stable from positive,” the global rating agency said on Monday.

Moody’s noted that the operating environment continues to recover, “but only gradually, supported by the country’s slowly improving economic and fiscal outlook and strengthening external position.”

The agency also highlighted that while banks’ financial performance will remain stable over the next 12-18 months, challenges related to asset quality and profitability persist.

“The sector outlook also aligns with that of the Government of Pakistan (Caa1 stable), given banks’ substantial holdings of government securities, which account for around half of total banking assets,” Moody’s said. It added that Pakistan’s long-term debt sustainability remains uncertain due to a still-weak fiscal position and external vulnerabilities.

Moody’s projects that Pakistan’s economy will grow by about 3.5% in 2026, a slight increase from 3.1% in 2025. Inflation has significantly reduced to 4.5% in 2025, down from 23% in 2024, but is expected to rise again to approximately 7.5% in 2026. Lower inflation is helping reduce borrowing costs, which may encourage more borrowing and stabilize banks' loan quality.

Despite recent floods affecting agriculture, the industrial and service sectors are expected to remain strong. Although there were initial spikes in loan defaults, Moody’s anticipates robust credit growth in 2026. Even with some weaknesses, banks should keep their problem loan ratios around 8% and maintain solid capital ratios, indicating a healthy balance.

Waqas Ghani, Head of Research, JS Global, said, “It is clear that sustained improvement will depend on effective policy implementation and greater external financial support, as risks are still hanging around.” He added of the revision that, "This development is not expected to materially alter the overall outlook of the sector."

However, the stable outlook does reflect a positive shift toward a more stable banking environment, linking banks’ health closely to the government’s economic outlook. Lower interest rates are expected to support credit growth without significantly increasing risk.

Overall, Moody’s rating indicates that while there are still risks, Pakistan’s banks are on a path to gradual recovery, offering a more balanced outlook in the current emerging-market landscape.

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Moody’s revises Pakistan’s banking sector outlook to stable amid gradual recovery