In its latest report, the US-based bond rating firm, Moody Investor Services, has offered stable prospects for Pakistan’s banking system over the next 12-18 months, backed by strong financing and liquidity and close ties to the sovereign.

Moody anticipates in his study that the government will remain willing, in case of need, to support at least the critically significant banks, but its capacity to do so is constrained by fiscal challenges reflected by its B3 ranking.

“The sovereign credit profile has improved in recent months, benefiting the banks through their high exposure to government securities, which account for around 40pc of their assets,” says Constantinos Kypreos, a Moody’s Senior Vice President.

As per Moody, ongoing infrastructure projects and improvements in electricity generation and domestic security will also support economic development in Pakistan in terms of operating environment. Moreover, terms of trade gains and the depreciation of rupees are likely to elevate private investment from low levels.

“Operating conditions for Pakistan banks, although gradually improving, remain difficult amid tight monetary conditions – with the policy rate at 13.25pc – and large government borrowing needs crowding out funding for the private sector,” adds Kypreos.

The agency added that while economic growth will remain sluggish, the exchange rate has stabilized since June 2019, and markets are expecting lower policy rates from the State Bank of Pakistan over the coming years.

Read More: Moody says Pakistan’s banking system has ‘stable outlook’

Stable deposits from customers and high liquidity still remain key strengths, providing ample low-cost financing for banks. Capital rates should remain relatively stable, but Moody’s takes these modest compared to peers into consideration. Profits will slightly increase but remain below past levels.