Global credit rating agency, Moody's Investors Service has downgraded Pakistan's outlook for the banking system to negative from stable.
"Over the next 12-18 months, banks in Pakistan will see their credit profiles challenged by their high exposure to the country's low-rated sovereign debt and a slowing economy," Dawn quoted Constantinos Kypreos, a senior vice-president at Moody's, said in a statement.
According to a statement released on Monday, the company noted that the financial operations of the banks in Pakistan would become even more difficult in the coming days, as the real GDP growth slowing to 4.3 per cent in the fiscal year ending in June, down from 5.8 per cent in 2018.
"On a more positive note, the banks will continue to benefit from stable customer deposits and high liquidity," Kypreos added.
The Pakistani rupee has depreciated 30% in front of the US dollar, interest rates rose by 450 basis points between December 2017 and February 2019, and inflation is rising; all factors which affect business and consumer confidence and the private sector's debt repayment capacities, the company adds.
The company further noted that Pakistani banks are currently facing problems at the macroeconomic level owing to a range of issues, including the large holdings of government securities, and the incapacity of the government authorities to support the banks during such times of need, the Dawn reported.
The negative outlook of Moody's assessment of Pakistani banks is based on six categories, namely operating environment (deteriorating); asset risk (deteriorating), capital (stable); profitability and efficiency (stable); funding and liquidity (stable); and government support (deteriorating).