On 26 March, the State Bank of Pakistan (SBP), the country’s central bank, cut its policy rate 150 basis points to 11%, reduced banks’ capital conservation buffers (CCB) 100 basis points to 1.5%, relaxed terms for new and existing loans and announced other forbearance measures to increase banks’ cushion against the economic effects of coronavirus, stated the Moody’s report.
“We expect the measures to mitigate banks’ asset-quality deterioration amid less business generation and loan growth in an economic slowdown. Additio nally, the Pakistani banks we rate – Habib Bank Limited (B3 stable, caa11), National Bank of Pakistan (B3 stable, caa1), United Bank Ltd. (B3 stable, b3), MCB Bank Limited (B3 stable, b3) and Allied Bank Limited (B3 stable, b3) – benefit from high or very high levels of government support, which will shield their credit profiles from impairment of their standalone credit assessments.
“We expect Pakistan’s real GDP growth to slow to 2.0%-2.5% for fiscal 2020 (which ends 30 June 2020), lower than our earlier forecast of 2.9%, reflecting the impact of the coronavirus pandemic. Consumption of services, which has underpinned growth in recent years, will be adversely affected by the movement restrictions. The textile sector, the country’s key manufacturing sector which accounts for around 60% of exports, has also been hit by supply-chain disruptions and a decline or postponement of orders. Manufacturing loans (mainly to the textile and food sectors) accounted for 62% of private-sector loans as of 29 February 2020.
“The policy rate reduction to 11% follows a 75-basis-point cut on 17 March and will help maintain credit growth, which we expect will remain below nominal GDP growth. Lower interest rates on loans will also improve borrowers’ repayment capacity. However, the lower rates will reduce net interest margins and diminish banks’ earnings.
“Reducing the capital conservation buffer to 1.5% will free up PKR800 billion of capital, or 10% of outstanding loans, according to the SBP’s estimate. The lower CCB will support banks’ lending activities, but creates potential asset-quality pressure.
“The SBP has offered cash-flow relief through loan refinancing schemes and loan payment holidays to borrowers such as exporters and manufacturers affected by the coronavirus disruptions. The central bank is allowing delayed principal payments (but not interest) for up to one year at the discretion of the lender, but application for the delays must be by 30 June 2020. The grace period lowers the risk of asset impairment and supports the value of securitised assets over the longer term.
“The central bank is allowing banks to classify restructured loans as performing unless the borrower has taken no action for 180 days after the originally scheduled payment date. It has also postponed for two months until 30 August 2020 the preparation of pro forma accounts based on the International Financial Reporting Standard No. 9, requiring full implementation by 1 January 2021. The delay supports capital ratios that would be adversely affected by higher provisions if IFRS9 were to have taken effect earlier.”