International credit rating agency Moody’s has revised Pakistan’s banking sector outlook from positive to stable.

According to Moody’s outlook report, Pakistan’s economic conditions are gradually improving, although the pace of recovery remains slow. The report states that banks’ performance is expected to remain stable over the next 12 to 18 months.

The report also highlights that high interest rates and credit risk pressures persist in Pakistan. Moody’s identified government financial challenges as a major risk for the banking sector.

Moody’s projects Pakistan’s GDP growth at 3.5 per cent in 2026 but noted that concerns over external financing and inflation remain. Additionally, risks associated with policy implementation could affect the outlook.

Read: Moody's upgrades deposit ratings of Pak banks

Earlier, Moody's Ratings upgraded to Caa1 from Caa2 the local and foreign-currency long-term deposit ratings of five Pakistani banks, namely Allied Bank Limited (ABL), Habib Bank Limited (HBL), MCB Bank, National Bank of Pakistan (NBP) and United Bank Limited (UBL).

"We have also upgraded the baseline credit assessments (BCAs) and adjusted BCAs for ABL, HBL, MCB and UBL to Caa1 from Caa2, and for NBP to Caa2 from Caa3," the rating agency said in a statement.

The outlook on long-term deposit ratings of all banks has been changed to stable from positive.

Rating actions follow its decision to upgrade the government of Pakistan's local and foreign currency issuer and senior unsecured debt ratings to Caa1 from Caa2 to reflect Pakistan's improving external position, supported by its progress in reform implementation under the International Monetary Fund's (IMF) Extended Fund Facility.

Moody's said that the decision to upgrade Pakistani banks' ratings reflects the country's improving operating environment, as captured by the raising of its Macro Profile for Pakistan to "very weak+" from "very weak"; the government of Pakistan's improved capacity to support banks in case of need, as indicated by the sovereign rating upgrade; and banks' own resilient financial performance.

The revised Macro Profile score is underpinned by Pakistan's improving external position, supported by its progress in reform implementation. Nonetheless, it said, Pakistan's external position remains fragile. Its foreign exchange reserves remain well below what is required to meet external debt obligations, underscoring the importance of steady progress with the IMF programme to continually unlock financing.