• The announcement is credit negative for Pakistani banks because it raises questions about potential additional restrictions relating to banks' foreign-currency clearing service, says Moody.
  • Banks' profitability risks being constrained as a result of increased compliance and operational costs, says Moody.

Credit rating agency Moody, has termed Pakistan's continued presence on the Financial Action Task Force (FATF) grey list as ‘credit negative' for the country banks.

“The announcement is credit negative for Pakistani banks because it raises questions about potential additional restrictions relating to banks' foreign-currency clearing services, as well as their foreign operations," said Moody's Credit Outlook on Thursday.

“Banks' profitability risks being constrained as a result of increased compliance and operational costs," it said.

The intergovernmental body on Friday gave Pakistan until June 2020 to improve its anti-terrorism financing measures. “The FATF strongly urges Pakistan to swiftly complete its full action plan by June 2020," the global body said in a statement issued at the conclusion of plenary meeting in Paris.

Moody said that if Pakistan failed to implement the FATF Action Plan, international financial institutions could curtail their interactions with Pakistani banks and other financial companies, including terminating correspondent banking relationships.

“This in turn would further constrain banks' ability to generate business and result in higher compliance costs."

The agency highlighted that Pakistan's improving, ‘but still-weak,' compliance with global anti-money-laundering and combating terrorist financing standards, both by Pakistani banks and the country's authorities, means that banks still risk losing access to foreign-currency clearing services, which is crucial for Pakistani banks because it allows them to process cross-border payments for clients.

“Clearing in US dollars is particularly important given Pakistan's high import and export economic activity, as well as the fact that a large proportion of international payments are made in this currency."

“That said, this risk has so far not crystallised in the jurisdictions that have been placed on the increased monitoring list," Moody added.