Pakistan’s banking sector reported a modest increase in profitability during the first half of 2026, with aggregate profit rising to Rs. 370 billion despite geopolitical tensions in the region, according to the State Bank of Pakistan’s Mid-Year Performance Review of the Banking Sector.
The sector had reported a profit of Rs. 365 billion during the same period a year earlier.
Net interest income declined slightly to Rs. 1,140 billion from Rs. 1,157 billion in the first half of 2025. The State Bank attributed the decline to higher interest expenses following a 100 basis point increase in the policy rate in late April 2026.
Noninterest income, however, increased to Rs. 370 billion from Rs. 289 billion during the comparable period. The increase was mainly driven by foreign exchange dealings, gains from the sale of securities, and higher fees and commissions.
The rise in fees and commissions and foreign exchange income was supported by increased remittances, a higher volume of trade-related letters of credit and elevated oil prices during the first half of 2026.
Banks also recorded higher gains from the sale of securities. The State Bank said this reflected efforts by banks to realize gains by selling securities and avoid declines in their value following an increase in secondary market yields.
The central bank said the sector’s profitability remained stable as stronger noninterest income, reversals in credit loss allowances and write-offs offset the decline in net interest income.
The banking sector’s capital adequacy ratio stood at 19.6 percent, indicating a strong solvency position. The latest macro stress tests showed that the sector, particularly large systemically important banks, was expected to remain solvent and withstand severe economic shocks over the projected two year period.
The sector’s balance sheet expanded by 9.1 percent to Rs. 68,997 billion during the first half of 2026, mainly because of increased investments in government securities. Private sector lending also recorded moderate growth during the period.
The sector’s ability to absorb potential losses improved further, with net nonperforming loans to capital declining to negative 2.3 percent in June 2026 from negative 1.8 percent in December 2025.
Lending increased across both the public and private sectors. Long term financing for small and medium sized enterprises continued to grow, while mortgage lending gained momentum, largely because of the government’s subsidized housing scheme.
Banks mobilized an additional Rs. 3,673 billion in deposits during the period under review. Financial market conditions were mixed during the first half of 2026. Volatility increased in the equity market, while the foreign exchange and money markets remained relatively stable.
Renewed conflict in the Middle East weakened investor confidence and caused greater volatility in stock prices during the early part of the period. Market sentiment later improved as tensions eased and oil prices declined during ceasefire negotiations that concluded in June.
The foreign exchange market remained stable because of stronger central bank reserves, supported by a current account surplus, bilateral financial arrangements and inflows from the International Monetary Fund.
The money market also continued to function smoothly, with the overnight rate remaining close to the State Bank’s policy rate. The State Bank expects the banking sector to maintain steady growth during the second half of 2026. Lower inflation, currency stability and continued economic recovery could support higher demand for credit.
The central bank said seasonal factors and an increase in the aggregate exposure limit for unrated large private sector borrowers were expected to support growth in bank lending. However, the relevant figures for the revised exposure limit were not specified in the review.
The continuing uncertainty surrounding the conflict in the Middle East remains a risk to the broader economic outlook and the banking sector’s performance.
Banks are also expected to remain important sources of government financing because of the projected borrowing requirements for fiscal year 2027 and a substantial decline in estimated nontax revenue.
Despite lower interest rates, bank earnings are expected to remain stable as lending to the private and public sectors increases. Credit risks are likely to remain manageable because of improved financial conditions, resilient economic activity and an expected improvement in borrowers’ repayment capacity.
The State Bank also expects the sector’s solvency position to remain strong. The latest stress tests indicate that banks, particularly large systemically important institutions, should be able to withstand severe macroeconomic shocks over the next two years.
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