KARACHI: Pakistan’s banks kept profits growing in the second quarter of 2026, as stronger foreign exchange income helped offset weaker interest margins and rising costs.
The banking sector’s profit after tax rose 2% year over year to Rs166 billion in 2QCY26, according to a review by Sherman Securities, while first-half earnings reached Rs342 billion, up 3% from a year earlier. The results highlighted the sector’s resilience despite geopolitical tensions and volatility in Pakistan’s financial markets.
The banking sector gained 19% during the quarter, trailing the benchmark KSE-100 Index, which rose 21%. Pakistan’s economy recorded 3.7% GDP growth in fiscal 2026, while inflation and the current account remained within targeted ranges.
The improving macroeconomic outlook was also reflected in sovereign credit-rating upgrades. Moody’s upgraded Pakistan’s rating to B3 from Caa1, while S&P Global Ratings raised it to B from B-. Sherman Securities expects both agencies to maintain their current ratings with stable outlooks.
FX income gives banks an earnings boost
Net interest income, the sector’s main source of earnings, declined 2% year over year to Rs517 billion during the quarter. Interest income rose 6% to Rs1.49 trillion, but interest expense increased faster, climbing 11% to Rs973 billion.
The pressure largely reflected the delayed impact of earlier policy-rate increases on banks’ asset yields, temporarily squeezing margins.
Non-interest income provided a key boost, rising 24% year over year to Rs163 billion. The increase was driven mainly by stronger foreign exchange income as activity through the banking system expanded.
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Remittances sent through formal banking channels increased 10% year over year during the quarter, while trade activity rose 8%, supporting higher foreign exchange transaction volumes. Several major banks recorded triple-digit growth in foreign exchange income.
Rising costs squeeze banking margins
Operating expenses remained a challenge, increasing 15% year over year to Rs342 billion. As a result, the sector’s cost-to-income ratio rose to 50% from 45% a year earlier.
United Bank Ltd., National Bank of Pakistan, Meezan Bank and Askari Bank recorded relatively higher expense growth, largely reflecting branch expansion and inflation-related costs.
The sector also benefited from provision reversals, which amounted to Rs8 billion during the quarter compared with Rs6.6 billion a year earlier. United Bank, National Bank and JS Bank recorded some of the largest reversals.
The effective tax rate declined to 52.1% from 55.9% in the same quarter of 2025, providing additional support to overall earnings.
Deposits surge as banking system expands
Banking-sector deposits increased 15% year over year to Rs41 trillion by June 2026, signaling continued expansion in the financial system.
United Bank held the largest deposit market share at 15%, up from 12% a year earlier, while Habib Bank maintained a 14% share. National Bank’s share declined to 10% from 13%.
The results also showed differences between public- and private-sector lenders. Islamic and conventional banks each recorded 2% year-over-year earnings growth, but private conventional banks posted 10% growth when public-sector institutions were excluded.
Public-sector banks, including National Bank, Bank of Punjab and Bank of Khyber, collectively recorded a 27% decline in earnings, weighing on overall sector profitability.
UBL leads the banking pack
United Bank posted the highest profit among the banks covered in the Sherman Securities review, earning Rs36 billion in 2QCY26, up 28% year over year. Meezan Bank followed with Rs25.5 billion, up 6%, while Habib Bank earned Rs18.1 billion, an 11% increase.
Askari Bank recorded a 93% increase in earnings, while JS Bank posted the strongest year-over-year growth at 704%, although the sharp increase was partly influenced by a low comparison base.
Other banks reported weaker earnings. National Bank’s profit fell 29%, Allied Bank declined 20% and Habib Metropolitan Bank dropped 22%.
Dividend payouts hold firm
Banks largely maintained their dividend payouts during the first half of 2026, with the sector’s payout ratio standing at 49%.
Standard Chartered Pakistan, MCB Bank and Meezan Bank were among the highest dividend distributors, with payout ratios of 99%, 76% and 57%, respectively.
Bank valuations keep investors bullish
The banking sector was trading at about 1.5 times price-to-book value, according to Sherman Securities. Meezan Bank and United Bank traded at higher multiples of 3.6 and 2.7 times, respectively, supported by stronger returns on equity.
Faysal Bank, MCB Bank and Bank of Punjab traded at discounted price-to-book multiples despite delivering relatively strong returns on equity.
Sherman Securities maintained an “Overweight” stance on the banking sector, citing improving macroeconomic conditions and resilience in bank earnings.
The sector continues to face risks, including weaker-than-expected credit growth, deterioration in asset quality and lower-than-expected increases in interest rates. These factors could affect banks’ margins, loan growth and valuations in the coming quarters.
