Pakistan Banking Sector Profits Fall 1% to Rs505 Billion in Nine Months

Pakistan banking sector profits declined slightly during the first nine months of 2026, with banks reporting a combined after-tax profit of Rs505 billion, down 1% compared with the same period last year. An Arif Habib Limited (AHL) report attributed the decline to higher interest expenses and operating costs, despite growth in non-interest income and lower taxation.

Banks earned 6% more in interest during the period, but their interest expenses increased by 9%. As a result, net interest income remained almost unchanged at Rs1.6 trillion. The average policy rate stood at around 11.1%, compared with 11.4% a year earlier.

Average interest yield dropped from 13% to approximately 11%, while the average cost of funds declined from 8% to around 6%. This brought the sector’s net interest margin to nearly 4%.

Non-Interest Income Records 18% Growth

Banks generated Rs504 billion in non-interest income, marking an increase of around 18%. Fee income rose 11%, foreign exchange income increased 36%, while capital gains grew 30%.

Sector also recorded a net provisioning reversal of approximately Rs21 billion, compared with Rs8 billion in the corresponding period last year. National Bank of Pakistan reported the largest reversal at Rs6 billion, followed by United Bank Limited at Rs4.4 billion and Bank Alfalah at Rs3.2 billion.

Meanwhile, operating expenses increased by around 15% to Rs1.1 trillion. Meezan Bank reported the lowest cost-to-income ratio at 32%, followed by Standard Chartered Bank Pakistan at 33% and UBL at 38%.

Although pre-tax profit declined by 5%, a lower effective tax rate of 53% helped limit the overall fall in profitability.

Listed Banks Report Rs164 Billion Quarterly Profit

During the third quarter of 2026, listed banks recorded combined profits of Rs164 billion. This represented a 3% decline year-on-year and a 2% decrease compared with the previous quarter.

Following a 100-basis-point policy rate increase in the second quarter, average asset yields rose to around 11% in the third quarter, up from 10.7%. The average cost of funds also increased from 6.1% to approximately 6.4%.

Quarterly interest earned reached around Rs1.6 trillion, up 13% year-on-year, while interest expenses climbed 18% to Rs1.1 trillion.

Non-interest income fell 4.6% compared with the previous quarter, mainly due to the normalisation of capital gains, which stood at Rs154 billion during the quarter.

The sector recorded a quarterly provisioning reversal of Rs12.2 billion, compared with Rs4.9 billion a year earlier. Bank Alfalah led with Rs2.6 billion, while Bank Al Habib and Meezan Bank each recorded Rs2.5 billion.

Quarterly operating expenses reached Rs384 billion, an increase of 14% year-on-year. Standard Chartered, Meezan Bank and MCB Bank reported cost-to-income ratios of 32%, 34% and 42%, respectively.

Deposit Growth Slows as Banks Adjust Investments

Deposit growth was almost flat during the third quarter, increasing by just 0.02% compared with the previous quarter. However, some major banks continued to increase their deposits. UBL recorded 6% growth to Rs6.5 trillion, followed by Meezan Bank at 5% and MCB at 4%.

Total investments across the banking sector declined by around 6% quarter-on-quarter. Banks allowed investments to mature and used the proceeds to reduce their exposure to Open Market Operations, indicating a move towards reducing balance-sheet leverage.

Fourth Quarter Earnings May Face Pressure

The AHL report expects some pressure on bank earnings in the fourth quarter following a 50-basis-point policy rate increase at the end of October.

However, banks with stronger current and savings account deposits, lower leverage and shorter investment portfolio durations may be better positioned to manage the impact.