SBP says banks maintained strong capital buffers, improved asset quality and growing deposits during the first half of 2026 despite heightened global risks.
KARACHI: Pakistan’s banking sector remained resilient during the first half of calendar year 2026 (H1CY26), supported by strong capital buffers, improving asset quality and continued growth in advances and deposits, according to the State Bank of Pakistan (SBP).
The central bank has issued its Mid-Year Performance Review of the Banking Sector, covering the performance and soundness of banks from January to June 2026.
The review also examines developments in financial markets and presents findings from the Systemic Risk Survey (SRS), which captures the views of independent experts on key existing and emerging risks to financial stability.
According to the SBP, the banking sector’s balance sheet expanded by 9.1 per cent during H1CY26, primarily driven by increased investment in government securities.
Advances also grew across both public and private-sector segments. The central bank noted that long-term financing for small and medium-sized enterprises (SMEs) continued its upward trend during the review period.
Mortgage financing also gained further momentum, largely supported by the government’s subsidised housing finance scheme.
On the funding side, banks mobilised an additional Rs3,673 billion in deposits during the first half of 2026, strengthening their overall funding base.
Banking sector credit risk improves
The SBP said credit risk did not pose any serious threat to financial stability during H1CY26.
A significant reduction in non-performing loans (NPLs), combined with growth in advances, brought the NPL-to-loans ratio down to 5.5 per cent in June 2026, compared with 6.1 per cent in December 2025.
The sector’s provisioning position also strengthened during the period. The provisioning coverage ratio rose to 110.2 per cent in June 2026, from 107.7 per cent at the end of December 2025.
The improvement points to stronger coverage against potential credit losses despite challenging domestic and international economic conditions.
Bank profitability moderates
While the banking sector remained financially sound, the SBP noted that earnings growth was relatively moderate during H1CY26.
The sector’s return on assets (ROA) declined to 1.1 per cent in June 2026, compared with 1.3 per cent in June 2025.
Similarly, return on equity (ROE) fell to 19.0 per cent, compared with 21.3 per cent a year earlier.
Despite the moderation in profitability indicators, the overall solvency position of the banking sector remained strong.
The capital adequacy ratio (CAR) stood at 19.6 per cent during H1CY26, providing banks with a substantial capital buffer against potential financial shocks.
Banks expected to withstand severe shocks
The SBP’s latest macro stress tests indicate that Pakistan’s banking sector is expected to remain solvent and resilient over the next two years.
The assessment showed that the banking sector as a whole, as well as large systemically important banks, would be capable of withstanding even severe shocks over the projected period.
The central bank attributed this resilience to the sector’s strong capital position and improved asset-quality indicators.
Middle East tensions increase equity market stress
The review noted that stress in the equity market increased during H1CY26, while foreign exchange (FX) and money markets experienced comparatively calmer conditions.
Higher equity-market volatility was mainly attributed to adverse geopolitical developments in the Middle East, which increased uncertainty across global financial markets.
The latest Systemic Risk Survey identified volatility in commodity prices, particularly oil prices, as a top-tier risk to financial stability.
This was followed by global geopolitical risk, highlighting the potential impact of international developments on Pakistan’s financial system and economy.
Despite these concerns, survey respondents expressed confidence in the stability of Pakistan’s financial system and in regulators’ ability to maintain financial stability.
Overall, the SBP review presents a resilient picture of Pakistan’s banking sector during H1CY26. Strong capitalisation, improved asset quality and growing deposits have strengthened banks’ ability to absorb potential shocks despite heightened geopolitical and financial-market risks.