Stronger capital gains, foreign exchange income and provisioning reversals offset pressure from rate changes and higher costs.
KARACHI: Pakistan’s banking sector posted a profit of around Rs341 billion during the first half of calendar year 2026 (1HCY26), remaining broadly unchanged from the corresponding period last year as a shift in interest rates reshaped earnings.
According to a report by Arif Habib Limited, interest earned by the banking sector increased 3% year on year to around Rs3 trillion, while interest expenses rose 5% to approximately Rs1.9 trillion.
The first half of CY26 featured two distinct interest-rate regimes.
During the first quarter, the downward trend in average interest rates continued. Although sector profitability remained broadly stable year on year, banks recorded unrealised losses on their equity holdings as secondary market yields increased amid expectations of tighter monetary policy.
The State Bank of Pakistan (SBP) subsequently raised the policy rate by 100 basis points in April, marking the start of the second interest-rate regime.
The rate increase temporarily compressed net interest margins (NIMs) because of repricing dynamics, resulting in net interest income (NII) declining 1% year on year during 1HCY26.
Non-interest income strengthens
Non-interest income (NFI) provided significant support to banking sector earnings during the period.
Overall NFI increased 24% year on year to Rs350 billion, driven largely by stronger net capital gains and foreign exchange income.
Net capital gains rose 63% to Rs78 billion, while foreign exchange income increased 45% to Rs77 billion.
The banking sector also recorded a net provisioning reversal of around Rs9 billion during 1HCY26, compared with a reversal of Rs3 billion in the same period last year.
National Bank of Pakistan (NBP) recorded the largest provisioning reversal at Rs5.2 billion, followed by United Bank Limited (UBL) at Rs4.2 billion and JS Bank Limited (JSBL) at Rs2.7 billion.
Banking costs increase
The banking system’s operating expenses (OPEX) increased 15% year on year to Rs718 billion during the first half of CY26.
Despite higher operating costs, several banks maintained relatively strong cost efficiency.
Meezan Bank Limited (MEBL) recorded the lowest cost-to-income ratio at 31%, followed by Standard Chartered Bank (Pakistan) Limited (SCBPL) at 33% and UBL at 34%.
Meanwhile, the sector’s profit before tax declined 5% year on year during the period.
However, an 8% reduction in overall taxation helped cushion the decline in pre-tax earnings. The average effective tax rate fell to 52%, compared with 54% in the corresponding period last year.
Rate environment reshapes bank earnings
The banking sector’s first-half performance remained broadly stable despite changing interest-rate conditions.
While higher rates and repricing pressures weighed on net interest income, stronger non-interest income, higher capital gains, foreign exchange earnings and provisioning reversals provided important support to overall profitability.
Lower taxation also helped offset the decline in pre-tax earnings and rising operating expenses, keeping aggregate banking sector profit broadly flat during 1HCY26.