Pakistan’s commercial banking sector is expected to face a squeeze on profitability in the second quarter of 2026 as elevated provisions, narrowing margins and weaker non-funded income offset stable core earnings.
The earnings pressure comes despite a modest 3% sequential increase in net interest income. Higher provisions are emerging as a key drag on the sector’s bottom line. An analysis by Optimus Capital Management projects the banking sector will post profit after tax (PAT) of Rs112 billion in 2QCY26, compared with Rs133 billion in the preceding quarter. This marks a 16% quarter-on-quarter decline, though still up 4% year-on-year.
Despite a 3% quarter-on-quarter increase in net interest income, a 5.3-times sequential rise in provisions, along with an 88% decline in capital gains and 45% decline in dividend income, is expected to weigh heavily on earnings.
Non-funded income is projected at Rs80 billion, down 34% quarter-on-quarter and 9% year-on-year. Fee and commission income is projected to rise 3% quarter-on-quarter and 16% year-on-year. The report attributed the decline mainly to normalisation in fee income.
Fee income at United Bank Limited and Bank Alfalah Limited is expected to lead the sector, increasing by 62% and 58% respectively, as capital gains income normalises.
Net interest margins (NIMs) are projected to fall to 4.3% for 1HCY26 from 4.9% in 1HCY25, marking a 60-basis-point compression. Most banks, except Meezan Bank and Bank Alfalah, are expected to see negative to flattish margin trajectories on a sequential basis.
Dividend payouts for the quarter are projected at Rs67 billion, down 1% quarter-on-quarter. On an annual basis, payouts are projected to rise 5% year-on-year, supported by higher distributions from Habib Bank, Meezan Bank and Bank Alfalah.
Optimus maintains a neutral stance on the sector, noting most banks are trading close to their justified price-to-book levels. The brokerage said ongoing geopolitical friction poses a near-term risk to inflation and could impact monetary policy decisions, but views this as a transitory headwind.
Over the medium term, the sector is expected to benefit from regulatory pushes towards a documented, cashless economy, which should structurally enhance the low-cost deposit base.
Earnings remain resilient despite quarterly pressure
The banking sector’s total revenues stood at Rs970.6 billion in 1HCY26, up 8% year-on-year from Rs899.4 billion in 1HCY25. Net interest income (NII) rose 5% year-on-year to Rs769.1 billion, while non-interest income increased 18% to Rs201.5 billion.
Operating expenses rose 16% year-on-year to Rs445.6 billion, while provisions increased to Rs14 billion from Rs4.8 billion, marking a 192% year-on-year rise.
Profit before tax (PBT) remained broadly stable at Rs511 billion in 1HCY26, compared with Rs510.1 billion in the same period last year. Profit after tax (PAT) rose 9% year-on-year to Rs245.8 billion from Rs225.7 billion.
Net interest margins declined to 4.3% in 1HCY26 from 4.9% in 1HCY25. Dividends increased 14% year-on-year to Rs133.8 billion, while the payout ratio rose to 54.5% from 51.9%.
For the second quarter, total revenues stood at Rs471 billion, down 5.7% quarter-on-quarter but up 3% year-on-year. Net interest income increased 3.3% quarter-on-quarter and 5.9% year-on-year to Rs390.8 billion. Non-interest income fell 33.8% quarter-on-quarter and 9% year-on-year to Rs80.2 billion.
Profit before tax declined 15.9% quarter-on-quarter and 8.7% year-on-year to Rs233.5 billion. PAT fell 16.2% quarter-on-quarter but increased 3.7% year-on-year to Rs112.1 billion. Dividends stood at Rs66.7 billion, down 0.54% quarter-on-quarter but up 6% year-on-year.
Research approach
“Our banking sector analysis and forward-looking financial models are built upon a foundation of publicly available financial statements, management disclosures, and our internal macroeconomic projections regarding long-term policy and KIBOR rates,” Optimus Head of Research Yasin Iqbal Kodvavi told The Express Tribune.
He said based on these fair value estimates, the firm maintains a neutral stance on the sector. Most banks are currently trading near their justified price-to-book levels, presenting limited broad-based upside potential outside of a few select opportunities. Additionally, with the sector experiencing a persistent contraction in net interest margins, future earnings sustainability and balance sheet growth will increasingly rely on volumetric expansion rather than margin enhancement, he added.Latest News, Breaking News & Top News Stories | The Express TribuneShazia Tasneem FarooqiRead More