Pakistan’s banking sector is expected to record a modest quarter-on-quarter decline of around 1% in profits for the fourth quarter of calendar year 2025 (4QCY25), primarily due to lower returns on investment portfolios. Despite this, overall net interest margins are anticipated to remain largely stable, as falling asset yields are offset by a reduction in deposit costs following recent cuts to the central bank’s policy rate.
The 50-basis-point policy rate reduction announced in December is projected to have a more pronounced impact in the current quarter, even as borrowing spreads have tightened. Banks continue to operate with positive margins, supported by strong balance sheets and healthy revaluation surpluses on investment holdings, which provide flexibility to book capital gains and offset narrowing core spreads.
KTrade Research noted that while the industry’s investment-to-deposit ratio fell slightly from September levels, total deposits grew in volume terms. Deposit mobilization remained robust, expanding by more than 6%, with several banks promoting current accounts to secure lower-cost funding. This shift toward cheaper deposits is expected to partially cushion net interest income from the drag of declining yields. Market interest rates have also moved closer to the central bank benchmark, with secondary market yields and the six-month KIBOR trending downward during the quarter.
Among major banks, Bank Alfalah (BAFL) and the National Bank of Pakistan (NBP) are projected to report sequential earnings growth, while United Bank Limited (UBL) and Habib Bank Limited (HBL) may see softer results due to weaker income from their investment books. Lending activity has accelerated alongside double-digit quarterly loan growth, prompting a rise in provisioning expenses as credit risk edges higher.
Fee-based income and capital gains are expected to play an increasingly important role in sustaining profitability, supported by large unrealized gains on investment portfolios. Analysts also highlighted that banking stocks continue to trade at attractive multiples, with moderate price-to-book and price-to-earnings ratios and dividend yields in the mid-single-digit range.
KTrade Research maintains a constructive outlook on the sector, listing NBP, BAFL, UBL, and HBL among preferred names for investors. Expected earnings per share for 4QCY25, compared with actual figures for 4QCY24, are as follows: BAFL 4.54 vs 3.05, HBL 10.93 vs 11.11, MCB 11.48 vs 8.88, MEBL 11.7 vs 13.49, UBL 13.51 vs 10.4, and NBP 11.52 vs 10.5.
Overall, while the banking sector faces modest pressure from lower investment returns and tightening spreads, strong deposit growth, robust balance sheets, and diversified revenue streams are expected to sustain stability and moderate profitability through the quarter.
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