Pakistan’s banking sector is adjusting its balance sheets as changing interest rate expectations, higher bond yields and inflationary pressures reshape funding and investment decisions. Since the onset of the US-Iran conflict, Pakistan’s bond yields have moved upward, creating a more challenging rate environment for financial institutions. Secondary market rates increased by around 110 to 220 basis points during the period, while higher oil prices added to inflationary pressures. In response to these developments, the State Bank of Pakistan (SBP) delivered a 100-basis-point increase in the policy rate in late April, prompting banks to reassess the composition of their balance sheets and the cost of their funding sources.
The financial results of banks for the second quarter of calendar year 2026 indicate that several institutions had already begun responding to the changing rate environment. Data covering nine banks under AHL’s coverage shows that five banks reduced their REPO positions during the quarter. The reductions were particularly notable at Habib Bank Limited (HBL), Bank of Punjab (BOP), MCB Bank, Faysal Bank (FABL) and Askari Bank (AKBL). HBL recorded the largest decline, with its REPO position falling by PKR 646 billion, followed by BOP with a reduction of PKR 315 billion. MCB reduced its position by PKR 119 billion, while FABL recorded a decline of PKR 94 billion. AKBL reported a comparatively smaller reduction of PKR 6 billion.
The movement in REPO positions points to a broader adjustment in the way banks are managing their funding structures as expectations around interest rates become less predictable. Rather than maintaining a heavier reliance on repricing liabilities, banks appear to be placing greater importance on building funding sources that carry lower costs and provide more stability. Low-cost deposits are therefore becoming increasingly important in the sector’s balance sheet strategy, particularly as banks assess how changes in market rates could affect margins and overall profitability in the coming quarters.
The shift is also taking place against a backdrop of elevated inflationary risks and changing expectations for monetary policy. Rising oil prices have added pressure to domestic inflation, while movements in secondary market yields have increased the cost and valuation considerations associated with fixed-income assets and funding positions. For banks, these developments make the composition of liabilities increasingly important because changes in the cost of deposits and other funding sources can directly influence net interest income. The reduction in REPO positions among a number of major banks suggests that institutions are preparing their balance sheets for conditions in which interest rates may remain volatile over the medium term.
The second-quarter financial figures therefore provide an indication of how banks are adapting beyond simply responding to the latest policy rate decision. The changes in funding composition suggest that management teams are taking a broader view of liquidity, repricing risk and deposit costs. Greater reliance on low-cost deposits can help banks manage funding expenses, while a reduced dependence on repricing liabilities may provide some protection against further fluctuations in market rates. At the same time, the impact of these adjustments will vary across individual banks depending on their deposit mix, investment portfolios, lending growth and exposure to different interest-sensitive assets and liabilities.
As banks move toward the end of the third quarter of calendar year 2026, the changes in funding mix are expected to remain an important factor in determining sector performance. The repositioning seen during the second quarter could influence margins, funding costs and profitability as banks navigate the evolving monetary and market environment. With bond yields having moved higher and inflationary pressures remaining an important consideration, the ability of banks to maintain a stable and cost-efficient deposit base could become increasingly significant for their financial results. The third-quarter performance will therefore provide a clearer indication of how effectively the sector’s balance sheet adjustments are translating into financial outcomes.
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