As Pakistan’s banking earnings season kicks off, MCB Bank Limited (MCB) has set the tone by reporting a 10% year-on-year decline in pre-tax profit for the first quarter of the calendar year 2025 (1QCY25). Despite the earnings dip, MCB maintained its dividend-friendly reputation by announcing a Rs9 per share first interim cash dividend. However, the real story lies not in the profit and payout, but in the stark shift in MCB’s asset allocation strategy—a mirror to the broader industry pivot away from private sector credit and back toward government bonds.
Just one quarter ago, the banking sector was engaged in a rapid lending push, driven by regulatory pressure to improve Advance-to-Deposit Ratios (ADR) and sidestep penal taxation. That short-lived surge saw MCB pushing its ADR to 54% by the close of Q4CY24. But as the new quarter began, the credit enthusiasm waned sharply. By the end of 1QCY25, MCB’s ADR had fallen dramatically to 36%, signaling a quick return to the long-standing industry habit of prioritizing sovereign exposure over private sector lending.
In numerical terms, MCB’s lending book contracted by Rs282 billion, a decline of 27%, bringing its total advances down to Rs760 billion—a level not seen since the end of 2022. On the other hand, the bank’s investment portfolio surged by Rs650 billion, marking a 56% quarter-on-quarter increase. This massive buildup propelled MCB’s Investment-to-Deposit Ratio (IDR) to an all-time high of 87%, reinforcing the bank’s shift back to government securities.
This retreat from credit growth is not isolated to MCB. It reflects a sector-wide retraction. Total banking sector advances shrank by 15% quarter-on-quarter, falling to Rs15 trillion as of March 2025. A deeper look reveals that Non-Bank Financial Institutions (NBFIs)—which account for just 8% of the total banking sector loan book—were disproportionately responsible for the pullback, contributing nearly a third of the Rs2.4 trillion quarterly drop. This reversal underscores the temporary and regulatory-driven nature of the previous quarter’s lending spike.
Analysts note that while the shift to risk-free government paper bolsters banks’ liquidity and cushions balance sheets in uncertain economic conditions, it comes at the cost of real sector credit penetration. The renewed reliance on sovereign debt, while low-risk, may hinder economic momentum by limiting access to private financing for businesses and consumers alike.
MCB’s results also highlight a structural paradox in Pakistan’s banking landscape: banks remain flush with liquidity but reluctant to lend, preferring the predictability and yield of government securities over the complexities of private credit risk.
As market watchers dissect MCB’s Q1 performance, the bigger narrative emerging is one of caution. With macroeconomic headwinds and regulatory uncertainty still prevalent, banks may continue to play it safe, even at the expense of growth. MCB’s balance sheet may just be the first of many to illustrate this industry-wide retreat back to bonds.