Pakistan’s banking sector maintained its resilience during the first half of calendar year 2026, with the overall balance sheet expanding by 9.1% as banks increased their investments in government securities and advances continued to grow across both public and private sector segments. According to the State Bank of Pakistan’s Mid-Year Performance Review of the Banking Sector, the sector remained financially stable during H1CY26, with improvements recorded in several indicators related to credit quality, provisioning and capital strength. The review also highlighted continued growth in long-term financing for small and medium enterprises and further momentum in mortgage lending during the period.
The expansion in the banking sector’s balance sheet was largely supported by increased investments in government securities, which remained an important component of banks’ assets during the six-month period. At the same time, advances recorded growth across both public and private segments, indicating continued lending activity within the economy. Long-term financing for small and medium enterprises continued to increase, supporting access to longer-tenor funding for businesses. Mortgage lending also gained further traction, with growth attributed largely to the government’s subsidised housing finance scheme.
On the funding side, banks mobilised additional deposits amounting to Rs3.673 trillion during H1CY26. The increase in deposits provided banks with additional funding to support their balance sheet expansion and lending activities. The deposit mobilisation also reflected continued growth in the banking sector’s funding base during the review period. Alongside stronger deposits, the SBP’s assessment indicated that credit risk did not present serious concerns for financial stability during the first half of the year.
Credit quality indicators showed improvement during H1CY26, with the ratio of non-performing loans to total loans declining to 5.5% in June 2026 from 6.1% in December 2025. The decline was supported by a significant reduction in non-performing loans as well as an increase in advances during the period. The provisioning coverage ratio also strengthened, rising to 110.2% in June 2026 from 107.7% at the end of December 2025. The improvement in these indicators points to a stronger coverage position against problem loans and provides additional support to the overall resilience of the banking sector.
However, the increase in banking sector earnings remained moderate during the period. Return on assets declined to 1.1% in June 2026 from 1.3% a year earlier, while return on equity decreased to 19% from 21.3%. Despite the decline in these profitability indicators, the sector maintained a strong solvency position. The capital adequacy ratio stood at 19.6% during H1CY26, reflecting a substantial capital buffer within the banking system and supporting the sector’s ability to absorb potential financial pressures.
The SBP’s latest macro stress tests also indicated that Pakistan’s banking sector is expected to remain solvent and resilient over the projected two-year horizon, including under severe shock scenarios. The assessment particularly pointed to the resilience of large systemically important banks, suggesting that these institutions are expected to maintain their solvency even under challenging conditions. The stress-testing results provide an additional indication of the banking sector’s capacity to withstand potential deterioration in economic and financial conditions.
The review also highlighted developments across financial markets during the first half of 2026. Stress in the equity market increased during the period, while foreign exchange and money markets experienced comparatively calmer conditions. The SBP’s latest Systemic Risk Survey identified volatility in commodity prices, including oil, as a top-tier risk for the financial system, followed by global geopolitical risks. Despite the risks identified through the survey and the increased pressure in the equity market, respondents remained confident in the stability of Pakistan’s financial system and in the ability of regulators to maintain financial stability.
Overall, the SBP review indicates that Pakistan’s banking sector entered the second half of 2026 with a stronger balance sheet, improved credit quality indicators and a solid capital position. Continued growth in SME financing and mortgage lending, combined with significant deposit mobilisation, supported the sector’s expansion during H1CY26. While profitability remained under pressure and financial markets faced several external risks, the decline in non-performing loan ratios, improvement in provisioning coverage and strong capital adequacy position provided important buffers against potential shocks.
Follow the PakBanker Whatsapp Channel for updates across Pakistan’s banking ecosystem.