Pakistan’s banking industry is entering a more favorable phase as improving macroeconomic indicators and financial reforms create new growth opportunities, according to Fitch Ratings’ latest report. The ratings agency has highlighted that the sector is poised to benefit from reduced economic pressures, stabilizing inflation, and an upgraded sovereign credit profile.
Fitch revised Pakistan’s Long-Term Issuer Default Rating (IDR) to ‘B-’ with a Stable Outlook in April 2025, moving it up from ‘CCC+’. The upgrade reflects stronger fiscal discipline, progress in structural reforms, and a clearer path to economic recovery. This shift in the country’s creditworthiness is expected to directly support investor sentiment and create more opportunities for financial institutions.
Over the past two years, Pakistan’s economy has undergone a turbulent period marked by high inflation, slowing growth, and a constrained external position. However, recent trends show resilience and stability returning. Fitch projects the country’s real GDP growth to rise from 2.5 percent in 2024 to 3.5 percent by 2027, with inflation easing from its peak of 38 percent in May 2023 to just 4.1 percent in July 2025. For the full year, inflation is expected to average around 5 percent, creating a more stable environment for households, businesses, and financial institutions alike.
Supporting this turnaround is a sharp decline in the policy rate, which has been halved since May 2024 to 11 percent. This measure, coupled with a steadier external position, is expected to lift credit demand from the private sector, allowing banks to focus more on corporate and retail lending rather than their traditional reliance on public-sector financing.
Fitch emphasized that Pakistan’s banks have already shown resilience in navigating challenging years. The sector’s impaired loan ratio fell to 7.1 percent by March 2025, down from 7.6 percent at the end of 2023, aided by robust loan growth of 26 percent during the inflationary period. While the pace of improvement may slow as loan expansion moderates, lower interest rates are expected to enhance repayment capacity, keeping credit risk largely under control.
Profitability remains steady despite some pressures. Return on average equity stood at 20 percent in the first quarter of 2025, lower than the 27 percent recorded in 2023, primarily due to narrowing interest margins and higher operating expenses. However, non-interest income streams, treasury earnings, and fee-based revenues are expected to cushion banks against profit erosion in the near term.
Another bright spot is the capital adequacy ratio, which hit a decade-high of 21 percent by March 2025, significantly above the regulatory minimum of 11.5 percent. While this could moderate as lending to the private sector accelerates, the buffer remains more than sufficient to absorb potential risks.
Funding and liquidity also remain supportive. With loan-to-deposit ratios at just 38 percent as of June 2025, deposits providing 65 percent of total funding, and dollarization levels limited to 7 percent, Pakistani banks have a solid foundation to withstand external volatility. Fitch notes these factors will continue to underpin sector growth as macroeconomic conditions stabilize.
Looking ahead, Fitch suggests that banks with stronger diversification strategies, innovative product offerings, and disciplined credit practices will be best positioned to thrive in the evolving environment. While challenges such as structural reforms and external risks persist, the outlook for Pakistan’s banking system has shifted toward cautious optimism.