Bank profits slip 1%to Rs505b

Net interest income flat at Rs1.6tr as interest expenses rise 9% and deposit growth stalls

KARACHI:

The banking sector recorded a marginal decline in profitability in the first nine months of calendar year 2026 as higher interest expenses and operating costs offset growth in non-interest income and lower taxation, an Arif Habib Limited (AHL) report showed.

Banks posted a consolidated profit after tax of Rs505 billion, down 1% year-on-year. Total interest earned rose 6% while interest expenses climbed 9%, leaving net interest income flat at Rs1.6 trillion compared with the same period last year.

The average policy rate stood at approximately 11.1% against 11.4% a year earlier, though earnings shifted as banks realigned balance sheets ahead of expected rate volatility from the US-Iran conflict.

Average interest yield fell to about 11% from 13%, while average cost of funds declined to around 6% from 8%, taking the sector-wide net interest margin to approximately 4%.

Non-interest income grew about 18% to Rs504 billion, driven by fee income up 11%, foreign exchange income up 36% and capital gains up 30%.

The sector recorded a net provisioning reversal of about Rs21 billion against Rs8 billion a year earlier, with National Bank of Pakistan posting the largest at Rs6 billion, followed by United Bank Limited at Rs4.4 billion and Bank Alfalah Limited at Rs3.2 billion, on improving recoveries from specific lending portfolios.

Operating expenses reached Rs1.1 trillion, up about 15%. Meezan Bank Limited recorded the lowest cost-to-income ratio at 32%, followed by Standard Chartered Bank Pakistan Limited at 33% and UBL at 38%.

Effective taxation declined to 53%, partly offsetting a 5% fall in pre-tax profit and leaving the bottom line down 1%.

On a quarterly basis, listed banks recorded a combined profit of Rs164 billion, down 3% year-on-year and 2% quarter-on-quarter.

Following a 100-basis-point policy rate hike in the second quarter of calendar year 2026, average yields on assets expanded to about 11% in the third quarter from 10.7% in the preceding quarter. Average cost of funds rose to around 6.4% from 6.1%.

Quarterly interest earned stood at about Rs1.6 trillion while interest expenses amounted to Rs1.1 trillion, increases of 13% and 18% year-on-year respectively.

Non-interest income declined 4.6% sequentially, primarily due to normalisation in capital gains, reported at Rs154 billion during the quarter.

The sector recorded a net provisioning reversal of Rs12.2 billion in the third quarter against Rs4.9 billion a year earlier. Bank Alfalah posted the largest quarterly reversal at Rs2.6 billion, followed by Bank Al Habib Limited and Meezan Bank at Rs2.5 billion each.

Quarterly operating expenses reached Rs384 billion, up 14% year-on-year, with the sector's average cost-to-income ratio at 61%. Standard Chartered, Meezan and MCB Bank were the most cost-efficient, at 32%, 34% and 42% respectively.

The quarterly average effective tax rate settled at approximately 53% against 54% a year earlier, providing some support as pre-tax profit declined 5%.

Bank earnings are expected to come under slight pressure in the fourth quarter following a 50-basis-point policy rate hike at the end of October, though banks with strong current account and savings account profiles, lower leverage and shorter investment portfolio durations could offset the impact.

Deposit growth slowed sharply, rising just 0.02% quarter-on-quarter, though some major banks continued to expand market share. UBL led with 6% growth to Rs6.5 trillion in deposits, followed by Meezan Bank at 5% and MCB at 4%.

Total investments across the sector declined around 6% quarter-on-quarter as banks allowed investments to mature and used proceeds to reduce exposure to Open Market Operations, indicating a shift towards balance-sheet deleveraging ahead of the expected rate outlook.