Bank stocks to extend return in double digits

October 14, 2025 (MLN): Pakistan’s banking sector is on track to maintain its strong performance through CY26, buoyed by steady asset base growth, easing interest rates, and accelerating digitalization all of which are expected to keep profitability and share valuations on an upward trajectory.

With earnings momentum intact and sector fundamentals strengthening, bank stocks are to extend their gains over the coming year as investor confidence builds around robust balance sheet growth and improving economic stability, according to a report by AKD securities.

The brokerage has initiated a Buy stance on all the banks below forecasting improvements in share price for June 2026.

Source: AKD Research

It  further anticipates double-digit returns across the board, led by Allied Bank (ABL) with an expected gain of over 80%, followed by Bank Alfalah (BAFL) and Bank Al Habib (BAHL), which are projected to post strong capital appreciation in the coming year.

The sector’s asset base expansion is likely to outpace the anticipated compression in net interest margins (NIMs), supported by easing monetary conditions, rising deposits, and ongoing financial deepening.

As inflation moderates and policy rates move into single digits, credit demand is expected to rebound, driven by recovering GDP growth and increased private-sector activity.

Government measures to formalize the economy, coupled with stronger remittance inflows and rapid adoption of digital payments, are seen accelerating deposit mobilization, allowing deposits to outgrow M2 over the medium term.

The brokerage house noted that Pakistan’s planned transition to a fully Islamic banking system by January 2028 will further strengthen sector fundamentals and deepen funding channels.

Islamic banks already enjoy a structural cost advantage under the MDR framework, supported by asset-backed financing and historically stronger asset quality with non-performing loans at 3.5% compared to the sector average of 7.4%.

Deposits in Islamic banking have expanded more than sixfold since March 2017, far outpacing the 2.7 times growth seen in conventional banks.

The government’s increased issuance of Shariah-compliant debt is also expanding investment opportunities and facilitating balance sheet alignment.

Together, these developments underscore the sector’s capacity to sustain deposit growth, enhance profitability, and build long-term resilience.

AKD Securities projects advances to grow at a five-year compound annual rate of 15.5% between CY26 and CY30, reflecting renewed credit momentum amid stronger deposit inflows and improved fiscal discipline.

Asset quality across the sector remains robust, supported by disciplined lending practices and high coverage ratios that offer ample loss-absorption capacity. With macroeconomic stability improving and non-performing loan formation expected to stay contained, the sector is well-positioned to sustain profitability and weather potential shocks.

Non-interest income is set to rise meaningfully, led by higher fee-based revenues stemming from digitalization, economic documentation, and rising remittances through official channels. The government’s Rs3.5 billion Raast P2M subsidy under the Prime Minister’s Cashless Economy initiative, effective from September 2025 to June 2026, is expected to accelerate QR code adoption and merchant onboarding, driving transaction volumes and fee income growth.

Beyond transaction throughput, wider digital payment adoption should strengthen deposit mobilization and enhance funding stability, supporting earnings diversification across the sector.

The government’s continued emphasis on formalizing the economy has already begun to reduce currency in circulation, with the share of cash in total money supply falling to 26.5% by August 2025 and projected to decline further to 25.7% by CY27.

Rising remittances expected to reach $39.1bn in FY26 and $39.8bn in FY27 will also contribute to sustained deposit inflows and stronger fee-based revenues.

Meanwhile, strong capital buffers continue to provide a cushion for higher dividend payouts. The sector’s average capital adequacy ratio stands at 21.4%, well above regulatory requirements, ensuring ample room for enhanced shareholder returns while maintaining balance sheet strength.

AKD Securities maintains an ‘Overweight’ stance on Pakistan’s banking sector, citing robust asset base growth, resilient asset quality, and rising non-interest income as key drivers of sustained profitability.

However, there are several risks that could weigh on the outlook. These include external shocks, fiscal slippages, and global commodity price volatility, which may push inflation higher and delay monetary easing.

A sharper-than-expected fall in yields could also intensify NIM compression, while prolonged macroeconomic weakness could test banks’ credit risk management. Furthermore, slower progress in the government’s cashless economy drive or delays in the Islamic banking transition could hinder growth in transaction-based revenues and funding efficiency.

Regulatory measures such as higher taxation on deposits or profit on debt could additionally constrain sector earnings.

Despite these challenges, the  banking sector’s strong capital position, diversified revenue streams, and accelerating digital and Islamic transformation leave it well-placed to deliver sustained, broad-based profitability and attractive shareholder returns over the medium term.

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