Banks brace for modest earnings drop

February 03, 2026 (MLN):  Pakistan’s banking sector is expected to post a marginal quarter-on-quarter decline in profits of about 1% for the fourth quarter of calendar year 2025 (4QCY25), mainly because of reduced returns on investment portfolios.

Even so, overall net interest margins are forecast to stay largely intact as falling asset yields are balanced by a lower cost of deposits following recent interest-rate cuts.

 The 50-basis-point reduction in the policy rate announced in December is anticipated to have a clearer effect in the current quarter’s numbers.

Although borrowing spreads have tightened, banks are still operating with positive margins.

The industry’s investment-to-deposit ratio slipped slightly compared to September levels, but total deposits increased in volume terms.

Among major players, Bank Alfalah (BAFL) and the National Bank of Pakistan (NBP) are projected to register sequential earnings growth, while peers such as United Bank Limited (UBL) and Habib Bank Limited (HBL) may report softer results due to weaker income from their investment books.

Research estimates released by KTrade indicate that strong balance sheets continue to act as a buffer for the sector. Banks have seen a significant rise in revaluation surpluses on their investment holdings through the year, creating room to book capital gains and soften the impact of narrowing core spreads.

However, provisioning expenses are expected to climb as lending activity accelerates and credit risk edges higher alongside double-digit quarterly loan growth.

Deposit mobilization remained healthy during the quarter, expanding by more than 6%, with several banks pushing aggressively for current accounts to secure cheaper funding.

This shift toward low-cost deposits could partially shield net interest income from the drag of declining yields. Meanwhile, market interest rates have moved closer to the central bank’s benchmark, with secondary market yields and the six-month KIBOR both trending downward during the period.

The difference between investment yields and prevailing market rates is expected to narrow further heading into early 2026, according to the brokerage.

Fee-based revenue and capital gains are likely to play a larger role in sustaining profitability as economic activity improves. Large unrealized gains sitting on investment portfolios provide additional flexibility for banks to manage earnings pressure.

On the valuation front, banking stocks continue to trade at relatively attractive multiples, with price-to-book and price-to-earnings ratios remaining moderate and dividend yields near the mid-single-digit range.

The brokerage retains a constructive view on the sector, highlighting NBP, BAFL, UBL, and HBL among the preferred names.

Source: K Trade Research

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