Pakistan’s banking sector set to gain from economic stabilization

August 18, 2025 (MLN): Pakistan’s banks are expected to gain from improving business opportunities as the country’s operating environment stabilizes, Fitch Ratings said in a latest report.

It noted that easing macroeconomic pressures and stronger sovereign creditworthiness are creating conditions for growth in the sector.

Fitch upgraded Pakistan’s Long-Term Issuer Default Rating (IDR) to B-/Stable from CCC+ in April 2025, citing progress in economic recovery, structural reforms, and fiscal consolidation.

The outlook for banks is supported by these improvements, though risks remain tied to the country’s still-weak credit rating and the pace of reforms.

Pakistan’s economy has shown signs of stabilization after a turbulent period of high inflation and sluggish growth.

Real GDP is forecast to expand to 3.5% by 2027, compared with 2.5% in 2024. Inflation has eased sharply, falling to 4.1% in July 2025 from a peak of 38% in May 2023.

The central bank’s decision to cut the policy rate by half since May 2024 to 11%, alongside a steadier external position and current account surpluses, is expected to reinforce the recovery.

The lower rate environment and improved macroeconomic backdrop are likely to encourage private-sector credit demand, which fell to a cyclical low of 9.7% of GDP in 2024.

Fitch said continued reforms could further support banks in expanding private lending while reducing reliance on financing the public sector.

Despite recent challenges, Pakistani banks have shown resilience.

The sector’s impaired loan ratio declined to 7.1% by March 2025 from 7.6% at the end of 2023, helped by strong loan growth.

Although improvements may moderate as growth slows, lower borrowing costs should strengthen repayment capacity and keep asset-quality risks manageable.

Bank profitability has returned to more normal levels, with return on average equity easing to 20% in the first quarter of 2025, compared with around 27% in 2023, as net interest margins narrowed and operating expenses rose. Loan expansion and treasury income are expected to continue supporting earnings.

The capital adequacy ratio rose to a decade-high of 21% by March 2025, well above the 11.5% regulatory minimum.

While an increase in risk-weighted private-sector lending could weigh on this metric, capital buffers are projected to remain sound.

Funding and liquidity also remain strong, with customer deposits accounting for 65% of total funding, a low loan-to-deposit ratio of 38%, and deposit dollarisation at just 7%. These strengths are expected to underpin sector growth in the medium term.

Most large banks are well-placed to adjust to a lower interest rate environment, according to Fitch

Those that diversify revenue sources and maintain prudent lending standards will be better positioned to benefit from Pakistan’s economic recovery while guarding against unforeseen risks.

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