- Digital adoption and higher remittance flows will boost fee income and sustain sector profitability
Improving macroeconomic conditions, with moderating inflation and expected monetary easing, are set to accelerate credit growth and strengthen banking activity. Rising deposit inflows, supported by formalization of the economy, expanding digital payments, and steady remittance channels, will reinforce funding stability.
Meanwhile, transitioning towards an Islamic banking framework and gradual recovery in private sector borrowings are expected to drive asset expansion.
These factors, coupled with lower funding costs and stable asset quality, should sustain profitability growth across the sector.
According to the brokerage house asset growth will drive profitability despite margin compression: The banking sector is set for strong balance sheet expansion, supported by rising deposits, improving liquidity, and easing monetary conditions.
As inflation moderates and interest rates fall, credit appetite should strengthen, especially in the private sector. Structural shifts such as economic formalization, digital inclusion, and higher remittance inflows will accelerate deposit growth. While NIMs may narrow, a rising share of low-cost deposits and asset expansion should sustain profitability.
It is also believed that Islamic transition will enhance stability and competitiveness. Pakistan’s plans to shift to a fully Islamic banking framework by 2028 is expected to strengthen sector fundamentals. Islamic banks’ cost advantage, better asset quality, and risk-sharing structure provide a stable base for growth.
Expanding issuance of Sukuk and Shariah compliant instruments will deepen investment opportunities. As convergence with conventional banks narrows yield gaps, margins and liquidity should improve. The projections incorporate full Islamic transition from 2031 onward, which has enhanced NIMs for banks with larger deposit bases and higher savings proportions.
Advances are expected to rise with stable asset quality Credit growth is expected to remain strong, driven by higher liquidity, improving macro stability, and declining fiscal requirements. Prudent underwriting and robust provisioning buffers will preserve asset quality as lending accelerates. Lower rates should curb new NPLs, while high coverage ensures resilience against shocks. With disciplined lending and stable asset performance, banks remain well-positioned for sustained profitability. Digitalization and remittances to boost fee income as fee-based income is expected to strengthen with rising digital adoption, greater economic formalization, and higher formal remittance flows. Reduced cash usage and initiatives like Raast P2M will boost digital transactions and float income, supporting deposit growth and revenue diversification. These trends will enhance funding stability and sustain sector profitability.
Strong capitalization is likely to support higher payouts as strong capital buffers and sustained profitability provide banks ample room to maintain and enhance dividend payouts. Healthy earnings, revaluation gains, and easing credit costs have bolstered solvency ratios above regulatory thresholds. Even under stress, capital levels remain comfortable, ensuring financial stability. This resilience allows banks to balance sheet growth with steady shareholder returns, sustaining attractive cash distributions over the medium term.
The brokerage house maintains an ‘Overweight’ stance on Pakistan’s banking sector, driven by: 1) strong asset base growth outpacing NIM compression, 2) resilient asset quality, 3) higher non-interest income from digital adoption, 4) Transition towards Islamic banking to enhance sector fundamentals, and 5) strong capital buffers to support higher dividend sustainability.
Key downside risks to our thesis include: 1) external shocks threaten growth stability, 2) pressure on NIMs, 3) deterioration in asset quality, 4) uncertainty in non interest income, 5) structural and regulatory risks, and 6) delay in conversion towards Islamic banking.
Confidence in Pakistan’s growth story is taking roots; the outlook appears positive. Interest rates are near bottom and banks are pivoting from rate-driven gains to balance sheet expansion, prioritizing zero-cost deposits. NIMs are sticky, with banks’ earnings flattening in CY26 before rebounding over the medium term.
Intermarket Securities EPS estimates incorporate updated assumptions on balance sheet growth, asset quality and deposit mix, where CY26/27f earnings are higher by 20% from the previous estimates.
The brokerage house remains Overweight on Pakistani banks with MCB, HBL and MEBL being high-conviction plays. Its banks universe masks rerating potential for HBL, while MCB continues to offer sector beating dividend yields with downside protection even in a more risk-off setting for equities. MEBL is best in class, delivering superior balance sheet growth in a low-interest rate setting.
Estimates revised in an improving macroeconomic backdrop. The key updates to its assumptions include: 1) stronger deposit growth at 17% against earlier 15% supported by rising digital adoption and greater documentation, 2) modest NII growth (2% for CY26 and 10% for CY27 driven by balance-sheet expansion and better deposit mix management, and 3) lower provisioning needs as asset quality remains strong in a lower-interest rate, softer-inflation setting.
It maintains a 52% tax rate across its forecast – well above the 10-year average of 43%. Dividend payout expectations remain largely intact despite a projected 4% earnings dip in CY26, with MCB leading the pack at an impressive 75% payout.
Earnings for its universe banks have surged more than 3x from 2022–2025, driven by record-high margins under a 22% policy rate. With rates now near a cyclical floor at 10.5%, banks are shifting decisively towards volume to cushion the ongoing margin squeeze, with a focus on mobilizing zero cost deposits.
The brokerage house expects sustained, above-GDP loan growth of 15% per annum, supported by stable asset quality as inflation stays within the 5% to 7% band and coverage remains strong at above 90%.
Loans declined sharply in CY25 year, 20% since December 2024 amid the removal of ADR-based taxation and banks’ preference for SBP-funded carry trades, dampening loan appetite in CY25. Going forward, growth is expected to re-emerge selectively from higher-yielding SME and consumer segments (notably auto loans), alongside potential SOE privatizations requiring syndicate financing.
This can lift overall loan growth to mid-teens in CY26–27. Asset quality is supportive with the NPL ratio still at a low 5% and coverage at a high 100%. Fee income is expected to recover in CY26 while softening inflation is likely to keep costs anchored in the low double digits even as C/I rises over the medium term.