Pakistan’s banking sector posts record half-year profits

Pakistan’s banking sector has reported its highest-ever half-year profit after tax, reaching PKR 326 billion, a 19% increase compared to the same period last year. The sector also contributed PKR 394 billion in taxes to the government, marking a significant 44% jump year-on-year.

The momentum continued into the second quarter of 2025, with profits after tax hitting PKR 160 billion, a 23% rise, fueled by balance sheet growth and diversified income streams. Sara Tawfik, Head of Research at Arif Habib Ltd., highlighted that Net Interest Income (NII) remained the driving force, reaching an impressive PKR 1 trillion in the first half of 2025, reflecting a 22% increase.

In the second quarter of 2025, NII alone amounted to PKR 510 billion, up 20% from the same period last year, supported by expanding asset volumes. Non-markup income also showed strength, rising to PKR 255 billion, up 7% from the previous year.

Non-markup income breakdown (1H CY2025):

• Fee income: PKR 141 billion, a 13.6% rise, driven by robust digital and trade activities.
• Foreign Exchange income: PKR 49 billion, a modest 0.2% increase, aided by a stable currency environment.
• Gains on securities: PKR 39 billion, up 2.9%, supported by tactical portfolio moves.

However, operating expenses (OPEX) climbed to PKR 553 billion, reflecting an 18.2% increase compared to the same period last year. In the second quarter, OPEX stood at PKR 285 billion, up 17%, mirroring the broader inflationary pressures.

The banking sector has outperformed in 2025, delivering a 70% return year-to-date (CY25), significantly outperforming the KSE-100 Index, which gained 27%. This success has been driven by record profits in the first half of the year, strong asset quality, and unexpected dividend announcements that have bolstered investor confidence.

Within the sector, National Bank of Pakistan (NBP) led the charge with a remarkable 148% increase, followed by UBL at 111% and AKBL at 105%, each benefiting from strong earnings growth and capital distribution.

Deposits also reached record levels in the second quarter of 2025, with 11 out of the 13 KSE-100 listed banks achieving their highest-ever deposit figures. UBL topped the growth chart with a 32% increase to PKR 4.3 trillion, followed by MEBL at 26% (PKR 3 trillion) and BOP at 23% (PKR 1.9 trillion). In absolute terms, HBL led the sector with the largest deposit base of PKR 5.2 trillion, followed by NBP (PKR 4.7 trillion) and UBL (PKR 4.3 trillion).

On the dividend front, surprises added to the sector’s upward momentum. BOP declared an interim dividend of PKR 1/share in Q2CY25, the first such payout in its history, made possible by the bank's recent approval for interim payouts. Similarly, AKBL announced a dividend of PKR 2/share in Q2CY25, its first since Q2CY14.

In terms of asset quality, the sector recorded a modest net provisioning reversal of PKR 1 billion in the first half of 2025, signaling benign trends in asset quality. Notably, Q2CY25 posted reversals of PKR 6.3 billion, a significant improvement compared to a provisioning charge of PKR 5.2 billion in Q1CY25.

However, Islamic banks faced challenges in the first half of 2025, impacted by both the decline in interest rates and regulatory changes effective from January 2025. The new framework imposed a Minimum Deposit Rate (MDR) on Islamic Banks’ PKR savings deposits, affecting their profitability. As a result, KSE-100 listed full-fledged Islamic banks saw a 13% year-on-year decline in profits to PKR 57 billion, with NII slipping 9% to PKR 160 billion.

In contrast, conventional banks showed resilience, posting strong growth in earnings (+29% YoY) for the first half of 2025, with NII soaring by 31% to PKR 855 billion.

The banking sector’s contribution to the national exchequer remained substantial, with an effective tax rate averaging 54% in 1HCY25, up from 48% in 1HCY24. This translated into a hefty tax contribution of PKR 394 billion, marking a 44% year-on-year increase. Sequentially, tax contributions reached PKR 205 billion in Q2CY25, a remarkable 61.8% increase compared to the previous quarter.