Banking sector review: SBP expects uptick in credit demand

KARACHI: The State Bank of Pakistan (SBP) said on Monday that the banking sector’s performance is expected to maintain steady momentum during the second half of CY26, with credit demand likely to increase amid contained inflation, currency stability and continued economic recovery. The SBP on Monday issued the Mid-Year Performance Review (The Review) of the Banking Sector for the first half of 2026. The Review covers the performance and soundness of banking sector from January to June 2026 period (H1CY26). It also briefly discusses the performance of financial markets as well as the results of the Systemic Risk Survey (SRS). The latter represents the views of independent experts about key current and potential future risks to financial stability. The review expects that seasonal uptick and increase in aggregate exposure limit of unrated large private sector borrowers from Rs3 billion to Rs10 billion are likely to augment banks’ advances during H2CY26. Nonetheless, uncertainty around the Middle East conflict remains a downside risk to macroeconomic outlook, hence to the sector’s performance. The reliance of the government on the banks for budgetary financing is likely to remain higher given the estimated borrowing needs for FY27. The estimated Government’s budgeted borrowing from banks is Rs4, 012 billion for FY27 significantly higher than Rs 2, 231 billion in FY26. The Review notes that the balance sheet of the banking sector expanded by 9. 1 percent, driven primarily by investments in government securities. Advances also increased across public and private segments. Encouragingly, long-term financing to SMEs kept trending upward during H1CY26. In addition, mortgage loans gained further traction largely due to Government’s subsidised scheme. On funding side, banks mobilised additional deposits of Rs3, 673 billion during the reviewed period. The Review suggests that the credit risk of the banking sector posed no serious concerns to financial stability during H1CY26. As a result of significant reduction in non-performing loans and increase in advances, NPLs to loans ratio fell to 5. 5 percent in June-2026 (6. 1 percent in December-2025). Positively, provisioning coverage ratio further improved to 110. 2 percent in June-2026 from 107. 7 percent in December-2025. The relative increase in the sector’s earnings was, however, moderate. Consequently, Return on Asset (ROA) and Return on Equity (ROE) softened to 1. 1 percent (1. 3 percent in June-205) and 19. 0 percent (21. 3 percent in June-2025), respectively, in June-2026. The solvency position of the sector—with CAR at 19. 6 percent—remained strong during H1CY26. The latest macro stress tests indicate that the banking sector in general and large systemically important banks in particular are expected to remain solvent, exhibit resilience and can withstand even severe shocks over the projected horizon of two years. The Review highlights that stress in equity market increased during H1CY26 while FX and money markets witnessed calmer conditions. Increased volatility in equity market was mainly driven by adverse geopolitical developments in the Middle East. The latest wave of Systemic Risk Survey reveals volatility in commodity prices including oil as the top-tier risk followed by global geopolitical risk. The respondents, however, expressed confidence in the financial system stability and regulator ability to ensure financial stability. There is a substantial decline in the estimated non-tax revenue expected for FY27 as contribution from SBP’s transfer of profits to the government in FY27 is projected to be declined by 40. 9 percent. Banks’ earnings, despite low interest rates, are likely to remain intact due to expected increase in lending volume (towards private and public sectors). Credit risk appears to remain in check owing to eased financial conditions, resilient economic activity, and anticipated improvement in re-payment capacity of the banks’ borrowers. In addition, solvency position of the sector is likely to remain strong. This view is reinforced by the results of the latest macro stress tests which suggest that the banking sector, in general, and the large systemically important banks in particular, are expected to show resilience and withstand assumed severe macroeconomic shocks over the projected period of two years. Copyright Business Recorder, 2026

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