*KARACHI* – Pakistan’s banking sector is gearing up for a strong recoveryas economic stability returns and inflationary pressures ease, according toa new report by *Fitch Ratings*.
The global credit ratings agency highlighted that Pakistani banks arelikely to benefit from *improving business volumes, stronger credit demand,and enhanced financial performance*, fueled by lower interest rates, easinginflation, and a steady economic rebound.
Fitch’s optimism follows its recent decision in *April 2025* to upgradePakistan’s Long-Term Issuer Default Rating from *‘CCC+’ to ‘B-’/Stable*,citing progress in economic reforms and fiscal discipline.——————————Economic Recovery in Motion
Pakistan’s economy is showing signs of a sustained turnaround after adifficult stretch marked by record inflation and external vulnerabilities.
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*GDP Growth*: Expected to accelerate from *2.5% in 2024* to *3.5% by 2027*. –
*Inflation*: Down from a peak of *38% in May 2023* to just *4.1% in July 2025*, with an annual average of around *5% in 2025*. –
*Interest Rates*: The central bank has halved its policy rate since May 2024, now standing at *11%*. –
*External Stability*: Reduced currency volatility and current account surpluses are helping restore balance.
——————————Banking Sector Outlook
With conditions improving, *private sector credit demand* is expected tobounce back from its *2024 low of 9.7% of GDP*. Stronger loan and depositgrowth is likely to support banks’ performance going forward.
The sector has already shown resilience:
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*Non-Performing Loans (NPLs)* improved to *7.1% in March 2025*, down from *7.6% in 2023*. –
*Loan Growth* surged by *26%* during the high-inflation period.
Although asset quality gains may now slow, *lower borrowing costs* shouldcontinue to support repayment capacity.——————————Profitability and Capital Strength
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Bank earnings are normalizing after exceptional highs.
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*Return on Average Equity (ROAE)* stood at *20% in Q1 2025*,compared to *27% in 2023*. –
*Capital Adequacy Ratio (CAR)* reached a decade-high of *21%* in March 2025, well above the *11.5% minimum requirement*.
Fitch expects some margin pressure as interest rates stabilize, butstronger loan volumes and treasury income will likely keep profitabilityhealthy.——————————Funding Stability
One of the sector’s strengths remains its *conservative banking model*:
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*Loan-to-Deposit Ratio*: Just *38%*. –
*Customer Deposits*: Account for *65% of funding*. –
*Low Dollarization*: Only *7%*.
These buffers allowed banks to weather the turbulence of 2023–24 and willremain vital for future resilience.——————————Outlook: Resilience with Risks
Fitch cautioned that Pakistani banks’ fortunes remain *closely tied tosovereign risk*, given their significant exposure to government securitiesand state-linked borrowers. Sustained *economic and fiscal reforms* will bekey to maintaining growth momentum.
Overall, the report paints a *cautiously optimistic picture*: banks thatfocus on *diversifying income, prudent lending, and adapting to structuralchallenges* will be best placed to capitalize on the recovery whileprotecting against future shocks.