Investing in the PSX Banking Sector: How Interest Rates Drive Bank Profitability

Commercial banks are the biggest sector on the Pakistan Stock Exchange (PSX) by market value and some of the biggest dividend payers. Their profit moves with interest rates, but not in the simple way many investors expect. When the State Bank of Pakistan (SBP) cut rates sharply in 2024 and 2025, bank profits did not fall. This guide explains why, what has happened since rates started rising again in 2026, and what to look at before you buy a bank share.

This is general information, not investment advice. Sector figures come from brokerage research reported in the press, and some reports use different samples or projections. Conflicts are noted below. Check the latest quarterly results before acting.

The Rate Path

Date	SBP policy rate	Note
June 2024	22%	Start of the easing cycle
December 2025	10.5%	1,150 basis points of cuts in total
April 2026	11.5%	Raised by 100 basis points on 27 April
15 June 2026	11.5%	Held
October 2026	12%	Raised 50 basis points, per a brokerage report

The June 2026 hold and April rise come from a bank-rate comparison article. The October increase to 12% comes from an Arif Habib Limited research report published on 1 November 2026. We did not find the SBP’s own announcement, so confirm the current rate on the SBP website.

How a Bank Makes Money From Rates

A bank earns interest on what it lends and on the government securities it buys, and pays interest on deposits. The difference is its net interest income (NII), and NII divided by earning assets is the net interest margin (NIM). Three features of Pakistani banks matter:

1. A big share of assets sits in government securities. One summary citing Moody’s puts government securities at about half of total banks’ assets, with loans to the private sector only about a quarter of assets. These securities re-price as they mature or as new auctions happen.
2. Deposits do not all re-price at the same speed. Current accounts pay little or nothing and do not follow the policy rate. Savings and term deposits move, but with a lag.
3. Taxes take about half. Effective tax rates on the sector ran at 53% to 57% in 2025 and about 53% in 2026, because of corporate tax, a super tax on banks and a special tax on banks whose lending falls short of required levels (the ADR tax). So a rupee of extra pre-tax profit is worth only about Rs 0.45 to shareholders.

The usual shorthand is that falling rates squeeze margins and rising rates widen them. In practice the direction of profit depends on how fast assets and deposits re-price relative to each other and on balance-sheet growth.

What Actually Happened: 2025

• The SBP cut rates by 1,150 basis points between June 2024 and December 2025.
• Even so, sector after-tax profit reached Rs 671 billion in calendar 2025, up 11%, according to one analysis.
• Yields on earning assets fell, but the cost of deposits fell faster, helped by the SBP removing the minimum deposit rate on corporate and institutional deposits.
• NII rose 12% to about Rs 1.6 trillion because the balance sheet grew faster than margins shrank. Even so, one broker’s covered banks saw their NIM fall from 5.81% to 4.46%.
• Provisions turned to a net reversal of Rs 6.5 billion, against Rs 59 billion of provisions in 2024.
• Gains were concentrated. UBL and NBP drove most of the growth, while Meezan (down 11%), MCB (down 6%), Bank Alfalah (down 30%) and Bank AL Habib (down 23%) saw profits fall.
• Aggregate dividends hit a record. MCB paid Rs 36, NBP Rs 35, UBL Rs 29.5 and Meezan Rs 28 per share.

The lesson: rate cuts did not hurt every bank equally, and a falling policy rate did not mean falling profit.

What Has Happened in 2026

Rates turned up in April. The sector’s results since then show a squeeze that is mild so far:

Period	Sector profit after tax	Net interest income	Notes
H1 2026	Rs 342 billion, broadly unchanged year on year	Down 1% year on year
Q2 2026	Rs 168 billion, flat year on year, down 4% on the quarter	Rs 527 billion, down 2% on both	The decline reflects the lagged re-pricing of the April rate rise
Q3 2026	Rs 164 billion, down 3% year on year	Rs 566 billion, up 3% year on year	Helped by higher yields
9M 2026	Rs 505 billion, down 1%	Rs 1.646 trillion, about flat	Interest earned rose 6%, interest expense rose 9%

Other points from the nine-month review:

• Average asset yield fell to about 11% from about 13%, and cost of funds fell to about 6% from about 8%, leaving a sector NIM of about 4%.
• Non-interest income rose 18% to Rs 504 billion, led by fees (up 11%), foreign exchange income (up 36%) and capital gains (up 30%).
• Operating expenses rose 15% to Rs 1.1 trillion. The cost-to-income ratio reached 51.3% in Q2, up from 45.9% a year earlier.
• Provisions were a net reversal of about Rs 21 billion, a sign that recoveries are improving.
• Deposit growth was almost nil in Q3 (0.02% on the quarter), and banks cut investments and borrowings, which the brokerage described as deleveraging ahead of possible rate volatility.
• The brokerage expects earnings pressure in the fourth quarter, after the October rate rise to 12%, and says banks with strong low-cost (CASA) deposits, lower leverage and shorter investment maturities are better placed.

A conflict in the data. A separate report dated 23 July 2026, based on Optimus Capital’s projections, put Q2 profit after tax at Rs 112 billion, up 4% on a year earlier, and H1 at Rs 246 billion. That is a projection for a sample of banks, not the reported sector total, and does not match the Rs 168 billion and Rs 342 billion in the Topline and Arif Habib figures above. We use the reported totals. The projection also showed net interest margin falling from 4.9% to 4.3% across the half, in line with the other sources.

Bank-by-Bank Highlights (9M 2026)

Bank	What the research says
United Bank (UBL)	Profit of about Rs 117 billion, the largest. Q3 non-interest income up 71%. Deposits Rs 6.5 trillion. Investments down 20% on the quarter.
Meezan Bank	Profit about Rs 74 billion. Core income up 10%. ROE about 32%, NIM about 6.3%.
Habib Bank (HBL)	Profit before tax Rs 115 billion and after tax Rs 54.1 billion, EPS Rs 36.84. NII Rs 210 billion. Q3 interim dividend Rs 6, on top of Rs 12 paid earlier.
Bank Alfalah	Q3 profit up 46%. Investments down 27% on the quarter and about Rs 600 billion of borrowings retired.
Standard Chartered Pakistan	ROE about 23%, NIM about 7%, the highest in the sector.
Askari, Bank of Punjab, National Bank	Trading below the sector price-to-book of 1.1x, with Askari and Bank of Punjab showing ROE above the sector average of about 16%.

Dividends per share for the first nine months: MCB Rs 27, UBL Rs 24, Meezan Rs 23.50.

What to Look at Before Buying a Bank Share

1. Funding mix (CASA). The more of a bank’s deposits are in current and low-cost accounts, the less its funding cost rises when policy rates go up. The research above singles this out for 2026.
2. Asset repricing profile. Banks with short-maturity investments re-price faster. Those with long-dated bonds locked in earlier lose less when rates fall and gain less when they rise.
3. Loans-to-deposits ratio. Banks below the required lending ratio pay an extra tax on their government securities income (10% if the ratio is 40% to 50%, 16% below 40%). Credit growth lowers that cost and reduces reliance on government paper.
4. Fee and foreign exchange income. In 2026 these have carried the sector while NII was flat.
5. Costs. A cost-to-income ratio over 50% leaves less to pay out.
6. Asset quality. Gross non-performing loans were about 6.6% in September 2025 and capital adequacy about 22% against an 11.5% minimum, according to Moody’s figures in one summary. Watch provisions turn from reversals back to charges.
7. Valuation and yield. Compare price-to-book with return on equity. See our high-dividend stock guide for the yield snapshot.
8. Payout. The sector paid out about 54.5% of profit in H1 2026. A bank paying far more than that may not sustain it.

Risks

• Rates can go either way. A further rise helps new yields but hurts existing bond values, and sharp rises can slow lending. A cut compresses margins unless deposit costs fall faster.
• Tax risk. With more than half of pre-tax profit going in tax, budget changes to the super tax or the lending-ratio tax have an outsized effect.
• Government borrowing. Banks are major lenders to the government. A single auction can swing results: in February 2026 the government raised Rs 997 billion in a T-bill auction against a Rs 450 billion target.
• Geopolitics and inflation. The Arif Habib report links rate volatility to a regional conflict. Inflation has also risen: June 2026 inflation was 11.1% against 3.2% a year earlier.
• Concentration. Banks hold much of the sovereign’s debt, so they share its fortunes.

Final Thoughts

Interest rates matter to bank profits, but the speed at which deposits and assets re-price, balance-sheet growth, fee income and tax matter just as much. In 2025 profits grew while rates fell. In 2026 profits are roughly flat while rates have risen, and the brokerages expect a patch of pressure in the fourth quarter. Choose banks on funding quality, cost control and payout, not on a view of the next rate decision alone, and remember that dividends are taxed at source. You can follow the market on the PakGains dashboard and the charts page.

Related Guides on PakGains

• Explore the PSX hub, the banking hub, and the start-here page
• Top High-Dividend Paying Stocks on PSX
• How Commercial Bank Dividends Work on PSX
• Banking System in Pakistan: Overview
• KSE-100 Index Explained
• PSX Dividend Investing Guide
• PSX Market Performance Analysis
• Capital Gains Tax on PSX Stocks
• The PakGains dashboard

Sources: Pakistan’s Banking Sector: Navigating the Rate Cycle with Resilience, Kahloon Journal, Listed banks post Rs168 billion profit in Q2 2026, PakBanker, Pakistan’s listed banks post PKR 505 billion profit, Nukta, Bank profits sink on provisions, Express Tribune, HBL 9M26 results, Business Recorder, Bank Profit Rates Pakistan 2026 Compared, ToolsFluent, Pakistan ends FY26 with higher inflation, TechJuice