Pakistani Banks to Benefit from Improving Economic Conditions: Fitch Ratings

Pakistan’s banking sector is expected to seize better business opportunities as operating conditions improve with receding macroeconomic pressures, according to a detailed report released by Fitch Ratings.

The agency’s optimistic projection comes in the wake of Pakistan’s sovereign credit profile being upgraded, as Fitch raised the country’s Long-Term Issuer Default Rating (IDR) to ‘B-‘/Stable from ‘CCC+’ in April 2025. This upgrade reflects sustained economic recovery, ongoing fiscal reforms, and improved macroeconomic stability.

Economic Recovery and Growth Outlook

Pakistan’s economy has shown notable resilience following a period marked by high inflation and financial uncertainty. Fitch projects real GDP growth to accelerate to 3.5% by 2027, compared to 2.5% in 2024. Inflation, which peaked at a staggering 38% in May 2023, has now declined to 4.1% as of July 2025, with an average of 5% forecast for the year.

The halving of the policy rate since May 2024 to 11%, alongside a stabilizing external position, has significantly supported recovery, the report highlighted.

Banking Sector Outlook

According to Fitch, the improving environment will likely stimulate private credit demand, boosting loan and deposit growth while strengthening banks’ overall performance. The report further stressed that ongoing fiscal and economic reforms could allow banks to expand private-sector lending — which had slumped to a cyclical low of 9.7% of GDP in 2024 — and reduce reliance on lending to the public sector.

Despite the hurdles of recent years, Pakistani banks have shown strong resilience. The sector’s impaired loan ratio improved to 7.1% by March 2025 from 7.6% at the end of 2023. This was driven by robust loan growth of 26% amid high inflation. While the pace of recovery may slow with moderating loan growth, Fitch expects lower interest rates to ease repayment pressures for borrowers, keeping asset-quality risks under control.

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Profitability and Capital Strength

Return on average equity normalized to 20% in Q1 2025, down from 27% in 2023, mainly due to narrowing net interest margins and higher operating costs from inflation. However, strong non-interest income and treasury earnings are expected to keep profitability stable despite margin pressures.

The system’s capital adequacy ratio reached a decade-high of 21% by March 2025, supported by strong internal capital generation. Though this may moderate if private lending expands, the ratio will remain comfortably above the regulatory minimum of 11.5%.

Funding and Liquidity Strengths

Another key highlight in the report is the sector’s solid funding and liquidity position. With loan-to-deposit ratios at just 38% (June 2025), customer deposits forming 65% of total funding, and low deposit dollarization of only 7%, banks have successfully weathered volatile funding conditions in recent years. These strengths are expected to support medium-term growth.

Challenges Ahead

Fitch pointed out that while most major Pakistani banks are well-placed to adapt to a normalized environment of lower rates, structural challenges remain. Those institutions capable of diversifying revenue streams and ensuring disciplined credit underwriting will be better positioned to leverage Pakistan’s economic stabilization while mitigating risks from potential financial shocks.