Pakistan’s banking sector is poised for a strong rebound as macroeconomic conditions stabilize and the country emerges from a prolonged period of financial and inflationary turbulence, according to a new report by Fitch Ratings.
The international credit ratings agency has highlighted that banks in Pakistan are expected to see better business volumes, improved credit demand, and more robust financial performance, driven by easing inflation, lower interest rates, and a steady economic recovery. This optimism comes on the heels of Fitch’s upgrade of Pakistan’s Long-Term Issuer Default Rating from ‘CCC+’ to ‘B-’/stable in April 2025, reflecting progress in economic reforms and fiscal consolidation.
Economic Recovery
Pakistan’s economy is showing signs of a sustained recovery following a challenging period marked by soaring inflation and external sector vulnerabilities. According to Fitch, the country’s real GDP growth is expected to accelerate from 2.5% in 2024 to 3.5% by 2027. Inflation, which once spiked to 38% in May 2023, has significantly eased, falling to 4.1% in July 2025, and is projected to average around 5% in 2025.
A key driver of the recovery is the halving of the central bank’s policy rate since May 2024, now standing at 11%, alongside reduced currency volatility and current account surpluses that have helped restore external stability.
Banking Sector Performance
With operating conditions improving, private sector credit demand is expected to rise, reversing the slowdown that saw credit to the private sector dip to a cyclical low of 9.7% of GDP in 2024. Lower interest rates and a stronger economic outlook are expected to support loan and deposit growth, providing a much-needed boost to the banking sector.
Despite recent challenges, Pakistani banks have shown resilience. The sector’s non-performing loan ratio improved to 7.1% in March 2025, down from 7.6% at the end of 2023, while loan growth surged by 26% during the high-inflation period. Though the pace of asset quality improvement may now slow, lower borrowing costs are expected to support borrower repayment capacity.
Profitability and Capital Strength
Bank profitability has adjusted as the economic environment normalizes. Return on average equity stood at 20% in Q1 2025, down from the unusually high levels of 27% in 2023. Fitch expects margin pressure to continue as interest rates stabilize, but growing loan volumes and treasury income are likely to keep earnings strong.
Meanwhile, the sector’s capital adequacy ratio reached a decade-high of 21% by March 2025, indicating strong internal capital generation. Although the ratio may decline slightly with greater risk-weighted private lending, it remains well above the regulatory minimum of 11.5%.
Funding Stability
Fitch also points to Pakistan’s conservative banking model as a relative strength. With low loan-to-deposit ratios (38%), customer deposits comprising 65% of total funding, and low dollarization (7%), banks have maintained strong liquidity buffers. These traits helped the sector navigate volatile conditions in 2023 and 2024 and are expected to continue supporting stability and growth in the medium term.
Most major Pakistani banks are well-positioned to take advantage of a normalizing economic landscape, though challenges remain. Fitch cautions that the banks’ fortunes remain closely tied to sovereign risk, given their exposure to government securities and state-linked borrowers. Sustained economic and fiscal reforms will be critical to maintaining momentum.
In this shifting environment, banks that are able to diversify income sources, maintain prudent credit standards, and adapt to structural challenges will be better equipped to capitalize on the recovery while guarding against future economic shocks. The report paints a cautiously optimistic picture of Pakistan’s banking sector—one where resilience, reform, and recovery are beginning to align.