Karachi: Pakistan's banking sector is expected to experience a 10% decline in earnings for the second quarter of 2026 compared to the previous quarter, primarily due to the absence of significant capital gains that were recorded in the first quarter. This decline is anticipated despite a 5% year-over-year increase in net interest income, driven by an increase in the policy rate and repricing impacts.

According to JS Global, the Topline Banking Universe is projected to post a 1% year-over-year decline in earnings for the second quarter of 2026. This is attributed to higher operating expenses and provision charges, contrasting with reversals recorded in the same period last year. The profit before tax for the sector is expected to decline by 10% year-over-year, although this may be partially offset by a lower effective tax rate of 52%, down from 56% in the second quarter of 2025.

Non-interest income is forecasted to decline significantly by 13% year-over-year and 31% quarter-over-quarter, primarily due to reduced capital gains. Provision expenses are expected to rise sharply, clocking in at Rs8.5 billion, a significant increase from the reversals seen in the previous year.

Despite these challenges, banks within the Topline Universe are expected to maintain their quarterly payout levels, supported by stable revaluation reserves and a slight uptick in secondary market prices. The market weight stance on the banking sector remains unchanged, with Meezan Bank and Habib Bank highlighted as top picks.