Karachi: Pakistan's banking sector is poised to experience a 9% year-on-year decline in earnings for the first quarter of 2026. This downturn is attributed to elevated operating expenses and provision charges, contrasting with a reversal recorded in the same period last year. However, sequentially, earnings are projected to rise by 5%, as a result of higher taxation booked in the fourth quarter of 2025.

According to JS Global, the sector's profit before tax is anticipated to decrease by 11% on a year-over-year basis, yet maintain stability quarter-over-quarter. This is due to higher provision charges being counterbalanced by a reduction in operating expenses. Net interest income for the banks is expected to grow by 3% year-over-year, reaching Rs329 billion, driven by volumetric expansion. Nonetheless, it is likely to see a 1% decline sequentially, influenced by a policy rate cut at the end of December 2025.

Non-interest income is projected to decline by 1% year-over-year. Total provision expenses for the sector are estimated to reach Rs7.8 billion in the first quarter of 2026, reflecting a 152% increase quarter-over-quarter. The effective tax rate for the period is expected to be 52%, slightly lower than previous quarters.

Despite these challenges, banks are expected to sustain their quarterly payout levels, supported by comfortable buffers above minimum adequacy requirements. However, recent increases in secondary market yields may impact banks' equity through a reduction in revaluation surplus. JS Global maintains a market weight stance on the banking sector, highlighting Meezan Bank and Bank Alfalah as top picks.