Karachi: Pakistan's listed banks experienced a decline in profitability for the third quarter of 2026, with earnings totaling Rs165 billion, marking a 4% decrease year-over-year and a 2% drop from the previous quarter. This reduction brings the cumulative earnings for the first nine months of the year to Rs506 billion, a slight 1% decrease compared to the same period last year.

According to JS Global, the decline in profitability was primarily attributed to a 14% decrease in non-interest income alongside a 4% rise in non-interest expenses. Despite these challenges, net interest income (NII) showed a positive trend, increasing by 3% year-over-year to Rs556 billion, driven by volumetric growth and asset repricing. Bank Islami, JS Bank, Askari Bank, and Meezan Bank reported robust NII growth ranging from 10% to 24% year-over-year.

Non-interest income rose by 4% year-over-year to Rs153 billion, bolstered by higher fees and foreign exchange income, although it fell by 14% quarter-over-quarter due to reduced capital gains and foreign exchange income. Non-interest expenses increased significantly by 14% year-over-year to Rs374 billion, largely influenced by United Bank Limited’s expense growth of 66% as part of its expansion strategy. Excluding UBL, the sector's expense growth was 7% year-over-year.

The banking sector's cost-to-income ratio increased to 52.8% in the third quarter of 2026, up from 51.3% in the previous quarter and 47.9% in the same period last year. A provision reversal of Rs11.3 billion was recorded in the third quarter, contrasting with a charge of Rs1.5 billion in the same period last year, aiding overall profitability.

The effective tax rate for the third quarter remained steady at 52.5%. Among individual banks, UBL led with earnings of Rs30.7 billion, followed by Meezan Bank at Rs26.0 billion, Habib Bank Limited at Rs19.6 billion, National Bank of Pakistan at Rs16.3 billion, and MCB Bank at Rs16.2 billion.

In terms of earnings growth, Bank Islami posted the highest increase of 59% year-over-year, while Bank of Khyber, Soneri Bank, National Bank of Pakistan, and Habib Metropolitan Bank saw declines ranging from 17% to 43% year-over-year. Bank Makramah reported a loss of Rs1.1 billion.

Dividend payouts remained consistent, with Meezan Bank announcing Rs8.0 per share, MCB Rs9.0, UBL Rs8.0, and others varying accordingly. The banking universe is trading at a projected 2026 price-to-earnings ratio of 7.3x and a price-to-book value of 1.4x, with a return on equity of 21%. JS Global maintains a 'market weight' stance on the banking sector, with Meezan Bank and UBL as top picks.