Banks Could Shift Core Business from Bonds to Loans Soon

Pakistan's banks appeared to position their investment portfolios for higher interest rates during the first half of calendar year 2026, even as the sector's outlook for the second half points to stronger lending activity and the possibility of lower rates.

Key points

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• Banks additionally climbed their participation in market treasury bill auctions, with the offered-to-target ratio rising to 2.8 from 2.5.
• The report's outlook for the second half of 2026 presents a different picture.
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• Treasury auction data indicated that banks' interest in floating-rate Pakistan Investment Bonds climbed significantly.

Meanwhile, the State Bank of Pakistan's (SBP) Mid Year Performance Review of the Banking Sector indicated that banks climbed their preference for short term and floating rate administration securities during January through June 2026. Their investment behavior suggested that banks projected the yield curve to shift upward and interest rates to rise further.

Banks' investments rose during the period, with most of the expansion concentrated in administration securities. Investments in market treasury bills rose by Rs. While holdings of Ijara Sukuk and Pakistan Investment Bonds rose by Rs, 2, 943 billion. 1, 255 billion and Rs. 834 billion, respectively.

Pakistan Banks' Profit Rises To Rs. 370 Billion in First Half Of 2026.

For context, the composition of administration securities additionally changed. The share of market treasury bills in total administration securities climbed to 20.1 percent by the end of June 2026 from 14.8 percent in December 2025. In contrast, the share of Pakistan Investment Bonds declined to 60.7 percent from 66.5 percent during the same period.

Treasury auction data indicated that banks' interest in floating-rate Pakistan Investment Bonds climbed significantly. The offered to target ratio for semiannual floating rate Pakistan Investment Bonds rose to 12.9 during the first half of 2026 from 4.7 in the second half of 2025. Meanwhile, the ratio for fixed-rate Pakistan Investment Bonds declined to 3.7 from 4.7.

Banks additionally climbed their participation in market treasury bill auctions, with the offered-to-target ratio rising to 2.8 from 2.5. The shift toward shorter maturity and floating rate instruments indicated that banks were seeking greater protection against potential increases in interest rates. FBR Extends Sales Tax Exemption on Aircraft Imports to All Airlines.

Notably, the rise in secondary market yields additionally affected banks' portfolios. Average yields throughout major maturities climbed by 1.1 percent during the first half of 2026. Banks recorded gains of Rs. 85 billion from the sale of securities, compared with Rs. 49 billion during the same period a year earlier. The State Bank remarked the gains reflected banks' efforts to sell securities and avoid further value erosion as market yields climbed.

In practice, the changing interest rate environment additionally affected banks' earnings. After tax profits rose slightly to Rs. 370 billion during the first half of 2026 from Rs. 365 billion a year earlier. Nevertheless, net interest income declined to Rs. 1, 140 billion from Rs. 1, 157 billion, mainly since interest expenses climbed after a 100 basis point rise in the policy rate in April 2026.

Interest expenses reached Rs. 1, 946 billion during the period, compared with Rs. 1, 866 billion a year earlier. According to The State Bank, savings deposits are generally repriced earlier after a policy rate change, while earning assets are repriced according to their contractual maturity or repricing dates. This timing difference can put pressure on banks' net interest margins when rates rise.

Despite the pressure on net interest income, higher noninterest income backed overall profitability. Noninterest income rose to Rs. 370 billion from Rs. 289 billion, supported by foreign exchange dealings, fees and commissions, and gains from the sale of securities.

For context, the report's outlook for the second half of 2026 presents a different picture. It expects banking activity to maintain steady momentum as inflation remains contained, the currency stays stable and economic recovery continues. While seasonal factors and higher exposure limits for certain substantial private sector borrowers could backing advances, credit demand is projected to rise.

SBP additionally stated banks' earnings are probable to remain intact despite lower interest rates as of an projected rise in lending to both the private and public sectors. Credit risk is projected to remain manageable as financial conditions ease, economic activity improves and borrowers' repayment capacity strengthens.

This suggests that banks' strategy may be moving from protecting returns against rising yields toward preparing for a feasible rate reversal. Their positioning during the first half of the year favored short term and floating rate securities, but the outlook for the second half places greater emphasis on loan expansion to protect earnings in a lower interest rate environment. Stay Connected with ProPakistani.

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In short, banks Could Shift Core Business from Bonds to Loans Soon is the central thread here, and readers can expect follow-up reporting as the picture becomes clearer.