Fitch Ratings says banking sector to gain as economy stabilises

Islamabad: Pakistan’s banks are set to benefit from stronger business opportunities as operating conditions improve with easing economic pressures, Fitch Ratings said in its latest assessment.

The global ratings agency noted that Pakistan’s economy has begun to stabilise following the USD 7 billion IMF bailout programme secured in September 2024, which restored investor confidence and helped improve the country’s credit profile. In April 2025, Fitch upgraded Pakistan’s Long-Term Issuer Default Rating to ‘B-’/Stable from ‘CCC+’, reflecting fiscal reforms, lower inflation, and easing external vulnerabilities.

According to Fitch, the improved outlook should translate into healthier conditions for the banking sector. “Lower rates and a steadier macroeconomic environment should stimulate private credit demand and reduce banks’ dependence on lending to the public sector,” it said, while cautioning that risks remain due to banks’ high exposure to sovereign securities and state-linked entities.

Read: IMF forecasts Pakistan’s GDP growth to hit 3.2%

Pakistan’s inflation has dropped sharply, easing to 4.1% in July 2025 from a peak of 38% in May 2023, with the average forecast around 5% this year. Meanwhile, the policy rate has been cut by half since May 2024 to 11%, supported by a more stable currency and current account surpluses. These factors, Fitch said, will aid recovery momentum, with GDP growth projected to rise to 3.5% by 2027 from 2.5% in 2024.

The agency highlighted that despite past economic turmoil, Pakistani banks have remained resilient. The sector’s impaired loan ratio improved to 7.1% by March 2025, down from 7.6% at the end of 2023, supported by strong loan growth of 26% amid high inflation. Profitability has also normalised, with return on average equity at 20% in the first quarter of 2025, compared to 27% in 2023, while capital adequacy reached a decade-high of 21%.

Fitch concluded that most large Pakistani banks are “well-positioned to navigate the transition to a more normalised operating environment of lower interest rates, although structural challenges persist.”