KARACHI: Pakistan listed banks profit fell 4% to Rs168 billion during 2Q2026, a number that looks steady against last year but tells a different story if compare it to the previous three months, down 4% quarter-on-quarter. Add up the first half of 2026 and banks reported combined earnings of Rs342 billion, exactly where they stood a year ago. Flat lines don't usually make headlines, but the mechanics behind this one do.

Rising Costs and Softer NII Drive the Decline

Higher expenses and weaker net interest income (NII) jointly drove the quarterly slide. NII, the bread-and-butter metric that shows how much banks earn from lending versus what they pay depositors, fell 2% both year-on-year and quarter-on-quarter to Rs527 billion, reflecting the lagged repricing impact of the April 2026 rate hike. Banks leaned on current account deposits and pushed volumetric growth to soften the blow, but it wasn't enough to fully offset the pressure. Non-interest expense compounded the squeeze, climbing 7% quarter-on-quarter and 15% year-on-year to Rs361 billion.

The NII pressure wasn't universal. JS Bank, Bank of Punjab, Bank Alfalah and Askari Bank actually gained ground, with NII rising anywhere from 6% to 24% year-on-year. Samba Bank told a different story. So did Soneri Bank, National Bank and Habib Metropolitan Bank all four saw NII contract between 16% and 31% over the same period.

Cost-to-Income Ratio Climbs Past 51%

Expenses hurt more than income did, if the numbers are read closely. The sector's cost-to-income ratio jumped to 51.3%, up from 48.0% just one quarter earlier and 45.9% in 2Q2025. Topline attributed the increase mainly to branch expansion and inflation-linked staff costs. Askari Bank, United Bank, Meezan Bank and Bank AL Habib bore the brunt, with costs climbing 20% to 41% year-on-year the steepest increases anywhere in the sector.

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There was a silver lining, though. Non-interest income climbed 23% year-on-year and another 4% quarter-on-quarter, reaching Rs177 billion on the back of stronger FX earnings. Askari Bank more than doubled its non-interest income, up 128% year-on-year the standout number in this category. United Bank followed at 87%, Bank AL Habib at 49%, and MCB Bank rounded it out at 29%.

Provisions, oddly enough, worked in the sector's favour this quarter. Banks booked a Rs6.2 billion reversal in 2Q2026. That's down from Rs8.0 billion a year earlier but comfortably ahead of the Rs1.8 billion reversal recorded just one quarter prior. United Bank did the heavy lifting here, contributing Rs3.8 billion on its own; take that out and the sector-wide reversal shrinks to Rs2.4 billion. The effective tax rate eased too 52ALs.5% this quarter versus 55.8% a year ago.

Winners, Losers, and Where Investors Should Look Next

United Bank sits at the top of the earnings table, posting Rs37.5 billion for the quarter. Meezan Bank follows at Rs26.2 billion, then Habib Bank at Rs18.4 billion, National Bank at Rs16.6 billion, and MCB Bank closing out the top five at Rs15.0 billion.

Growth tells its own story. JS Bank's earnings shot up 704% year-on-year dramatic on paper, though a low base does most of the explaining. Askari Bank wasn't far behind at 91%, with United Bank up 31% and Bank Alfalah up 27%. Not everyone had a good quarter, though. Bank of Khyber, Standard Chartered, Habib Metropolitan and National Bank all posted declines ranging from 21% to 74%. Bank Makramah fared worse still, booking a Rs3.9 billion loss.

Most banks maintained their dividend payouts. Meezan Bank bumped its payout up to Rs8.0 per share. MCB Bank announced Rs9.0, United Bank matched Meezan at Rs8.0, Habib Bank came in at Rs6.0, and Allied Bank at Rs4.0. Three banks opted for half-yearly payouts instead Standard Chartered at Rs3.0, Bank of Punjab at Rs1.6, and Bank Islami at Rs1.5 per share.

Valuations remain reasonably attractive despite the softer quarter. The Topline Banking Universe currently trades at 8.1x 2026E earnings and 1.5x book value, with the sector generating a 19% return on equity. Topline Securities is sticking with its 'market weight' call, and continues to favour Meezan Bank and United Bank as its top picks for the second half of 2026.