Karachi: Pakistan’s banking sector faces heightened risks from sharply rising government bond yields, which analysts warn could largely wipe out revaluation surpluses on banks’ balance sheets in the March 2026 quarter.
According to a report by Optimus Capital Management, the sector-wide revaluation losses could exceed PKR 600 billion in a single quarter, driven by increased reliance on Open Market Operations (OMO) for government financing, concentrated exposures on select bank sheets, and a higher share of floating-rate bonds.
The report estimates that OMO now finances around 24% of domestic debt, with floating-rate bonds (PIBs) making up over 50% of total debt — up from 36% in December 2021.
This shift has introduced meaningful spread duration risk. An assumed 150 basis points rise in secondary market bond yields and a 45 bps widening in PIB floater spreads (from 55 bps to 100 bps) between December 2025 and March 2026 underpin the projections.
Key Impacts Highlighted:
Surplus largely wiped out: Revaluation surpluses accumulated during lower-yield periods are expected to be exhausted, potentially eroding CET-1 capital ratios for some banks if yields rise further. While the State Bank of Pakistan (SBP) has historically provided regulatory relief, banks with heavier exposures may face pressure on dividend payouts.
Profitability largely insulated: No material hit to core earnings is anticipated beyond normal lagged repricing effects. Banks typically benefit from higher rates with a lag through improved net interest margins.
Uneven exposure: United Bank Limited (UBL) stands out as the most vulnerable, with an estimated post-tax book value hit of PKR 117 billion. It is followed by Habib Bank Limited (HBL) at PKR 54 billion and National Bank of Pakistan (NBP) at PKR 45 billion. In contrast, banks like MCB, BAHL, BAFL, MEBL, and FABL appear relatively resilient due to lower fixed-income exposure and shorter duration profiles.
The report breaks down losses into floating-rate and fixed-rate components. Fixed bonds held by HBL, UBL, and NBP could see 4-5% price drops, while floating bonds show price declines of 1.0-2.25% depending on maturities. UBL exhibits the highest spread duration risk.
On the positive side, banks with stronger current account franchises relative to fixed-bond holdings (such as BAHL, AKBL, MEBL, MCB, FABL, and BAFL) are better positioned for earlier recovery as rates stabilize or rise further.
Sector Outlook Remains Cautious but Manageable The situation is fluid, but potential SBP support could limit the damage to balance sheet adjustments and regulatory ratios rather than core profitability. The Optimus report maintains a Neutral stance on the commercial banking sector overall.
This development comes amid ongoing government borrowing pressures and recent PIB auctions where yields have continued to climb. Market participants note that while revaluation hits are unrealized for now, sustained yield elevation could test capital buffers more broadly.
Analysts emphasize that the banking sector’s strong underlying earnings momentum from prior rate environments should help absorb the shock, but vigilance on duration management and liquidity remains key.