By Ayesha Saba

Pakistan’s banking sector recorded a 17.8% increase in total assets in 2025, reflecting strong balance sheet expansion and improved financial conditions, according to the Financial Stability Review 2025 released by the State Bank of Pakistan (SBP).

The report shows that the growth outpaced the 15.8% recorded in the previous year, highlighting the sector’s continued strengthening despite earlier macroeconomic challenges. The expansion was largely driven by increased investment in government securities, which formed a significant portion of banks’ asset base during the year.

The SBP noted that banks adjusted their asset composition in response to evolving policy and market conditions. With lending activity moderating due to the high base effect of earlier policy measures, banks increased their exposure to relatively low-risk sovereign instruments. As a result, the share of investments in total assets rose significantly, supporting overall balance sheet growth.

On the funding side, the banking sector witnessed strong deposit mobilization, which provided a stable source of funding and supported asset expansion. The growth in deposits also helped improve liquidity conditions, allowing banks to manage their operations more efficiently and meet regulatory requirements with ease.

The report highlights that the sector’s expansion took place alongside improvements in key financial indicators. Asset quality remained stable, with non-performing loans contained, while capital adequacy levels stayed well above regulatory thresholds. These factors collectively strengthened the resilience of the banking system.

The increase in asset size also reflects improved confidence in the banking sector, supported by macroeconomic stabilization and enhanced regulatory oversight. As inflation declined and financial conditions eased, the overall operating environment for banks improved, contributing to stronger performance.

The SBP also pointed out that while advances declined during the year, this largely reflected the base effect of previous policy measures that had temporarily boosted lending. Once adjusted for this distortion, underlying lending activity strengthened, indicating a pickup in credit demand as economic conditions stabilized.

The banking sector’s strong performance played a central role in supporting the broader financial system, given its dominant share in total financial assets. A stable and well-capitalized banking system is critical for ensuring effective financial intermediation and sustaining economic growth.

Despite the positive trends, the report cautioned that banks remain exposed to external risks, including global financial market volatility and geopolitical developments. However, strong capital buffers, prudent risk management, and effective regulatory frameworks provide a solid foundation for maintaining stability in the sector.

Credit: INP-WealthPk