By Azam Tariq

Pakistan’s banking sector maintained a strong capital position in 2025, with the capital adequacy ratio (CAR) rising to 20.8%, significantly above the minimum regulatory requirement of 11.5%, according to the Financial Stability Review 2025 released by the State Bank of Pakistan (SBP).

The report indicates that the improvement in CAR from 20.6% in the previous year reflects sustained earnings, prudent risk management, and strong financial buffers within the banking system. The high capital levels provide a substantial cushion against potential losses and enhance the sector’s ability to withstand adverse economic shocks.

The SBP noted that the banking sector’s solvency remained robust throughout the year, supported by consistent profitability and well-managed risk exposures. Strong internal capital generation, driven by earnings growth, played a key role in maintaining adequate capital buffers despite an increase in taxation and moderating profitability indicators.

The report highlights that the prevailing CAR level is not only well above the domestic regulatory threshold but also exceeds international benchmarks, underscoring the resilience of Pakistan’s banking system. This strong capital position enhances confidence among investors, depositors, and regulators, contributing to overall financial stability.

The composition of bank assets also supported capital strength, with a significant share allocated to low-risk government securities. This reduced the risk-weighted asset base and helped maintain favorable capital ratios. At the same time, improved asset quality and stable non-performing loan levels limited the need for additional provisioning, further supporting capital adequacy.

The SBP emphasized that maintaining strong capital buffers is critical amid external uncertainties, including global financial market volatility and geopolitical risks. Adequate capitalization ensures that banks can absorb potential losses while continuing to provide credit to the economy.

The report also notes that stress testing exercises conducted by the central bank confirm the resilience of the banking sector under various adverse scenarios. Even under severe stress conditions, the sector is expected to remain solvent, supported by its strong capital position and risk management frameworks.

In addition, regulatory oversight and compliance with Basel III standards have strengthened the capital framework of banks. Continuous monitoring and periodic assessments ensure that banks maintain adequate capital levels in line with evolving risks and international best practices.

While the current capital position is strong, the SBP highlighted the importance of sustaining this strength through prudent management of risks, efficient capital allocation, and continued earnings generation. Maintaining a balance between growth and capital preservation will remain essential as economic conditions evolve.

Credit: INP-WealthPk