By Moaaz Manzoor

Pakistan’s corporate sector demonstrated stronger repayment capacity in 2025 as declining interest rates reduced financing costs and supported profitability, according to the Financial Stability Review 2025 released by the State Bank of Pakistan (SBP).

The report indicates that easing monetary conditions played a key role in strengthening the financial position of firms, as lower borrowing costs reduced the burden of debt servicing. This improvement was reflected in better financial indicators across a range of sectors, despite continued pressures on sales revenues in some industries.

The SBP noted that while overall sales growth remained uneven, profitability was supported by a decline in finance costs and an increase in non-core income. As interest rates began to ease, firms experienced relief in their debt obligations, which helped improve cash flows and strengthen their ability to meet financial commitments.

The report highlights that key sectors showed mixed performance during the year.

Textile, power, and petroleum sectors recorded moderate increases in sales, while fertilizer and sugar sectors experienced declines. In contrast, the automobile sector posted strong growth in both sales and revenues, reflecting improved demand conditions and easing financial constraints.

At the same time, the probability of default among listed firms declined, indicating improved creditworthiness and reduced financial stress. This improvement reflects both better macroeconomic conditions and enhanced investor confidence in the outlook for corporate earnings.

The SBP also pointed out that higher taxation impacted profitability indicators such as return on assets and return on equity, which showed some moderation despite overall improvements in financial health. Nevertheless, the reduction in financing costs remained a key factor supporting the sector’s performance.

The report further notes that the financial health of major borrowing groups remained stable, with strong repayment capacity observed among the top corporate clients of the banking sector. This stability is important for maintaining asset quality within the banking system and supporting overall financial sector resilience.

Stronger corporate performance also supported financial stability by reducing banks’ credit risk and reinforcing overall economic activity. As firms strengthened their balance sheets, their ability to invest and expand operations improved, contributing to broader economic recovery.

Despite these gains, the SBP cautioned that external risks, including global economic uncertainty and commodity price volatility, could affect corporate performance if they intensify. Maintaining a stable macroeconomic environment will be critical for sustaining improvements in the sector’s financial position.

Continued easing of financial conditions, along with policy support and structural reforms, is expected to further strengthen corporate sector resilience and support long-term economic growth.

Credit: INP-WealthPk