High yields lead to Rs600b in losses.
A big financial shock is coming to Pakistan’s commercial banking sector. A big rise in interest rates is projected to wipe out more than Rs600 billion in revaluation surpluses in only one quarter.
The study “Back to Square One” from Optimus Capital Management says that the fixed-income market’s quick change has “largely exhausted” the cushion that banks had built up in prior quarters to deal with volatility. The loss of these reserves means that the sector’s balance sheet strength has gone back to where it was before.
The study found that secondary market yields rose by about 150 basis points (bps) from December 2025 to March 2026. This rise has caused the market value of government bonds held by banks to drop sharply, resulting in massive mark-to-market losses.
The report says that the banking sector will lose almost Rs685 billion in gross revaluation. When you take into account the current surpluses, the net effect is a deficit of about Rs95 billion across large institutions. This shows how much stress is on bank balance sheets.
The biggest banks are the ones that suffer the most.
United Bank Limited (UBL) is thought to be the most exposed of the big banks since it is more sensitive to how long interest rates last. Analysts think that UBL’s book value will go down by about Rs117 billion after taxes. Habib Bank Limited (HBL) and National Bank of Pakistan (NBP) are also likely to lose a lot of money, with estimates of Rs54 billion and Rs45 billion, respectively.
The research says that dangers in the banking sector have “increased materially” since interest rates are going up. If interest rates go up any higher, it could start to hurt Common Equity Tier-1 (CET-1) capital ratios. This could mean that banks have to be more careful with their dividends and how they manage their capital.
Comprehending the depreciation losses
The mark-to-market adjustment on banks’ massive holdings of government debt is the main cause of the stress right now. When yields go up, the values of lower-yield bonds that were issued earlier go down in the secondary market. This causes investment portfolios to lose money on their books.
Since Pakistan’s banks have a lot of money tied up in government bonds, even a small rise in yields can lead to big losses in value. The latest 150bps change has had a big effect, wiping out a lot of the revaluation reserves that were built up during the prior low-yield period.
This opposite link between bond prices and yields is a basic part of how fixed-income markets work. When new securities provide larger returns, bonds with lower fixed rates become less appealing. This makes their values go down to match the market yields.
The research says that part of the reason rates have gone up is that the government is relying more and more on short-term liquidity support. The State Bank of Pakistan (SBP) has started using Open Market Operations (OMOs) more. They now pay for around 24% of the country’s debt. This dependence has made the fixed-income market more unstable, especially as borrowing costs stay high and liquidity circumstances get worse.
Also, the makeup of public debt has changed a lot. Floating-rate instruments now make up more than 50% of all outstanding debt. These tools give the government more options, but they also make things riskier for banks.
The paper talks about the rise of “meaningful spread duration risk.” It says that floating-rate instruments can pass on changes in interest rates to bank profitability and capital positions more swiftly than traditional fixed-rate bonds.
The prognosis for profitability stays the same.
The report makes a clear distinction between accounting losses and underlying profitability, even though the book value took a big knock. Analysts don’t think that bank earnings will change much right away, other than the customary delay in changing the prices of assets and liabilities.
As banks reprice loans and invest in securities that pay more interest, they will probably gain from higher interest rates over time. This could help net interest margins and earnings expand, but the benefits may not show up right now.
The yield shock doesn’t have the same effect on all parts of the economy. Bank AL Habib (BAHL), Meezan Bank (MEBL), and MCB Bank (MCB) are some of the banks that are thought to be better able to handle the current situation. These institutions have shorter-term portfolios or less exposure to fixed-income assets, which makes them less likely to lose money when the market goes down. Because of this, they should get better faster as the market settles down.
The future of the banking sector will depend a lot on how regulators react. In the past, the SBP has helped banks stay within minimum capital requirements during times of high volatility by giving them extra time to meet those criteria. The research does say, though, that the current situation is different because of changes in the structure of debt and the growing use of floating-rate instruments.