MCB’s first-half numbers point to a banking franchise that is holding up reasonably well, but the headline resilience masks a more interesting shift underneath. Profit after tax declined 3 percent year-on-year to Rs26.5 billion despite total income rising 6 percent, as operating expenses climbed 9 percent and the benefit from lower funding costs was partly absorbed elsewhere.
The core earnings picture is nevertheless encouraging. Net markup income grew 6 percent to Rs75.3 billion even against a lower average interest-rate environment. More importantly, the liability franchise continues to do much of the heavy lifting. Deposits remain strong, with the current account mix improving to 55 percent from 54 percent at end-2025. The improvement is already visible in the domestic cost of deposits, which fell to 4.43 percent from 5.23 percent in H1CY25.
This is becoming increasingly important as banks operate in a structurally lower-rate environment. A stronger low-cost deposit base gives MCB some protection against compression in asset yields and allows the bank to preserve spreads without having to chase expensive deposits.
On the asset side, however, MCB continues to prefer liquidity and sovereign exposure over aggressively expanding the loan book. Gross advances increased 9 percent, but the advances-to-deposits ratio has slipped below 30 percent. This is not a new phenomenon. The investment portfolio, at Rs2.07 trillion, remains more than twice the size of the loan book and has expanded further during the period. Government securities continue to serve as the sector’s preferred parking lot for excess liquidity, reflecting both muted private-sector credit demand and the attractive risk-adjusted returns available in sovereign paper.
The sub-30 percent ADR is therefore less a sign of balance-sheet weakness than of the broader intermediation problem facing the banking sector. Banks have ample liquidity and capital, but private-sector credit growth has yet to absorb the liquidity being mobilized through deposits. MCB’s 19.65 percent CAR and 14.93 percent CET1 ratio leave substantial room to absorb a pickup in credit demand when the cycle eventually turns.
Asset quality also provides some comfort. NPLs remain manageable and coverage has improved, while the cleaner loan books across the banking sector should limit the immediate earnings shock from any deterioration in the economic environment. That said, the real test will come when banks begin reallocating a larger portion of their balance sheets from government securities towards private-sector lending.
For now, the interest-rate cycle remains the key swing factor. Any renewed easing cycle may still be at least another quarter away, leaving banks with some breathing room to continue benefiting from lower funding costs while government securities remain the preferred deployment avenue. If rates stay elevated for longer, MCB’s deposit franchise and sovereign-heavy asset mix provide a relatively comfortable cushion. If rates eventually fall more materially, however, the same government-heavy balance sheet could become less attractive as reinvestment yields decline.
The broader banking sector enters this phase from a position of considerable strength: capital buffers are healthy, liquidity is abundant and asset quality has improved. These are useful shock absorbers against near-term headwinds, even if the bigger question remains whether banks can convert their strong deposit franchises and excess liquidity into meaningful private-sector credit growth. MCB’s numbers suggest the balance sheet is ready. The demand side of the equation is still catching up.
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