Pakistan’s largest Islamic bank parks new money in investments as funding costs rise twice as fast as income; strong returns and a Rs8 dividend, but margins and provisions bear watching
KARACHI/LAHORE: Meezan Bank Limited (PSX: MEBL) added Rs632 billion in deposits in the first nine months of 2026, yet its Islamic financing book shrank by about Rs35 billion, raising a simple question about Pakistan’s largest Islamic bank: where is all that money going?
The answer, in results released on October 22, is mostly government-linked and other Shariah-compliant investments. The shift has kept profits rising, with consolidated net profit up 5.9% to Rs74.65 billion, but it has also exposed pressure on margins as the cost of paying depositors climbed far faster than the bank’s income.
Income up 13%, funding costs up 25%
Profit and return earned on financing, investments and placements rose 13.1% to Rs353.04 billion in January to September, from Rs312.13 billion a year earlier. The return paid on deposits and other funds jumped 25.3% to Rs155.32 billion from Rs123.91 billion.
With funding costs growing at nearly twice the pace of income, net profit/return, the Islamic-banking equivalent of net interest income, rose only 5% to Rs197.72 billion from Rs188.21 billion. For a bank, gross income matters less than the spread between what it earns and what it pays; that spread is narrowing.
Non-funded income helped. Fee and commission income rose 19.7% to Rs26.14 billion, and foreign exchange income increased to Rs7.15 billion from Rs5.99 billion, reflecting growth in trade services, cards and digital transactions. Total income rose about 7% to Rs233.81 billion.
Costs and efficiency
Operating and other expenses rose 15.7% to Rs75.56 billion, faster than income. The cost-to-income ratio therefore rose to about 32.3% from 29.9%; the bank now spends Rs32.3 to earn every Rs100 of income, compared with Rs29.9 a year ago. That is still efficient by local standards, though the trend is upward. The bank has been investing in branches and services, including Pakistan’s first round-the-clock assisted service centre.
Third quarter: stronger profit, higher provisions
Quarterly profit growth outpaced the nine-month trend. Net profit for July to September rose 11.3% to Rs26.01 billion from Rs23.38 billion. Earnings per share for nine months rose to Rs41.02 from Rs38.59.
But the quarter also brought a net charge of about Rs2.54 billion for credit loss allowances and provisions, against a net reversal of about Rs255 million a year earlier. One quarter’s provisioning does not by itself show a rise in bad loans; that requires the non-performing financing and coverage ratios, which were not included in the announcement. In June, the bank reported a non-performing financing ratio of about 1.83% and coverage of about 152%.
The balance-sheet story
Deposits rose to about Rs3,935 billion at the end of September from Rs3,302 billion in December 2025. Islamic financing and related assets fell to about Rs1,606 billion from Rs1,641 billion. Investments, meanwhile, rose by about Rs435 billion to Rs3,044 billion.
As a result, the financing-to-deposit ratio dropped to about 40.8% from 49.7%. In plain terms, less than half of each rupee deposited is being lent directly to businesses and households; the rest is going into Shariah-compliant investments such as government ijarah sukuk, which carry little credit risk.
That is a rational choice for a bank when government paper offers solid returns and private credit demand is weak. It is also a reminder of a wider problem in Pakistan’s economy: banks flush with deposits are financing the state more than private enterprise. Meezan has recently pledged to help small firms become bankable, and its record under the government’s housing scheme, where it approved Rs49 billion in home loans but funded about 1,000 families, shows how hard it is to convert intent into lending.
Returns and capital
Consolidated assets grew 12.2% to about Rs5,408 billion, and equity rose to about Rs306 billion from Rs288 billion. Based on annualised nine-month profit and average opening and closing balances, return on assets is about 1.95% and return on equity about 33.5%, exceptionally high for any bank. These are estimates from period-end figures and may differ from the bank’s official ratios. The capital adequacy ratio was above 19% in June.
Dividend and valuation
The board announced an interim cash dividend of Rs8 per share, bringing the 2026 total so far to Rs23.55. At Rs546.95, the October 21 share price, that implies a yield of about 4.3% to date.
Annualising nine-month earnings gives EPS of about Rs54.69 and a price-to-earnings ratio of roughly 10. Book value is about Rs168 per share, putting the stock at around 3.25 times book. A premium of that size is common for banks with very high returns and strong asset quality, but it leaves little room for disappointment.
Elsewhere in the sector, Askari Bank announced an interim cash dividend of Rs2 per share for the September quarter, on top of Rs4 already paid.
Three trends stand out: deposit costs rising faster than income, the cost-to-income ratio edging up, and a financing-to-deposit ratio that has fallen below 41%. The jump in third-quarter provisions adds a fourth. With Pakistan’s policy rate at 11.5% and the IMF programme keeping fiscal policy tight, the direction of interest rates will shape both Meezan’s investment returns and its deposit costs in 2027.
Meezan remains one of Pakistan’s strongest banking franchises. Its next test is turning a fast-growing deposit base into profitable private-sector financing, rather than simply into more investments.
NOTE: Analysis by Jahangir Hayat; editing by The Lahore Times Business Desk. This article is for information only and is not investment advice.
Leave a Reply