Comparative Analysis.docx

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN EMPIRICAL INVESTIGATION FROM COMMERCIAL BANKING SECTOR OF PAKISTAN

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A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN EMPIRICAL INVESTIGATION FROM COMMERCIAL BANKING SECTOR OF PAKISTAN

MASTER OF COMMERCE (M.COM)

Name: Muhammad Asim

Roll No: AM552453

Registration No: 11-PLR-20394

Department of CommerceFaculty of Social Sciences and Humanities Allama Iqbal Open University IslamabadYear of Completion 2014A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN EMPIRICAL INVESTIGATION FROM COMMERCIAL BANKING SECTOR OF PAKISTAN

Name: Muhammad Asim Roll No: AM552453 Registration No: 11-PLR-20394

Name of Supervisor

This Project is submitted to Department of Commerce, Faculty of Social Sciences and Humanities, Allama Iqbal Open University, Islamabad in partial fulfillment of the requirement for the degree of M.Com

Department of CommerceFaculty of Social Sciences and Humanities Allama Iqbal Open University IslamabadYear: 2014

EXECUTIVE SUMMARY

A growing and dynamic banking sector is essential for revenue generation in Pakistan because growth in the banking sector and the real economy mutually reinforce each other. The banking sector constitutes the core of the financial sectors in Pakistan. Private sector investment and consumption should be seen as the key drivers of the revenue generation and must be supported by growing financial intermediation and services, including not only banks but also non-bank financial institutions, and debt securities and the stock market. Pakistans banking industry and the broader financial sector has enormous potential to support faster economic growth and revenue generation. When compared with other emerging market countries (EMCs), these sectors remain small in relation to the economy. In recent years, a wide range of important structural reforms already have taken place but more reforms are needed for the banking sector to grow into its full potential for supporting strong and sustained economic growth and revenue generation.

APPROVAL SHEET(Viva Voce Committee)Title of Project: A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN EMPIRICAL INVESTIGATION FROM COMMERCIAL BANKING SECTOR OF PAKISTANName of Student: Roll No.: Registration No.: Accepted by the Viva Voce Committee, Department of Commerce, Faculty of Social Sciences and Humanities, Allama Iqbal Open University, Islamabad in partial fulfilment of requirements for the Degree of Master of Commerce (M.Com)

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CERTIFICATE

The Project entitled A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN EMPIRICAL INVESTIGATION FROM COMMERCIAL BANKING SECTOR OF PAKISTAN, at Master of Commerce (M.Com) conducted by _ Roll No. , Registration No. has been completed under my guidance and I am satisfied with the quality of students research work.

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ATTESTATION OF AUTHORSHIP I ------------Roll No. ---------- Registration No. ----------, a student of Master of Commerce in Allama Iqbal Open University, solemnly declare that my research project entitled A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN EMPIRICAL INVESTIGATION FROM COMMERCIAL BANKING SECTOR OF PAKISTAN is my own work and that, to the best of my knowledge and belief, it contain no material previously published or written by another person. This research project is not submitted already and shall not be submitted in future for obtaining a degree from same or another University or Institution. If it is found to be copied/plagiarized at later stage of any student enrolled in the same or any other university, I shall be liable to face legal action before Unfair Mean Committee (UMC), as per AIOU/HEC Rules and Regulations, and I understand that if I am found guilty, my degree will be cancelled.

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DEDICATION

This work is nicely dedicated to my parents for their hard work.

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ACKNOWLEDGEMENTSI would like to thank the following persons without whose guidance this dissertation could not have been completed.

First of all I would like to thank my () who always guides me in every walk of my life. Secondly, I would like to express my sincere appreciation and gratitude to my supervisor for his / her guidance and insight throughout in making my dissertation and especially, his / her invaluable suggestions and comments that really guided my research and also helped me to structure my dissertation. Thirdly I am also very indebted to my best friends, my father and mother for their continuous support. I owe a lot of their unconditional love and understanding. Well, their suggestions allowed me to think in many different ways. Most importantly, they continually helped me improve my confidence. There were certain times, when I used to say that I just did not think I could go on with my studies, but they always knew just what to say to get me back in the race. They really very special entities of my life. What a journey! I will never stop admiring them.

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Table of ContentsABSTRACT:101INTRODUCTION:121.1BACKGROUND121.2Public Sector or Private Sector Banks131.3THE NEED OF BANKING SYSTEM141.4DEVELOPMENT OF BANKING INDUSTRY IN PAKISTAN:151.4.1Controlling Reforms and Banking Overview in Pakistan181.4.2RECENT GROWTH TRENDS191.5SIGNIFICANCE AND SCOPE OF STUDY251.6OBJECTIVES OF Research251.7LIMITATIONS OF THE STUDY251.8Structure of thesis262REVIEW OF LITERATURE273RESEARCH METHODOLOGY313.1DATA SOURCES313.2SAMPLE AND SAMPLING TECHNIQUE323.3RELIABILITY AND VALIDITY323.4MODE OF ANALYSIS333.4.1Bank Size or Total Assets343.4.2Efficiency / Profitability Ratios343.4.3Liquidity Ratios343.4.4Capital / Leverage Ratios343.4.5Asset Quality Ratios344RESULTS AND DISCUSSIONS355Conclusions525.1Recommendations536References547APPENDIXS59

ABSTRACT: Commercial banks plays a major in financial progress of the banking sector and subsequently influence the development of economy. The study aims to comparatively analyze the financial performance of state and private sector banks in Pakistan. The banking industry is renowned as one of the major service sectors in Pakistan. Pakistani commercial banks can be separated broadly into two major categories such as state and private sector commercial banks. The numbers of studies are done in all over the world to evaluate and investigate the financial performance of their banking sector using different statistical methods such as DEA (Data Envelopment Analysis), CAMELS rating system and the Stochastic Frontier Approach (SFA). This study is initiated to compare the financial performance of commercial banks in Pakistan using ratio analysis of different private and state banks in Pakistan from the financial year 2006-2012. Ratio analysis are widely used for comparing and assessing the financial performance and position of banks.Accordingly ratio analysis confirmed that, In Pakistani context public banks had high financial performance than private banks but private banks are ahead in controlling their interest expenses and have lower level of liabilities and also larger in size comparatively. So private banks should focus to increase their financial performance to compete and survive successfully in the current world and also public commercial banks try to achieve their target financial performance for their long survival. It remained essential to measure the comparative performance of public sector to make and implement best strategies to reduce their interest expenses so they can compete with private sector in an efficient manner.Challenges like stiff competition, rapid changes in technologies, globalization that limit the geographic boundaries, and governmental regulations with lesser restrictions all are major contributors for the urge to reform the Public Sector particularly from banking perspective. The study is fully conducted for academic purposes and further studies can be done by extending the period of evaluation.KEYWORDS: Financial Performance, State & Private Sector Banks

CHAPTER-IINTRODUCTION:BACKGROUNDToday, banks are playing a key role to strengthen the financial system of all the counties. An efficient Banking system is needed to smoothly run the economic structure of a country and supports the societal development. Specially, in a developing country like Pakistan, it is indispensable to create such institutes that can boost the shaky economy. Such a scenario gave rise to the concept of banks and cause the development of banking industry across many countries. The purpose was to deliver financial support to the general public as well as to acquaint with such an institute that facilitate the economic functions especially in downturn.The term Bank is derivative from the term Bancus or Banque that means bench. Bank an institution that sells currency and lends, receives deposits, it collects money from saving unit including individuals and businesses at a lower Interest rate and provides to lenders at upper interest rate. According to The Oxford dictionary, A bank represents an institution to save money and pays out when customer demands. The White head defines bank as A Bank is an institute created to collect excess moneys from the people, maintain them, and pays them to the account holder when he requires and as well provide loans to those individuals or businesses who need funds and can make available required security against loan. The banker is defined broadly by the Americans as Through term banking, we denote the business of selling credits and through a Bank we indicate each individual or company that have a proper place to run business which open credits through deposits of assortment of cash or money that is payable via Cheque or pay order. The deposited money is used to give advances or loans or bonds, gold bars, promissory notes, bill of exchange, are established for rebate or deal.Adam Smith in 1776 in his famous book titled Wealth of Nations explained the key functions of bank of Amsterdam in following manner:"This bank received both foreign coin, and light and worn coin of the country at its intrinsic value in the gold standard money of the country, deducting only so much as necessary for defraying the expense of coinage, and the other necessary expense of management. For the value which remained, after this deduction was made, it gave a credit in its books. This credit was called bank money which, as it represented money exactly according to the standard of the mint, was always of the same real value, and intrinsically worth more than current money...., it could be paid away by a simple transfer, without the trouble of counting or the risk of transporting it from one place to another.Public Sector or Private Sector BanksThe prime role of each bank is to deliver the service of accumulating money deposit from the public as well as from businesses; it also meant for the issuance of loans on prescribed rules and regulations. The characteristics of getting deposit and offering loans make the bank different from other monetary institutes. The banks in Pakistan also perform similar functions. Mainly Pakistani banking sector can be classified in two broad categories namely public banks and private banks. The public banks are government owned and in such banks, the responsibility of financial transactions in bank accounts i.e. deposits and withdrawal of money is completely on the government. Conversely, in private sector bank are owned by a single person or an autonomous business that is administered by specific individual or individuals at large. Therefore, the individual or individuals governing the bank have sole responsibility of all monetary and other transactions occur in private banking sector. THE NEED OF BANKING SYSTEM

The banking system embodies an essential instrument to accumulate funds form those who saves and lend these funds to the businesses. At the apex of Pakistani banking structure, State Bank of Pakistan is regulating the whole of the banking system. Pakistan has several forms of banks such as central bank, commercial banks, industrial banks, Agriculture banks, Exchange banks, Saving banks, Investment banks, Mortgage banks, and Micro finance banks with respect to their functions. All the financial companies and banks are monitored by State Bank of Pakistan (SBP) is the central bank of Pakistan, which was established on 21st July, 1948. The aim of this bank is not to earn profits but safeguards the supreme interests of the country and is the controller of banking system. State Bank of Pakistan (SBP) make rules and regulations for working of the commercial banks and financial institutions.Pakistani commercial banks are usually divided into two major classes such as publically owned commercial banks and privately owned commercial banks; there are only five state commercial banks and 22 private sector commercial banks in Pakistan (Financial statement Analysis Central Bank as at 30.06.2012). Commercial banks are providing varieties of services, attractive deposit accounts which are fixed deposit, saving account, current account, pawning, loan, leasing, etc. Banking sectors are contributing a significant amount to the economic growth of the nation. Nowadays all the business activities are familiarly using the cheque in their business transaction.Financial system of a country is much needed for the successful economic development and performance of all the countries. It plays a major role in Pakistani economic. According to theAhmad, Raza, Amjad, & Akram, (2011), it can be seen that, banks and financial institutions are special components of a healthy and wealthy financial system of the country. Those can assist the investors for their fair investment through this investment; a country can obtain an efficient capital and money market in country. According to this study, they have noted that, exchange commission and state bank of Pakistan is also good working for the development of a healthy and wealthy financial system in Pakistan. Aburime, (2009) stated that a lucrative and profitable commercial banking system has the ability to tolerate the adverse circumastances and accumulate the strength and power in the economic system of the country. Athanasoglou, Brissimis & Delis (2008) noted that, profitability and sound of the commercial banking sector is at a better point to add performance in the financial system. Open economy was introduced in 1947 with the establishment of Pakistan from it, many domestic and foreign investors encourages to invest their investment in each and every sector as well as in banking sector, due to that number of private commercial banks have opened after the open economy in Pakistan. The research aims to analyze, contrast and compare the financial performance of state and private banks of Pakistan representing the period of 2007-2012.DEVELOPMENT OF BANKING INDUSTRY IN PAKISTAN:

Commercial banks are considered to be the crucial and essentially important part of the economy to spread the institutional credit. The commercial bank also form the heart of countrys financial system by getting deposits and being a primary source of supplying short term credits. The banking industry of Pakistan has significantly contributed to countrys economy over the years. Financial sector in Pakistan mainly comprises of the central bank, commercial banks, insurance companies, specialized financial institutions development finance institutions and stock exchanges. However, the contribution of commercial banks is significant in supporting and improving the efficiency of the Pakistans economy (Usman, Zongjun, Faiq and Humera (2010).

In 1947, at the time of establishment of Pakistan, the newly born country has only two banks owned by Muslims incorporated in the mid of 1940 in undivided India. Very after the partition, these banks opt to mainly operate in Pakistan and create their head offices in country. This laid the base of banking system in Pakistan.

In November 1949, The National Bank of Pakistan was established to handle the risen distress resultant to the trade blockage with India, however the government was intended to establish the bank in 1950. The reason behind its early formation was to face the critical situation arisen in in the jute trade, which especially grew as a result Indian rupee devaluation of 1949 as compare to Pakistani Rupee and refusal of Indian government to admit the Pakistani Rupee new exchange rate. The National Bank of Pakistan was established under November 19, 1949s Ordinance and it started functioning at principal jute centers with five branches. In cooperation with Jute Board, the National bank of Pakistan significantly affect the investment orientation in the jute trade. To manage national business and to deal with currency ribcages, the bank thus in 1952 started handling the agency work of the State Bank of Pakistan at those places where the central bank was not operating. Before the nationalization era, the government of Pakistan was held 25% share capital whereas others detained the residual 75%. Subsequent to the nationalization, the proportionate of capital owned by private banks was relocated and financed in the centralized government. Earlier to nationalization period, the National Bank was governed and monitored by the Central Board of Directors but following the nationalization, the government dissolve that Central Board and It was replaced by the Executive Board which also involves the President. At the apex of the pyramid the responsibilities of chief executive was given to the president and to have a control in general four further members were added. The Pakistani banks were nationalized in 1974, and remained under governmental control until the start of 1990s.

The main purpose of nationalization was to increase the Government revenues and better utilization of monetary resources of the country. The momentum of growth is not possible due to lack of capital, socio-economic and political instability. Therefore State Bank of Pakistan (SBP) did take many radical measures for the establishment and development /growth of commercial banks in Pakistan and many foreign investors were encourages due to privatization of banks in 1992.The World Bank in cooperation with international monetary funds has initiated the financial liberalization programme in December 1998. The key objectives behind its launch was to reorganize, bring improvements in the management of state owned commercial banks and giving licenses to the potential or newly established private banks. As a result, the commercial banks were denationalized by the government of Pakistan and this cause the entrance of numerous new private as well as foreign banks the banking sector of Pakistan (Ayub, 1996; Rizvi, 2001; Usman, Zongjun, Faiq and Humera 2010).CONTROLLING REFORMS AND BANKING OVERVIEW IN PAKISTAN

Pointless to consider that sufficient governing structure assists to confirm the economic steadiness, low risky and decrease the intermediation costs. Pakistani banking sector trail diverse periods of regulation ever since its origin. Erstwhile to financial reforms, the primary era displayed this part deeply controlled. The main governing necessities were to uphold the currency reserve and liquidity ratios. This era also practiced main program modifications in financial system of Pakistan. In first part of 1970s chief financial institutes were organized by public sector and all the assets of these banks were focused to import areas. The banking system accrued a huge volume of bad and doubtful debts over the years, i.e., around 15% of advances of banks resultantly inadequacies had turn into ubiquitous, that had distant inferences for Pakistani financial industry. In the initial reforms era i.e., 1988, prudential guidelines to classify the loans and directions for provisions were familiarized with precise recommendations for labelling of working capital loans as well as provisions with them. The Pakistani Government permitted the important banking functions in private sector during 1991. Initially, 10 banks were allowed to operate in private sector, which grew to 18 in 2002. Also, approval of licenses for new bank branches, capital adequacy standard, organization of loans, and further prudential rules were presented during the era of 1992-93 and 2002-2003 to impose a complete framework for managing risks and internal control. Financial sector practiced numerous tendencies in diverse ways in current years. Amongst the different types of key operational modifications shown in private and public banks associated to foreign banks. Though many private banks continued similarly, however ownership of such banks rehabilitated over and done with merger and acquisition events as indigenous private banks assimilated numerous banks.[footnoteRef:1] The Denationalization of public banks was also started in similar period by liquidation of public banks. The branch network of private and foreign banks extended largely, that also caused an increase in their deposits share and market expansion. Relatively the branch network of public banks were reduced to minimize the operative expenses. In summation, the goal behind the reforms of banking sector was to support a strong antagonism initiation through allowing private banks to operate in Pakistan in accordance with liberalization policy. [1: During 2000-02 six commercial banks completed merger and acquisitions. ]

RECENT GROWTH TRENDS

Today, the Banking sector of Pakistan is playing pivotal role in the growth of countrys economy. In accordance with the State Bank of Pakistan Act, the banking system of Pakistan is a two-tier system including the State Bank of Pakistan (SBP), commercial banks, specialized banks, Development Finance Institutions (DFIs), Microfinance banks and Islamic banks. As of June 2010, the banking sector comprised 36 commercial banks (including 25 local private banks, 4 public sector commercial banks and 7 foreign banks) and 4 specialized banks with a total number of 9,087 branches throughout the country. Among the banks, there are 6 fully fledged Islamic banks as at end of June 2010. Currently, banking industry in Pakistan covers above 70% of financial sector. In financial year 2012, the size of the banking sector expanded and the size of total assets grew up to Rs. 9.9 trillion from Rs. 8.3 trillion in the financial year with a rise of 19.3%. However, Profit before taxation enlarged by 6.7% in year 2012 over the preceding year. The table and figure below is showing the comparison of Return on Assets of various banks for the year 2007-2013. This table compare the return on assets value among different types of banks operating in Pakistan including public sector banks, local private banks, foreign banks, commercial banks and specialized banks. The study however, only concerned with the values represented for the public banks and commercial banks. The values here are indicating a growth trend in Return on Assets over the years.Table 1.4.1: RETURN ON ASSETSIndicatorsCY07 CY08 CY09 CY10 CY11CY12CY13*[footnoteRef:2] [2: The values taken for the financial year 2013 is the average values of four quarter vales including Mar-13, June-13, Sep-13 and Dec-13 and is based on Basel III and data from CY08 to Sep-13 is based on Basel II with the exception of the data of IDBL,PPCBL, and SME Bank, which is based on Basel I.]

EARNINGSPercent

Return on Assets (After Tax)

Public Sector Commercial Banks2.50.51.31.31.41.20.725

Local Private Banks1.40.90.90.91.51.41.175

Foreign Banks0.70.3-0.30.41.5-0.11.025

Commercial Banks1.60.80.90.91.51.31.1

Specialized Banks0.71.81.21.21.61.81.575

All Banks1.50.80.911.51.31.1

Figure 1.4.1The table and figure below is showing the comparison of Return on Equity values of various banks for the year 2007-2013. This table compares the return on equity of different types of banks operating in Pakistan including public sector banks, local private banks, foreign banks, commercial banks and specialized banks. The study however, only concerned with the values represented for the public banks and commercial banks. The values here are indicating a growth trend in Return on Equity over the years. Table 1.4.2: RETURN ON EQUITYIndicatorsCY07 CY08 CY09 CY10 CY11CY12CY13

EARNINGS

ROE (Avg. Equity& Surplus) (Before Tax)

Public Sector Commercial Banks27.25.213.315.21815.610.975

Local Private Banks20.412.913.215.624.724.121.15

Foreign Banks13.10-2.45.814.52.29.95

Commercial Banks21.810.612.41522.721.218.475

Specialized Banks-----

All Banks22.611.413.215.52321.418.575

Figure 1.4.2Many events were in use to reinforce the traditions to strengthen the banking sector in 1992-2002. Overview of prudential rules in banking sector aided to decrease non-performing loans (NPLs) of the banks in this age. Numerous practitioners and researchers considers Non-performing loans to total advances is a useful sign of assets quality and creditworthiness. Table 1.4.3 gives percentage of Advances, non-performing loans, NPL provisions, net advances and Net NPLS for different banks type for the period 2007 to all four quarters of financial year 2013. The figure 1.4.3 indicates an increase in advances over the years and decrease in non-performing. The provisions for non-performing loan are also decreasing trend which shows the rapid improvement in the quality of assets of banking sector. Table 1.4.3: BANKING SYSTEM: SELECTED INDICATORS OF ASSET QUALITYCY07CY08CY09CY10CY11CY12Mar-13Jun-13Sep-13Dec-13

Advances2,875,6863,422,5493,551,3313,729,0033,759,2354,243,5614,171,6964,177,8754,210,3374,505,495

NPLs217,998359,238446,005555,968591,579614,929612,609616,470603,770585,124

Provision187,603249,914311,588370,778410,016439,421440,416451,136461,732458,908

Advances (net)2,688,0873,172,6363,239,7443,358,2253,349,2193,804,1403,731,2803,726,7383,748,6054,046,587

Net NPLs30,395109,324134,417185,190181,563175,541172,193165,334142,038126,216

Source: State Bank of Pakistan, 2013

Figure 1.4.3Table 1.4.4 shows represents the key growth variables during the period 2007 to 2013. As shown in graph 1.4.1, all key variables are showing a growing trend in Pakistani banking industry and depicts the future growth and financial soundness till 2012. However there is a slight decline in the year 2013, might be due to election and resultantly change in administration and strategic orientation. The table depicts the key financial soundness variables including the capital adequacy ratio, capital to total assets, NPLs to Loan for gross values, Net NPLs to Net Loans, ROA, ROE, Liquid assets to total deposits and advances to deposit ratios of different bank categories during the year 2007-2013. It is found that adequacy ratio is growing for all banks over the years but slightly decrease in year 2013. Management soundness is one of the key determinant of the health and profitability of financial institutions. Operating costs of public banks have also been high due to overstaffing and excessive branch network, which affected the efficiency of these banks. The table also exposes the liquidity ratios (i.e. Liquid Assets/ Total Deposits) of different banks over the years. It clearly shows that the liquidity positions of overall banking sector has been developed subsequent the prudential measures started by the state Bank of Pakistan. Table 1.4.4: GROWTH RATES OF KEY VARIABLES AND KEY FINANCIAL SOUNDNESS INDICATORSGrowth RatesCY07CY08CY09CY10CY11CY12CY13

Assets18.88.815.89.214.818.911.95

Loans (Net)10.7182.13.7-0.312.96.575

Deposits18.49.413.513.914.516.814.15

Investments (Net)53.1-14.859.924.241.631.418.65

Equity35.33.417.35.212.912.58.3

KEY FSIs:CY07CY08CY09CY10CY11CY12CY13

Capital Adequacy Ratio12.312.21413.915.115.615.25

Capital to Total Assets10.51010.19.89.69.19

NPLs to Loans (Gross)7.610.512.614.915.714.514.2

Net NPLs to Net Loans1.13.44.15.55.44.63.975

ROA (Before Tax)2.21.21.31.52.221.725

ROE^ (Before Tax)22.611.413.215.52321.418.9

Liquid Assets/ Total Deposits45.137.744.547.159.564.561.675

Advances to Deposit Ratio69.775.267.761.653.652.249.25

^ Based on Average Equity plus Surplus on Revaluation Figure 1.4.4 (a)Figure 1.4.4 (b)

SIGNIFICANCE AND SCOPE OF STUDY

The thesis will highlight the growth of public sector and private sector bank in Pakistan and their impacts on revenue generation capacity of banking sector. By comprehending the problem areas, the public will themselves be able to judge the various dimensions of the situation. This research project will also help the policy framers to formulate policies under the light of the given facts. It will also be useful for others who are interested in doing such research or even to the general reader.OBJECTIVES OF Research

The central objective of the research is to comparatively analyze the financial performance of state and private sector banks in Pakistan with the following sub objectives,

i. To conduct a comparative analysis of the financial performance of public and private commercial banks situated in Pakistanii. To advice to the state and private sector banks on financial performanceLIMITATIONS OF THE STUDY

The research has certain limitations also particularly due to the inherent restrictions relative to time and resources. Few are discussed below to enhance the understanding of the study in relative the context. Firstly, this study was conducted in a limited time span of 6 weeks. So to finish the work in required time period the sample and other related limits were carefully chosen accordingly. The officials of the bank supported me a lot, but did not have sufficient time to make the points more clear. There was limited researches available on this topic in the scenario of Pakistan so the researcher was unable to compare his finding with other studies. As the secondary data has been taken to conduct this research from State Bank of Pakistan (SBP). So, the quality of research is dependent on the accuracy, validity and reliability of the data source. Structure of thesis

The remainder of this research is planned in the below mentioned sequences: Chapter no. 2, gives the review of literature with emphasis on the comparison of financial performance of Public and Private sector banks ; Chapter no 3 details the methodology employed in the research and development of the methods normally used to measure profitability in banking sector, which focuses of the various approaches to measure profitability and sources of data used by the study; the Chapter no. 4 details results of the analysis and main findings; and finally Chapter no. 5 details discussion and conclusion

CHAPTER-IIREVIEW OF LITERATURE

The growing antagonism in the domestic and foreign financial market places, the emerging trends of financial mergers and the technological advancements signals main alterations in banking environs, and also alarm the banks to change quickly to move in new competitive financial setting (Velnampy, 2008). Financial performance was measured using profitability ratios i.e. Return on assets, Return on Equity, Gross profit and Net profit are the important instruments of performance measurement. This measurement comply the studies of Velnampy, 2008, 2005 and 2013, Nimalathasan, 2008, Achchuthan and Kajananthan, 2011, 2012 and 2013. A number of studies have been conducted to analyze, compare and interpret the financial performance of state and private banks across various country. Hassan, Ali and Muhammad (2011) stated that commercial banks are a major component of the financial system as they contribute in the growth of economy. They concluded that private banks are better than public banks in the case of bank size however public banks and private banks had mixed financial performance during 2006-2009 in Pakistan.

Aswini et, al., (2013) done a study in the field of banking, objectives of the study was to analyze the soundness and to estimate the effectiveness of state and private sector banks centered on market gap. Capital adequacy ratio, Assets quality ratio, Management soundness, Earnings and Liquidity ratios CAMEL rating method was used in this study. They found that private banks were at the top with sound performance. Public sector banks had shown weak financial health than private banks. Recently a study done to analyze change in the efficiency selected banks operating in India during 2010 to 2012. B. Satish Kumar in (2008) suggests in his research article titled evaluation of the financial performance of Indian private sector banks that the Private sector banks are major contributor in the growth of Indias economy. Subsequently to the liberalization, significant changes were occur in banking sector and the radical economic restructuring have absolutely rehabilitated the banking industry. Resultantly the reserve bank of India, the central bank allowed new banks to start their operations in private sector according to the approbation of Narashiman commission. Firstly, the banking sector of India was dominated by state owned banks. But later on the situation was reverse and private banks with latest technology and with employment of new proficient management strategies has acquired a sound place in banking sector.

Kajal and Monika in (2011) analyze the efficiency level by which Public and Private sector banks are measuring their non-performing asset (NPA). This research was essential to comparatively evaluate the functions of both Private and Public sector banks. The Stiff competition, technological advancement thus declining processing cost, the attrition of merchandise and geographical limitations and minimized obstructive governmental rules has forced Public sector banks of Pakistan to compete with Private and Foreign banks. Morteza at el found that, there are substantial differences exists between private sector and public banks regarding liquidity ratio, performance levels and quality of management. The research shows that private banks are performing much better than public banks in relation to liquidity and earning performance however in terms of management performance the public banks are far ahead than private banks. The overall mean in this study shows the better performance of private banks and suggests even thought they should try to improve their performance. Velnampy (2008) stated computing the sales expansion, relative market segment, profitability in terms of overall performance and entire satisfaction of stakeholders represents a more precise assessment of performance of such firms. Similarly, Brijesh K. Saho, Anandeep Singh in (2007) attempted to empirically examine, the trends of performance in Indian commercial banks for the period: 1997-98 - 2004-05 and concluded the following results:Firstly, An increasing technical efficiency for all types of ownership structures on average basis annually designate an confirmatory signal regarding the impact of the transformation method on the profitability of banking sector in India. Secondly, the greater cost efficiency accretion of private banks over public banks show that public banks, although long-standing, but do not replicate their learning experience in their cost reduction actions because of X-inefficiency causes rising from public possession. These result also depicts the potential improvements in the capital market representing a significant relationship between the corporation regulatory market and private enterprises efficiency expected through the hypothesis of property right. The study finally, concludes that the measure of behavioral elasticity, the technological improvements and market oriented results change strongly are supportive to the experiential differences between measurement of returns and economies of scale, interchangeably used in the existing literature frequently.The research conducted by Khizer, Ali Muhammad, Farhan Akhtar and Hafiz zafar ahmed, efficiently reflect the profitability patterns in banking industry of Pakistan during the years of 2006-2009. They argued that the bank size, assets management, portfolio composition and operating efficiency effect the profitability in positive direction. Whereas capital and credit risk are two variables negatively effecting the profitability of bank in case it is measured on the basis of return on assets (ROA). Akhtar in (2002) measured banking efficiencies using implemented Data envelopment analysis (DEA) of Pakistani banks. Usman in (2009) studied dynamics of banking efficiency along with a detailed analysis of reforms effect on financial sector in Pakistan.The size of bank has a positive effect on economies of scale as research is evident of lesser profitability in smaller than banks larger in size. (Alam, Ali & Akram, 2011). Similarly, Pilloff and Rhoades (2002) explained that profitability and bank size are positively correlated. Correspondingly researches conducted by Sufian (2009); Molyneux and Seth (1998); Ramlall (2009) also examine the relationship between bank size and economies of scale and reported a positive relationship between the two variables because the banks in smaller size are lesser profitable than banks in larger size. However, Koasmidou, (2008); Spathis, Koasmidou & Doumpos, (2002) empirically investigated an adverse association exist among bank size and profitability.To compare the financial performance of public and private sector banks, the financial ratios including profitability ratios, leverage ratios, liquidity ratios, asset quality ratios and the size of bank are widely used tools and Statistical leaflet issued by State bank of Pakistan, the central bank also recommended these ratios to estimate the performance of banks. The return on assets (ROA), capital adequacy (CA) and interest margins (IM) are the financial measure that are positively related with quality of customer service (Elizabeth & Elliot 2004). Raza, Farhan, & Akram, (2011) ordered the investment banks relative to their ROA and ROE ratio. The measures of efficiency and effectiveness are the independent from each other (Tarawneh, 2006; Raza, Farhan, & Akram, 2011), means it is not necessarily come about that efficient bank also effectiveness.Rahman (2004) reported that interest costs separated to total loans calculated as the quality of bank management. Capacity to fund the current and imminent tasks of bank rest on the worth of its profitability and earning side view (share et al 2011). The capital has a significant effect on the profitability, it also permit banks to shape a robust place in market- (Athanasoglou, Brissimis & Delis 2008).CHAPTER-IIIRESEARCH METHODOLOGY

The study aims to evaluate the financial performance of State and Private commercial banks in Pakistan operating till 2012. Five state owned banks were carefully chosen for the research purposes which are The First Woman Bank Limited, The Bank of Khyber, The National Bank of Pakistan, The Bank of Punjab, The Sind Bank Limited and the 22 Private sector banks were designated for the research purpose such as Albarka Bank (Pakistan) Limited, Allied Bank Ltd., Askari Bank Ltd., Bank Al-Habib Ltd, Bank Alfalah Ltd. Bank Islami Pakistan Ltd., Burj Bank Ltd., Dubai Islamic Bank Pakistan Ltd., Faysal Bank Ltd., Habib Bank Ltd., Habib Metropolitan Bank Ltd., JS Bank Ltd., KASB Bank Ltd., MCB Bank Ltd., Meezan Bank Ltd., NIB Bank Ltd., Samba Bank Limited, Silk Bank Limited, Soneri Bank Ltd., Standard Chartered Bank (Pakistan) Ltd., Summit Bank Limited and United Bank Ltd. Research stands for scientific investigation, which systematically examine the relevant facts and figures on a particular topic or topics. The reason behind the selection of research methodology is to gather knowledge regarding the methods and procedures necessary to be applied to successfully achieve the objectives determined for the project. The research methodology also helps other to understand and evaluate the results of the study and also keep the researchers on the right track.DATA SOURCES

To achieve the aims of the research, the data was collected from different secondary sources like annual report of the selected banks published by respective banks, websites of public and private banks, the reports published on the website of state bank of Pakistan, and various other secondary data sources like magazines newspapers, Internet surfing, and organizational guides etc. However for the study, it was make sure that the financial reports must be audited and must contain an independent auditors opinion to ascertain the reliability and validity of data.SAMPLE AND SAMPLING TECHNIQUE

This study was done in Pakistan. All public and private banks operating in Pakistan constitute the population for this study. According to the SBPs financial statement analysis 2008-2012, the banking sector consist of four public banks and twenty two private banks (see appendix). According to the scenario, the four State and twenty two Private commercial banks for this study were selected. Hence 100% sample taken from State and private commercial banks to this study according to the convenience sample technique. Researchers focused on same number of banks selection from State and Private sector banks. Data for the study were collected from 2006 to 2012 and the six years average ratios for public and private banks is computed to contrast the financial performance operational in Pakistan for the selected time period.RELIABILITY AND VALIDITY

Secondary data for this study was taken from audited financial statements (Income Statement and Statement of Financial Position) of the concerned banks as fairly accurate and reliable. Here State banks are audited by Auditor General of Pakistan and private banks are audited by independent auditors who are chartered accountants of Pakistan. These data may be considered reliable for the study and the necessary checking was done while getting the information and data from the particular sources.

MODE OF ANALYSIS

In this study, we analyze our data by employing ratio analysis, graph, descriptive statistics and independent samples T-Test. Entire analysis is done by personal computer for this study. Statistical Package for Social Science (SPSS) 22.0 Version was used in order to analyze the data especially descriptive analysis to satisfy the objectives, independent samples T-Test to accept or reject the hypothesis of the study and draw the conclusion which is well known statistical package in the current practice.The following ratios divided in four categories are used in this study to compare the both sector banks. Bank Size or Total Assets Efficiency / Profitability Ratios Spread Ratio Net Interest Margin Ratio Return on Owners Equity Ratio Return on Total Assets Ratio Non-Interest Expense to Total Income Ratio Liquidity RatiosCash and Cash Equivalents to Total Assets Ratio Investment to Total Assets Ratio Advances to Total Assets Ratio Total Liabilities to Total Assets Ratio Capital / Leverage Ratios Capital Ratio Breakup value per share Deposits to Equity Ratio Asset Quality Ratios NPLs to Gross Advances NPLs to Equity Ratio

CHAPTER-IVRESULTS AND DISCUSSIONS

Comparison of Public and Private Banks on the basis of Bank size and Financial Ratios:

Table-01Table-01 Total Assets (Rs.)

Type of Bank2006200720082009201020112012Average

Public Bank836160462

1035893081 1,042,310,1561,181,231,0191,330,647,7041,568,139,2381,845,230,4681262801733

Private Bank2982464260

3835719200

4,235,919,7844,978,942,5885,476,362,6356,321,782,6387,644,196,7735067912554

Figure-01

The data shown in above Table-01 and Figure-01 represents the data about the size of public and private banks operating in Pakistan in the period of 2006-2012. A Banks size is comprised of its total assets, the larger the worth of total assets means the larger the size of bank. The figure-01 shows the comparison of average total assets of public and private banks that depicts big differences in the total assets of public sector and private sector banks because of larger difference in bank numbers as 05 public banks and 22 private banks select for the study.Table-02Table-02 Spread Ratio (%)


Public Bank60.5753.7848.2840.2439.8539.7736.9745.63714286

Private Bank56.7152.1248.9048.0346.6746.9643.4848.98142857

Figure-02

The data displayed Table-02 and figure-02 reveals the spread ratio for two types of banks i.e. Public and private banks operating in Pakistan from 2006 to 2012. Spread ratio consist of income statement values and it is computed by division of total interest earned with total interest paid. This shows a gap in interest rates collected on loans and interest rates to be paid on deposits. The private sector banks have a higher spread ratio than public sector banks but the spread ratios for both banks is slightly different from each other.Table-03Table-03 Net Interest Margin Ratio (%)


Public Bank4.23 3.7 3.823.413.373.292.823.520000000

Private Bank4.02 3.91 4.284.274.144.353.554.074285714

Figure-03

The values in the Table-03 and figure-03 represents the facts about net interest margin ratio of state owned and private sector banks that were operating in Pakistan in the period of 2006-2012. It take income statement values and can be measured by computing the net interest income with total assets, which shows the ability of bank to earn at maximum through full utilization of its assets. The above figure shows that private banks are ahead the public banks and have high net interest margin ratio than public banks.Table-04Table-04 Return on Equity (%)


Public Bank0.31 0.26 6.056.2421.2515.5714.489.165714286

Private Bank0.21 0.15 9.039.069.8414.8815.138.328571429

Figure-04

The data shown in table-04 is related to the return on equity (ROE) which denotes comparison between public and private banks during the period of 2006-2012 were working in Pakistan. The return on equity ratio is a straight measure of net profit after taxes divided by the owners equity and shows value of profit earned through owners equity. The figure-04, describes that public banks have a higher ratio of return on equity as compare to the private banks that depicts that public banks are paying more to their owners from private sector banks.Table-05

Table-05 Return on Assets (%)


Public Bank2.53 2.3 0.540.561.681.271.081.422857143

Private Bank1.79 1.34 0.820.820.851.421.301.191428571

Figure-05

The Table-05 depicts the values of return on assets for the period from 2006 to 2012 of public as well as private banks. Here the average of return on assets is calculated to determine the overall trend for this ratio for the selected years. The return on asset ratio measures the ROA value by dividing after tax net profit to total assets. In figure-05 it is clearly shown that public banks are performing much better than private banks as they have higher return on assets which means earning more profits with their assets than private banks.Table-06Table-06 Non-Interest expense to total income (%)


Public Bank21.91 19.31 22.9722.6624.6522.5118.8821.84142857

Private Bank26.88 27.42 1.661.411.381.281.378.771428571

Figure-06

The Table-06 and figure-06 are showing the figures representative to the non-interest expenses to total incomes for selected public as well as private banks working in Pakistan in the period of 2006-2012. The ratio measures that how efficiently the management of banks utilize the resources to reduce the bank allied expenses. The ratio also called the overhead expense ratio, can be computed by dividing non-interest expenses to total incomes and also known as overhead expense ratio. The chart representing the figure-06 clearly depicts that the public banks have higher non-interest expenses ratio than public banks that reveals public banks have lesser expense values as compare to private banks.Table-07Table-07 Cash and Cash equivalent to Total Assets (%)


Public Bank17.15

14.94

15.7013.8512.9111.9911.8914.06142857

Private Bank12.42

10.73

10.0010.0010.0610.2410.0810.50428571

Figure-07

The amounts shown in above Tabl-07 represents the ratios for cash and bank balance to total asset for the period on 2006 to 2012 for the both public and private banks operative in Pakistan. The table also measures the average of different years ratio to depict a trend of proportionate of cash and bank balance to total asset for public as well as private banks. Generally, this ratio tells us about the worth of the total assets existing in shape of the highly liquid assets in the bank. The average values of the ratio shown in figure-1 reflects that the public banks have comparatively higher proportionate than private banks that explains the public banks have more liquid assets than private banks. Table-08Table-08 Investment to Total Assets (%)


Public Bank21.51

28.61

19.6522.2128.6130.5731.8726.14714286

Private Bank18.7

24.42

19.9727.7731.0639.0244.0429.28285714

Figure-08

The data represents in Table-08 is about the investment to total asset ratios of public as well as private sector banks operative during the year 2006 to 2012. This ratio generally measures the proportionate of total assets used different investments or portfolios of investments. The public banks here, are showing the higher proportionate of investment to total assets ratio as compare to private banks. This depicts that publically owned banks uses more investment choices comparative to the private banks opt for their assets in different areas.Table-09

Table-09 Advances to Total Assets (%)


Public Bank51.39

47.06

53.7952.6746.9144.1646.8748.97857143

Private Bank56.86

53.03

57.5349.5348.0740.8837.3849.04000000

Figure-09

The above figures in Table-09 and figure-09 evaluates the ratios of advances to total assets for different years i.e. 2006 to 2012 for the public and private banks working in Pakistan during the selected period. The ratio identifies the present link in the proportionate of advances of bank by dividing it with its total assets. The figure-08 represents a higher proportionate for private banks comparing to the public banks that means the private banks loaned more than public banks.Table-10

Table-10 Total Liabilities to Total Assets (%)


Public Bank87.8

86.26

89.2688.8689.0789.2089.5288.56714286

Private Bank90.65

89.84

89.9389.8890.5890.7091.2690.40571429

Figure-10

The data shown in the Table no. 10 covers the ratios total liabilities to total assets, also called debt to asset ratio and average values of this ratio for seven years (2006-2012) of public and private banks operative in Pakistan during the prescribed period. The ratio depicts the value of total assets that are funded with debt financing. The average trend of debt to total assets for both public and private banks is displayed in figure-10, which shows a higher ratio for private banks as compare to public banks that means the private banks have financed more assets with debt as compare to the public banks.Table-11

Table-11 Capital Ratio (%)


Public Bank8.06

8.78

8.959.067.918.157.428.332857143

Private Bank8.34

8.75

9.109.008.609.528.588.841428571

Figure-11

The capital ratios and their average value of public as well as of private banks operative in Pakistan during the years of 2006-2012 represents in the Table-11 and figure-11. As a balance sheet ratio it evaluates that exactly how many assets are financed by capital. The figure above, shows that private banks are more generally using higher capital to finance their assets rather than public banks. Table-12

Table-12 Breakup Value per Share (%)


Public Bank54.87

54.57

50.2850.1543.8130.860.0740.65857143

Private Bank21.16

18.32

18.2817.8717.1116.8617.9418.22000000

Figure-12

The amounts in Table-12 displaying the data about the breakup value per share during the period of 2006-2012 of public and private banks working in Pakistan in mentioned time period. The ratio shows the net value of shares and depicts whether the company is financially sound. The public banks are showing higher ratio than private banks, reveals the existence of greater financial soundness in public banks than private banks.Table-13

Table-13 Deposits to equity Ratio (%)


Public Bank9.88

8.94

8.798.6610.339.7710.339.528571429

Private Bank9.14

8.67

8.428.259.028.138.878.642857143

Figure-13

Table-13 and figure-13 displays the values of deposits to equity ratio of public as well as of private banks operative during a period of 2006-2012 in Pakistan. Being a balance sheet ratio it used to measure relationship among total deposits of account holders and total value of owners equity. The figure above, shows that public banks have higher proportionate than private banks, depicts that the account holders more largely deposit their money in public banks as compare to private banks.Table-14Table-14 Non performing Loans to Gross advance (%)


Public Bank9

8.36

10.9211.4513.0712.2910.6310.81714286

Private Bank5.27

6.01

5.647.458.749.679.337.444285714

Figure-14

The values shown in Table-14 represents the ratios for the period from 2006 to 2012 regarding Non Performing Loans (NPL) to gross advances of Pakistani public and private banks This ratio reveals the asset quality depending on loan portfolio. The public banks have larger proportionate as compare to private banks, shows better asset quality in public banks than private banks.Table-15Table-15 Non performing Loans to equity Ratio (%)


Public Bank62.11

48.42

110.07110.76160.37130.29119.32105.9057143

Private Bank37.27

38.17

47.8960.4474.6460.5659.9754.13428571

Figure-15

This Table numbered 15 contains the data regarding Non Performing Loans (NPLs) to equity ratio of Pakistani banks both public and private banks operative during the years of 2006-2012. This ratio indicates the exposure of NPLs to owners. The figure-15 represents that public banks have a higher ratio as compare to private banks showing the greater efficiency of public banks than private banks.Table-16 Ranks of Public and Private Banks based on Bank Size and Financial Ratios Financial RatiosPublic BanksPrivate Banks

Bank sizeBA

Efficiency / Profitability Ratios:

1. Spread ratioBA

2. Net Interest Margin RatioBA

3. Return on Owners EquityAB

4. Return on Total AssetsAB

5. Non-Interest Expenses to Total Income

BA

Liquidity Ratios:

1. Cash & Cash Equivalents to Total AssetsAB

2. Investment to Total AssetsAB

3. Advances to Total AssetsBA

4. Total Liabilities to Total AssetsBA

Capital / Leverage Ratios:

1. Capital RatioBA

2. Break up value per shareAB

3. Deposits to Equity RatioAB

Asset Quality Ratios:

1. NPLs to Gross AdvancesAB

2. NPLs to Equity RatioAB

CHAPTER-V

Conclusions

The results drawn from study concludes that both public and private banks are performing differently on the basis of various ratios i.e. bank size, liquidity ratios, capital / leverage ratio, efficiency / profitability ratios, and asset quality ratios, calculated to measure their financial performance. The table-16 shows the relative position in form of A and B grade of public and private banks measured by applying different ratios. The letter A represents the upper position and letter B represents the relative lower position.a. The average of bank size ratio depicts that private banks have more total assets and are ahead to the public banks so the private banks are graded at A and public banks are graded at B. b. The Average of efficiency / profitability ratios put public banks ahead from private banks on the bases of higher return on total assets (ROA) and a greater value of return on owners equity (ROE). While, private banks are positioned headfirst relative to higher average values of non-interest expenses to total income ratio, spread ratio and net interest margin ratio so their comparative position in table-16 is represented by A. c. The liquidity ratios place public banks with higher grades at A due to higher average value of cash & cash equivalents to total assets ratio and investments to total assets ratio of public banks. But the private banks are at leading the public banks due to higher average value for debt to assets ratio and advances to total assets ratio. d. The capital / leverage ratios confirms that the public banks prominent from private banks with point A on the basis of deposits to equity ratio and breakup value per share. While private banks are ahead from public banks relative to capital ratio.

The last category includes the asset quality ratios reveals that public banks with a higher average value represent they have a greater asset quality than private banks so the private banks are place second.

This study was aimed to compare the financial performance of Pakistani private and public owned commercial banks to analyze the stronger and weaken point for both types of banks. The study however concludes that instead of being smaller in size, the public banks are using its assets and maintaining its costs more efficiently than private banks but the private banks lower non-interest expense. Moreover the public bank has a good asset quality relative to private banks. All the scenario shows that although public banks are fewer in the Pakistani banking industry but they are leading ones. RecommendationsThe following recommendations are suggested on the basis of conclusions drawn from this study a) Government must try to alleviate the Tax Rate and should introduce improvements in existing taxation system in the country to strengthen the banking industry in Pakistan. This will resultantly enhances the investment opportunities and help to boost the countrys economy. State Bank of Pakistan must devise and revise the policies on regular basis in order to make the banking system stronger.

References

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APPENDIXSAPPENDIX-01: List of banks operating till December, 31st 2012Sr. No.Bank Name

Public Sector Banks

1First Women Bank

2National Bank of Pakistan

3Sindh Bank Ltd.

4The Bank of Khyber

5The bank of Punjab

Private Sector Banks

1Albarka Bank (Pakistan) Limited

2Allied Bank Ltd.

3Askari Bank Ltd.

4Bank Al-Habib Ltd

5Bank Alfalah Ltd.

6Bank Islami Pakistan Ltd.

7Burj Bank Ltd.

8Dubai Islamic Bank Pakistan Ltd.

9Faysal Bank Ltd.

10Habib Bank Ltd.

11Habib Metropolitan Bank Ltd.

12JS Bank Ltd.

13KASB Bank Ltd.

14MCB Bank Ltd.

15Meezan Bank Ltd.

16NIB Bank Ltd.

17Samba Bank Limited

18Silk Bank Limited

19Soneri Bank Ltd.

20Standard Chartered Bank (Pakistan) Ltd.

21Summit Bank Limited

22United Bank Ltd.

Retrieved from official web site of State bank of Pakistan

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