1

CHAPTER 1 Introduction
A well functioning the by financial of system is necessary which for is

enhancing achieved

efficiency

intermediation,

mobilizing domestic savings, channeling them

into productive investment by identifying and funding good business opportunities, reducing information, transaction, and monitoring costs and facilitating the diversification of risk. This results in efficient allocation of resources, contributing to a more rapid accumulation of physical and human capital, and faster technological progress, which in turn lead to higher economic growth. Anxious to achieve higher growth, policy makers in many developing countries saw public ownership of banks and other financial institutions as necessary in order to direct credit towards priority sectors.

It

was

in

this of the

backdrop Banks

that in

the

financial 1970s Act

sector under 1974.

in the The

Pakistan framework national

was

nationalized

the

early

Nationalization

nationalized domestic banks were consolidated into 6 major commercial were banks and several specialized credit established. The objective of the institutions

nationalization was to direct bank credit towards specific developing sectors and to provide a source of funding to

2 the government. quite By clear the end of the 1980s, it became,

however,

that the socio-economic objectives,

sought through the nationalization of the banking sector were not being achieved. Instead, the pre-dominance of the public direct sector monetary for in banking coupled and with Non-Bank the becoming Financial of the was increasingly to Institutions responsible public (NBFIs), instruments leading of in the

control, financial at the of

were

inefficiency beginning percent

crowding out of private sector investment. The dominance of sector with banks a 1990s apparent share 92.2 total assets

(Table 1) of the banking sector. The remainder belonged to foreign banks, as domestic private banks did not exist at that time. Similarly, high shares existed for deposits of the public sector banks. With these characteristics, the banking sector at the end of FY90 did not provide a level playing field for competition and growth. The importance of state-owned banks in many developing countries contrasts worryingly with recent research findings, which show that state ownership of banks is with negative effects.

Privatization the financial As Bank

of

government reforms this

owned

banks in

and the two

other early of the time to

liberalization measures introduced was the cornerstone of sector of initiated in nineties in order to revitalize the financial system of the country. Allied private commence part (ABL) with policy, 1991 At the publicly owned banks, the Muslim Commercial Bank (MCB) and were 10 privatized. new banks same permission was granted for setting up of new banks in the sector their getting licenses operations in 1991. Consequently, towards

3 the end of 2002, the structure of the banking sector in Pakistan had changed considerably (Table 1) as a result of the privatization/liberalization Policies pursued in the broader canvas of financial sector reforms. The share of public sector banks in the assets of the banking system was reduced to just 41 percent by 2002 compared to over 92 percent in 1990, while that of private banks had reached over 45 percent starting from nil in 1990. Similarly, the share of public sector banks in the deposit base of the banking system was reduced to 43.5 percent starting from 93 percent in 1990.

Table 1. Dynamics of the Banking Sector Number Amount (Rs. Billion) 1990 2002 1990 2002 Assets Public 7 5 392.3 877.6 Private 16 968.3 Foreign 17 17 33.4 280.9 Total 24 38 425.6 2126.8 Deposits Public 7 5 329.7 721.9 Private 16 754.2 Foreign 17 17 24.9 184.1 Total 24 38 354.6 1660.2 Source: State Bank of Pakistan (2000) and (2002)

Share (%) 1990 2002 92.2 7.8 100 93 07 100 41.3 45.5 13.2 100 43.5 45.4 11.1 100

Delimitations of the study The study would attempt to investigate, whether the privatized banks outperform their state owned counterparts or not? In order to answer this question a detailed comparison of key financial indicators can be conducted but in order to narrow down the study only two banks are selected. These selected banks are Allied bank limited (ABL) and National bank of Pakistan (NBP). Allied bank was

4 privatized in 1991 and National bank of Pakistan is completely controlled and monitored by the GOVT of Pakistan. For the purpose of comparison quarterly data of ten years will be taken consisting of financial indicators like ROA, ROE, And Profit margins etc. Here a brief introduction of both the banks is given to get an insight into their operations and financial performance.

National bank of Pakistan
NBP was established under the National bank of Pakistan ordinance 1949 in Pakistan.

Special Role: NBP occupies a unique position in the financial sector of Pakistan. It acts as an agent of the Central Bank wherever the State Bank does not have its own Branch. It also undertakes Government Treasury operations NBP is 100% owned by the Government of Pakistan (GoP). NBP has an extensive domestic branch network of over 1500 branches located all over Pakistan. The Bank also has a presence in 24 international locations including the USA, United Kingdom, Europe and the Far East NBP holds 24.6% share of time and demand deposits in the country. Local currency deposits comprise 67% of bank's total deposits while foreign currency deposits account for the rest. NBP's total assets stood at PKR350 billion on December 1999. This included total earning assets of about PKR268 billion with gross loan portfolio of PKR140 billion. The bank also has an investment portfolio of PKR91 billion. As of December 1999 NBP had a paid-up capital of PKR1.46 billion divided into 146 million shares of 10 rupees each. Total shareholders' equity was PKR10 billion, however, revaluation reserve has increased shareholders’ funds to PKR16 billion. NBP has, however, increased its paid up capital from PKR Rs. 1.46 billion to Rs. 3.73 billion through issuance of bonus shares (subject to corporate and shareholder approvals).

5

Allied bank limited

Identification and Description of Allied Bank:
Allied Bank Limited is the first bank incorporated on the soil of Pakistan. It was incorporated in Lahore before independence in 1942 as Australasia Bank and was renamed as Allied Bank of Pakistan Limited in 1974 and Allied Bank Limited in 2005. In August 2004 as a result of capital reconstruction, the Bank’s ownership was transferred to a consortium comprising of Ibrahim Leasing Limited and Ibrahim Group.

Today the Bank stands on a solid foundation of over 60 years of its existence having a strong equity, assets and deposits base offering universal banking services with higher focus on retail banking. The Bank has the largest network of on-line branches in Pakistan and offers various technology-based products and services to its diversified clientele through its network of more than 700 branches.

Allied

Bank

is on

the the

first

muslim

bank,

to

have

been

established

territory

that

became

Pakistan.

Established in December 1942 as the Australasia Bank at Lahore with a paid-up share capital of Rs. 0.12 million under the Chairmanship of Khawaja Bashir Bux, the Bank had attracted deposits, equivalent to Rs. 0.431 million in its first eighteen months of business. Total assets then amounted to Rs. 0.572 million. Today Allied Bank's paid up Capital & Reserves amount to Rs. 10.5 billion, deposit

6 Exceeded Rs. 143 billion and total assets equal Rs. 170 billion. The to Allied Bank's story is one of dedication, to by changing many. commitment and professionalism, envied and adaptation aspired

environmental

challenges resulting into all round growth

stability,

It was particularly galling for Khawaja Bashir Buxh to hear the gibe that “Muslims could not be successful bankers”. He decided to respond to the challenge and took lead in establishing this first Muslim bank on the soil of Punjab that was to become Pakistan in December 1942; by the name Of Australian bank limited

The initial equity of the Bank amounted to Rs 0.12 million, which was raised to Rs 0.5 million by the end of first full year of operation, and by the end of 30th June 1947 capital increased to Rs. 0.673 million and deposits raised to Rs 7.78 million.

Australasia Bank
Australasia Bank was the only fully functional Muslim Bank on Pakistan territory on August the 14th, 1947.

By the end of 1970 it had 101 branches. Unfortunately it lost 51 branches in the separation of East Pakistan. The bank did well despite losing a lot of its assets. By the end of 1973 the bank had 186 branches in West Pakistan.

7 In 1974, the Board of Directors of Australasia Bank was dissolved and the bank was renamed as Allied Bank. The first year was highly successful one: profit exceeded the Rs 10 million mark; deposits rose by over 50 percent and approached Rs 1460 million. Investments rose by 72 percent and advances exceeded Rs 1080 million for the first time in bank history. 116 new branches were opened during 1974 and the Bank started participation of the in the spot procurement seventeen agriculture program Government. Those

years of the Bank saw a rapid growth. Branches increased from 353 in 1974 to 748 in 1991. Deposits rose from Rs 1.46 billion, and Advances and investments from Rs 1.34 billion to Rs 22 billion during this period.

Allied Bank in late 90’s

As a result of privatization in September 1991, Allied Bank entered in a new phase of its history, as the world’s first bank to be owned and managed by its employees. In 1993 the “First Allied Bank Modaraba (FABM) was floated.

After

privatization, of

Allied

Bank

registered capital Rs.

an and

unprecedented growth to become one of the premier financial institutions Rs. 87.536 Pakistan. and Allied Bank’s were reserves were Rs. 1.525 (Billion) and assets amounted to (Billion) deposits 76.038 (Billion). Allied Bank enjoyed an enviable position in the financial sector of Pakistan and was recognized as one of the best amongst the major banks of the country.

In August 2004 as a result of capital reconstruction, the

8 Bank’s ownership was transferred to a consortium comprising Ibrahim Leasing Limited and Ibrahim Group.

Today the Bank stands on a solid foundation of over 63 years of its existence having a strong equity, assets and deposits base offering universal banking services with higher focus on retail banking. The bank has the largest network of on-line branches in Pakistan and offers various technology based products and services to its diversified clientele through its network of more than 700 branches.

Expected findings

Expected findings of my study are that the performance of privatized banks is greater than that of state owned banks.

Rest of the study is organized as follows:
Chapter number three discusses the literature review.

Chapter number three is comprised of data and methodology. It discusses the sources from where the data is taken and the methodology used to examine the data. Results are placed and analyzed in chapter number four. Chapter number five concludes the study along with the recommendations.

CHAPTER 2

9

Literature Review
The role of the public sector banks in economic development has been examined in many studies. There are two broad views about the government’s involvement in the financial systems around the world. These are the development view and political view. The development view as advocated by Gerschenkron intervene sectors. ownership (1962) states that governments institutions a part of a that are can not through their financial view in was

adequately developed to channel resources into productive Gerschenkron’s of enterprises broader sectors. consensus in development economics that favored government strategic economic Realizing this importance of financial sector in economic development, governments in developing countries sought to increase their ownership of banks and other financial institutions in the 1960s and 1970s, in order to direct credit towards priority sector.

Contrary to this view, in recent years a new ‘political’ view of government ownership has evolved which asserts that state control of finance through banks and other institutions politicizes resource allocation for the sake of getting votes or bribes for office holders and thereby results in lower economic efficiency. Barth et al (2001) using cross country data on commercial bank regulation and ownership from over 60 countries find that state ownership

10 of banks is negatively associated with bank performance and overall financial sector development and does not reduce the likelihood of financial crises.

The systematic decline in government ownership of banks by itself has not had any impact on the efficiency of capital allocation commercial industrial by Alvaro in (2007). Pakistan Arbey (2007) the showed conducted framework that the of the study attempted to analyze the structure and performance of banks under organization. Arbey

profitability of state owned banks deteriorated, especially after mid 1990s. Their profitability was on the rise as they started business but were unable to sustain it in the subsequent years.

Former

governor

state

bank

of

Pakistan

Ishrat

Hussain

prepared an article which was presented at world bank, IMF and borrowing institutions conference on “the role of state owned financial institutions: policy and practice held at Washington D.C on April 27, 2004.

The

outcome

of with

the

article and

was

that, to

privatization the Two banks

is

associated technology

improved

service

customers, were

up

gradation

efficiency.

analyzed in the article, which were MCB, and ABL. MCB was sold to a group of private strategic investors and ABL on the other hand wasn’t sold to a strategic investor but the

11 management control was given to its employees. The results showed allied a bank considerable limited improvement even in the than financial the public performance of MCB whereas the approach followed in case of proved worse sector ownership. The bottom line therefore is that for privatization to bring about tangible results, it must be done in the right way and following a proper approach.

Andrew (2005) did nothing but examined the case studies and cross-country analysis, which supported the conclusion that privatization, ownership, performing benefits: 1- Continued state ownership, even of minority shares improves the performance several over of continued reduce state poorly the even privatization relatively

banks.

However

policies

harms the performance of privatized banks.

2- In

weak

institutional

environments

share

offerings

produce lower performance gains than direct sales to concentrated strategic investors.

3- Prohibiting and SIP. 4- Competition improvements banking is

foreigners

from

participating

in

privatization reduces the gains from both direct sales alone in likely will to not lead secure but to performance oligopolistic negative

privatized

banks,

highly

consequences for the banks and financial systems.

12

Now we come to the question: how privatization can improve the performance of a state-owned enterprise? Generally, the case for privatization of state-owned enterprises can be grouped political 2006. The of around three main and themes, corporate i.e., competition, Medhat intervention governance

competition argument states that privatization in the economy, can market to if it results if in it greater even hinders

will improve the operation of the firm and the allocation resources competition. without to use Privatization improve efficiency

changing the It in SOEs is

structure

interventions by politicians and bureaucrats who would like further their political or personal argued that corporate than in governance private is enterprises firms gains. weaker also

state-owned

because of agency problems. “SOEs have multiple objectives and many principals who have no clear responsibility of Monitoring” [Clark et al. (2003)]. Another reason for SOEs to have poorer corporate governance is the weak incentive structure for managers to perform efficiently. They do not face a market for their skills or the and threat weaker of losing their jobs for are nonstrong performance. intervention Thus, “less competition, corporate greater political

governance

theoretical arguments against state Ownership” [Clark et al. (2003)]. George et al. (2003) using a combination of country case studies continued and cross country analysis However, conclude continued that state privatization of banks improves performance as compared to state ownership.

13 ownership even in minority shares of privatized banks is found to have of negative state lower effects gains on than their performance. public share to sales Privatization offerings strategic owned banks through

produces investors

direct

in countries where the institutional

environment is weak.

Lastly, they find that the benefits accruing are reduced if foreign banks are not allowed Otchere to participate (2003) in the a privatization process. presents

comprehensive analysis of the pre and post privatization Performance of privatized banks and their rival banks in low and middle-income countries. The author does not find any significant evidence of improvements in the privatized banks’ post privatization performance. In fact, the privatized banks have a higher proportion of bad loans and appear to be overstaffed relative to their rivals, in the post privatization period. The continued government ownership of privatized banks is found to be responsible for their underperformance, as it hinders managers’ ability to restructure them effectively. et Using a comprehensive examine the dataset of bank privatizations in 101 countries during the period 1982-2000, Boehmer al. (2003) economic and political factors that are likely to effect government’s decision to privatize a state-owned bank, in both is developing likely. sector, and The The developed countries. Their findings indicate that in developing countries, a bank privatization more lower the quality of the country’s more right wing the country’s banking

government is, and the more accountable the government is to its people.

14

Privatization is a long term process and is associated with a slight improvement of performance of banks Umer Khalid 2002. He conducted a study by dividing the whole banking system into four groups which are public sector banks, privatized banks, domestis private banks and foreign banks and comparing their data with the data of the whole banking system. We will be modifying his methodology for my study. We will take one privatized and one state-owned bank and will take their quarterly ROA&ROE values for comparison and arriving at some sort of conclusion. My main aim is to see whether the privately owned banks outperform their stateowned counterparts or not? On the basis of Literature Review done above we will test the hypothesis that the performance of privatized banks is greater than that of state-owned banks in the case study of NBP and ABP.

15

Chapter 3

DATA AND METHODOLOGY
Is privatization associated with improvement in financial performance of the banks or not? Core aspects of financial performance out it is price are profitability, to find of efficiency, the financial of leverage, dividend payout and output. In order to find this essential what determinants banks to financial share respective privately performance performance owned or banks not in of the banks are and to link the privatized their changes throughout their of privatization. state the owned

development

Another important objective is to find out that whether the outperform core and counterparts are aspects to financial desired

performance. For this study only the values of (ROA&ROE) specifically taken compared get the results.

This

study

would

attempt

to

investigate

whether

the

privatized banks outperform their state owned counter-parts or not. For this I would be employing the financial ratios (ROA& ROE) to gauge the effect of privatization policies pursued based on the quarterly data from last ten years for both the banks. Recent studies indicate that substantial

16 performance transferring private hands. and efficiency of gains banks can from be achieved sector by to

ownership

public

We will take the quarterly data (ROE&ROA) of most recent 10 years (from 1997 to 2006). The data will include the income statements, balance sheets and cash flow statements. These financial data is statements compiled are the the instruments sake of from where and the is for comparison

subjected to regression analysis.

Study is entirely based upon the secondary data which is all are both publicly income the available statement, can information balance of the and banks. cash Three flow financial statements are important in this regard, which sheet statement. By analyzing these statements yearly values of ratios be obtained and compared with each other to arrive at concluding remarks. The study has been limited to a sample of two banks. The banks selected are Allied bank of Pakistan (ABP) and National bank of Pakistan (NBP). The quarterly data for two commercial banks which are Allied bank limited and National bank of Pakistan during (1997-2006) are used for calculating key financial ratios in order to assess the performance of the banks. In addition, another source of data was through reference to the library and the review of different articles, papers, and relevant previous studies. This study uses a descriptive compare, and financial classify analysis the to describe, measure, financial

situations of both the commercial banks. The sample of this

17 study contains two commercial banks. Financial performance is the dependent variable, and measured by return on assets (ROA) and return on equity (ROE) which are the independent variables. The correlation between the paper variables is investigated at 5% level of confidence according to the SPSS software package. We will test the following parameters. • • Discriptive stat Correlation Analysis

Further we will test the following hypotheses: Mean equality test

Ho: H1: Ho: H1:

Mean ROANBP ≠ Mean ROAABL Mean ROANBP = Mean ROAABL Mean ROENBP ≠ Mean ROEABL Mean ROENBP = Mean ROEABL

Test for equality of variance

Ho: H1: Ho: H1:

Variance ROANBP ≠ Variance ROAABL Variance ROANBP = Variance ROAABL Variance ROENBP ≠ Variance ROEABL Variance ROENBP = Variance ROEABL

18 Granger causality Test:

Ho: H1: Ho: H1:

ROAABL does not affect ROANBP ROAABL effects ROANBP

ROEABL does not affect ROENBP ROEABL effects ROENBP

Earnings and Profitability Earnings and profitability are usually measured in terms of returns obtained on assets or capital employed. Quarterly ROA & ROE values of both the banks are taken and are subjected to the comparative analysis tests and results are critically analyzed to arrive at a final conclusion. Values are compared in the fourth chapter of the study to see which bank has greater financial performance and why that is so. ROI measures and ROE overall effectiveness or the in generating power power of on profits with available assets earning earning

investment

measures

shareholder book value investment.

Analysis The detailed analysis based on financial data of both the banks is presented below for one being a national while another being a privatized bank. Results are compared to arrive on a final conclusion. These ratios for the banks

19 under consideration are calculated for the recent 10 years period. For the purpose into of this study, banking sector has been categories. These categories include

divided

two

public sector banks and privatized banks. Moreover there are also domestic private banks and foreign banks in the Pakistani banking sector but are not considered in order to limit the study. Public sector banks are those in which the government holds management control and/or the majority shares. Privatized banks include those nationalized banks which have been privatized/ denationalized. The main focus of this comparative study is National bank of Pakistan (NBP) and Allied bank limited (ABL). Allied bank was handed over to the private sector in 1991. National bank is a purely state-owned bank.

Regression Analysis It is a statistical technique used to find relationships between values. dependent variables = a+bx+c, variables for the purpose of predicting future In other words by it predicts one equation the or behavior of a variable by analyzing an more called variable independent regression which the

constructing Y is the

equation. A regression equation usually takes the form of Y where dependent equation tries to predict and x is independent variable used to predict dependent variable Y.

20 Independent variables in this study are ROA and ROE and dependent variable is financial performance. Following regression tests are employed on the independent variables to predict the dependent variable.

Correlation Analysis It is a statistical analysis used to determine the extent to which changes in value of an attribute are associated with changes r is in is a other attributes. of the The correlation relationship coefficient coefficient measure known as linear

between two attributes or columns of data. The correlation also the Pearson product-moment correlation coefficient. The value of r can range from -1 to +1 and is independent of the units of measurement. A value of r near 0 indicates little correlation between attributes; a value near +1 or -1 indicates a high level of correlation.

When

two a A a

attributes an increase likely

have in

a the

positive value of of

correlation one less attribute than when 0 one

coefficient, indicates attribute. indicates

increase in the value of the second coefficient correlation. That is,

correlation negative

attribute shows an increase in value, the other attribute tends to show a decrease.

21 The t-Test The t-test assesses whether the means of two groups are statistically different from each other. This analysis is appropriate whenever you want to compare the means of two groups. The formula for the t-test is a ratio. The top part of the ratio is just the difference between the two means or averages. The bottom part is a measure of the variability or dispersion of the scores. This formula is essentially another that, in example this of case, the we signal-to-noise think our program metaphor or in research: the difference between the means is the signal treatment introduced into the data; the bottom part of the formula is a measure of variability that is essentially noise that may make it harder to see the group difference.

The f-Test

It is similar to a t-Test but the only difference is that it is used for calculating the significant differences in variances. F value is simply the ratio of two variances. After calculating this value it is compared with the table value of F for the degrees of freedom used to calculate both variances and for a given confidence level. If the calculated F is greater than the table value, then the null hypothesis is not correct. Else, the two could have come from the same population of measurements.

22

Standard Deviation In probability and measure of the can apply a is the to variable, deviation defined as a statistic, the standard deviation is a probability or a denoted distribution, data the (RMS) in most how the set. with a The σ. random standard It of is the

dispersion of a collection of numbers. It population

usually

letter

root-mean-square by Galton the measuring

deviation late

values from their variance. standard Formulated deviation

mean, or as the square root of the 1860s, the measure spread of the remains common widely

statistical

dispersion,

values in a data set are. If many data points are close to the mean, then the standard deviation is small; if many data points are far from the mean, then the standard deviation is large. If all data values are equal, then the standard deviation is zero. A useful property of standard deviation is that, unlike variance, it is expressed in the same units as the data.

where

is the arithmetic mean of the values xi

Median In probability theory and statistics, a median is described as the number separating the higher half of a sample, a population, or a probability distribution, from the lower

23 half. The median of a finite list of numbers can be found by arranging all the observations from lowest value to highest value and by picking the middle one. If there is an even number of observations, the median is not unique, so one often takes the mean of the two middle values. At most half the population have values less than the median and at most half have values greater than the median. If both groups contain less than half the population, then some of the population is exactly equal to the median. For example, if a < b < c, then the median of the list {a, b, c} is b, and if a < b < c < d, then the median of the list {a, b, c, d} is the mean of b and c, i.e. it is (b + c)/2. Skewness and Kurtosis A fundamental task in many statistical analyses is to

characterize

the

location and of a data set. A further

characterization of the data includes skewness and kurtosis. Skewness is a measure of symmetry, or more precisely, the lack of symmetry. A distribution, or data set, is symmetric if it looks the same to the left and right of the center point. Kurtosis is a measure of whether the data is peaked or flat relative to a normal distribution. That is, data sets with high kurtosis tend to have a distinct peak near the mean, decline rather rapidly, and have heavy tails. Data sets with low kurtosis tend to have a flat top near the mean rather than a sharp peak. A uniform distribution would be the extreme case.

24 For univariate data Y1, Y2, ..., YN, the formula for skewness is:

where the

is the mean, of data zero.

is the standard deviation, and N is points. Negative The skewness for for the a normal

number

distribution is zero, and any symmetric data should have a skewness near values skewness indicate data that are skewed left and positive values for the skewness indicate data that are skewed right. By skewed left, we mean that the left tail is long relative to the right tail. Similarly, skewed right means that the right tail is long relative to the left tail. Some measurements have a lower bound and are skewed right. For example, in reliability studies, failure times cannot be negative. For univariate data Y1, Y2, ..., YN, the formula for kurtosis is:

where

is the mean,

is the standard deviation, and N is the number of data points

Jarque-Bera

In statistics, the Jarque-Bera test is a goodness-of-fit measure of departure from normality, based on the sample kurtosis and skewness. The test statistic JB is defined as

25

where

n

is

the

number

of

observations

(or

degrees

of

freedom in general); S is the sample skewness, K is the sample kurtosis.

Pairwise Granger Causality Tests It is a statistical property reflecting the information

content of the data. Variable X is said to Granger cause variable Y if variable Y can be predicted better by past values of variables X and Y rather than by past values of Y alone.

26

Chapter 4

RESULTS & ANALYSIS
The return on equity (ROE) is considered to be one of the profitability performance ratios. It shows a higher value for National Bank of Pakistan when compared with Allied Bank of Pakistan as shown in table (4.1). The ROE is net profit after taxes divided by total owner’s equity. It reflects the bank management's ability to generate net profits from using the owner’s equity as one of the financial sources.

Table (4.1) shows the values of ROE for ten years starting from 1997 till 2006. Values are compared making 1997 as the base year. The average of total ROE values for national bank of Pakistan is 15.8% with a very high value 32.01% in 2006 as compared to that of base year 1997. The ROE is 30% for Allied bank of Pakistan with average total ROE of 7.45%.

Table 4.1 Comparison of ten years ROE values

27 YEAR BANK NBP (ROE) ABL (ROE)
7.9 0.93 5.8 0.72 6.6 1.81 4.65 2.53 9.2 0 15.5 0 19.1 0 24.4 9.1 32.8 29.4 32.01 30 15.8 7.45 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 AVG

Furthermore, to rank the banks based on their ROE values, National bank of Pakistan is showing better performance than Allied bank of Pakistan. This is mainly due to the poor show of Allied bank of Pakistan during the years 2001 to 2003. The bank’s performance is also relatively poor from 1997 to 2000. Another factor here is the difference in size of both the banks. National bank of Pakistan is relatively larger than Allied bank of Pakistan. Allied bank of Pakistan seems to be catching up with the performance of National bank of Pakistan in the last two years 2005 and 2006. The return on assets (ROA) is financial the could ratio used to

measure the relationship of profits or earnings and total assets. (ROA) of measure total assesses and profitability be treated as performance assets,

measure of financial performance in this study Table (4.2) reports the ROA values and the average of total ROA values during of 1997-2006. Pakistan’s As shown in is this table National Bank performance relatively

better than Allied bank of Pakistan. Again 2000-2002 are the three bad years for Allied bank of Pakistan in which its ROA values are negative and consequently the average of total values also lies on the negative side of the number ray. This shows that the performance of National Bank of

28 Pakistan is better than that of Allied bank of Pakistan. One important thing to note in table (4.2) is that again the performance of Allied bank of Pakistan is becoming better in 2005 and 2006. Same is the case with ROE values in table (4.1).

Table 4.2 Comparison of ROA of 10 years

YEAR BANK NBP (ROA) ABL (ROA)

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

AV G

0.97 0.03

1.07 0.03

0.66 0.01

1.5 -4.47

0.29 -0.96

0.58 -1.5

0.87 0.3

1.06 0.124

2.14 1.74

2.59 1.802

1.17 -2.9

In order to summarize the classification of the banks based on rank of their profitability ratios. table (4.3) contains the ranks of positions for both the banks. As shown in table, rank of national bank of Pakistan is the first position in both ROA and ROE values. Allied bank Limited has the second position on both the variables.

Table 4.3 Ranking of banks on the basis of data gathered

29 BANKS NATIONAL BANK OF PAKISTAN ALLIED BANK LIMITED

INDICATORS ROA ROE

01 01

02 02

Hypotheses Testing
Hypothesis Test, is tested and by using comparative pair-wise analysis granger

techniques. They include correlation analysis, T-Test, Fskewness kurtosis tests, causality tests etc. A brief introduction of these tests is given in chapter 03. Here we will examine the values of these tests to test the hypothesis of the study.

Correlation Analysis
Table 4.4 shows the correlation values of ROE for both the banks. Values indicate that ROE values are negatively correlated. These values are used to test the following hypothesis,

Ho: H1: Ho: H1:

ROENBP is not correlated to ROEABP ROENBP is correlated to ROEABP ROANBP is not correlated to ROAABP ROENBP is correlated to ROAABP

So according to the correlation coefficients values of ROE are negatively correlated. This indicates that the null

30 hypothesis Ho is not correct and is rejected. The alternate hypothesis H1 is accepted. Table 4.4 correlation between ROE values
Correlations ROEABP ROEABP ROENBP 1 -0.08547 ROENBP -0.08547 1

Table 4.5 shows the correlation coefficients for ROA values of both the ROA. banks. This Values show a positive null correlation is between indicates that hypothesis

rejected and alternate hypothesis is accepted. Table 4.5 correlation between ROA values
Correlations ROAABP ROAABP ROANBP 1 0.34656 ROANBP 0.34656 1

The t-Test

Ho: H1: Ho: H1:

Mean ROANBP ≠ Mean ROAABL Mean ROANBP = Mean ROAABL Mean ROENBP ≠ Mean ROEABL Mean ROENBP = Mean ROEABL

Both

the

calculated

t

values are lesser than the table

values for the given degrees of freedom. This indicates

31 that the null hypothesis is rejected and the alternate

hypothesis is accepted.

In theory also the performance of privatized and national banks should not be the same. So this theory is justified by t-test. Table 4.6 Tests for Equality of Means Between Series
Variable ROA ROE Method t-test t-test Df 78 78 Value 4.860936 1.054618 Probability 0 0.2949

The f-test Ho: H1: Ho: H1:
Variance ROANBP ≠ Variance ROAABL Variance ROANBP = Variance ROAABL Variance ROENBP ≠ Variance ROEABL Variance ROENBP = Variance ROEABL

Table 4.7 Tests for Equality of variance Between Series
Variable ROA ROE Method F-test F-test Df (39, 39) (39, 39) Value 5.395097 7345.274 Probability 0 0

F values for both the variables are greater than the table values for given degrees of freedom and probability values. This indicates that null hypothesis is correct. Hence the null hypothesis is accepted and the alternate hypothesis is rejected.

32

The Granger causality tests Ho: H1: Ho: H1:
ROAABL does not affect ROANBP ROAABL effects ROANBP ROEABL does not affect ROENBP ROEABL effects ROENBP

Table 4.8 pair wise Granger causality test
Null Hypothesis: ROANBP does not Granger Cause ROAABP ROAABP does not Granger Cause ROANBP ROENBP does not Granger Cause ROEABP ROEABP does not Granger Cause ROENBP Obs 38 38 FStatistic 3.37562 1.93749 0.04054 0.14404 Probability 0.04637 0.1601 0.96032 0.8664

Table 4.8 shows that the null hypothesis is accepted which means that values do not Granger cause each other. This is also true theoretically. So the test justifies the theory.

Table

4.9

shows

different

values

calculated

for

tests

performed above. These values are used in the formulas of F, T and Granger causality tests.

Table 4.9 Other values calculated
Method Mean Median ROEABP 1.862125 0.2325 ROENBP 43.28704 3.40945 ROAABP -0.07112 0.007 ROANBP 0.293307 0.2462

33
Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera Probability 7.9 0 2.89843 1.340753 3.000639 11.98413 0.002499 1575 0.991 248.4087 6.083809 38.01725 2290.432 0 0.551 -1.2 0.435506 1.201056 4.196762 12.00397 0.002474 0.71 0.05 0.187497 0.967996 2.789245 6.32081 0.042409

A small value of standard deviation (2.89) for ROEABP shows that majority of the data points are close to the mean and a large value of standard deviation (248.408) shows that majority of the data points are away from the mean. Values of standard deviation ROAABP and ROANBP are small thus showing that majority of the data points are close to the mean and data is not scattered. A high value of curtosis for ROENBP shows that it will have a distinct peak near the mean. Low curtosis values for ROEABP and ROA values for both the banks show that it will have a flat top near the mean rather than a sharp peak.

34

Chapter 5

CONCLUSION AND RECOMMENDATIONS
The importance of this study may be viewed from its contribution to fill an important gap in literature. That is, findings of this study can add to the existing body of the literature, and can serve as a staring point on which future studies can be done. On the practical dimension, this study may help bank decision makers to focus on the major banking activities that may increase the bank ranking and financial Such performance positions comparing with other information banks for in attaining should creating the help the management of appropriate planned financial financial banks.

commercial strategies performance.

required

Data analysis of this study revealed that the ranking of both the banks based on their ROA and ROE values is ranked as: National bank of Pakistan is considered to be the first one and Allied bank limited enjoys the second position. The performance of privatized bank Allied bank limited is less than satisfactory as compared to that of National bank of Pakistan. This was mainly due to poor show of Allied bank in years (2001-2003). Allied bank seems to be catching up with the performance of National bank of Pakistan in the years (2005-2007). One of the factors in this greater

35 performance of National bank of Pakistan is its greater size which has a very small impact on the results. Expected findings of the study were that the financial performance of privatized banks (ABL) is greater than that of stateowned banks (NBP). But in our sample it is the opposite. So we can say that the performance of privatized banks is not always greater or better than that of state-owned banks. Here performance of NBP is greater than ABL. This would suggest that the benefits of privatization in the form of improved performance indicators are likely to emerge over a longer period of time.

Finally, financial all the

the

study

provides The results to

bank of

managers this study

with imply

understanding of activities that would enhance their banks performances. required that it might be necessary for a bank management to take decisions enhance the financial positions of the bank.

RECOMMENDATIONS

36 • There is need for further studies and research on this topic. The impact of other factors should also be taken into account. • The research paper is only confined to ABP and NBP; other research work can also be conducted using this paper banks. • The study is confined to only two banking groups which are privatized and state-owned banks. The same model can be used to compare other groups like foreign banks and domestic private banks etc. • Banks can improve their performance by enhancing the capabilities and skills of employees and managers. • Privatization financial employed in does its not guarantee but if it it essence an is does increase embraced affect in and the for comparing financial performance of other

performance, true

performance of the organization. • Leaders in the financial institutions should be aware of the changing trends in economy to effectively tackle their external environment.

References:

37

o Andrew

,

A.,

Michael,

2005, and

State-Owned Growth:

Banks,

stability,

Privatization,

Practical

policy decisions in a world without empirical proof. o Arby, 2003, Structure and performance of commercial banks in Pakistan. o Akhtar , Samshad., 2004, Pakistan banking sector

reforms and challenges. o Alvaro, 2007, Impact of privatization on performance of financial institutions o Boehmer, Ekkehart, Robert C Nash and Jeffry M.

Netter (2003),” Bank privatization in developing and developed countries; Cross-sectional Evidence on the impact of economic at world and political factors. on Paper Bank presented bank conference

Privatization, Nov. 20-21 o Barth, James, Gerard Caprio Jr, and the Ross Levine Do

(2001),”Banking stability?”

system

Around

Globe:

Regulation and Ownership affect the performance and

o Clarke, R.G. Clarke, Robert Cull, and Mary Shirley 2004,” Empirical studies of bank privatization: Some Lessons.

38 o Gerschenkron, Backwardness in Alexander Historical (1962), perspective. Economic Cambridge

Harvard University press. o George, Debby and Kate 2004,” Is Privatisation

productive. o Ishrat hussain 2004,” Policy considerations before bank privatization country experiences. o Khalid, Umer 2002,” Impact of privatization and

liberalization on the banking sector performance in Pakistan. o Otchere, analysis their Gill of 2003,” banks pre in and of low post and privatization banks and middle-income

performance

privatized

rival

countries. o Tarawneh, Medhat 2006,” A comparison of financial performance in the banking sector: some evidence from the Omani commercial banks.

39

Appendix. Group-wise Composition of Banks (as on December 31)
1990 Allied bank Ltd Bank of Punjab First women bank Habib bank Ltd Muslim commercial bank National bank Ltd united bank Ltd Privatized Banks 1991 Public Sector Banks bank of Punjab first women bank Habib bank Ltd National bank Ltd United bank Ltd 1992 bank of khyber Bank of Punjab First women b ank Habib bank Ltd National Bank Ltd United bank Ltd Privatized Banks Allied bank Ltd Muslim commercial bank Askari commercial bank Bank alfalah Ltd Bank al Habib Ltd Bolan bank Metropolitan bank Prime commercial bank Soneri bank Union bank Ltd ABN Amro bank Al barka islamic bank Ltd American express bank ANZ Grindlays Citi bank N.A Credit agricole indosuez Deutsche Bank AG Doha Bank Emirates Bank Habib Bank AG zurich HSBC IFIC Bank Mashreq Bank Psc Rupali Bank Ltd Societe Generali Standard chartered Bank The Bank of Tokyo 1996 1993 Bank of khyber Bank of Punjab First women bank Habib bank Ltd National bank Ltd

Allied bank Ltd Muslim commercial bank Domestic Private Banks Bank al Habib Ltd

Allied bank Ltd Muslim commercial bank Askari commercial bank Bank alfalah Ltd Bank al Habib Ltd Bolan bank Metropolitan bank Prime commercial bank Soneri bank Union bank Ltd ABN Amro bank Al barka islamic bank Ltd American express bank ANZ Grindlays Citi bank N.A Credit agricole indosuez Deutsche Bank AG Doha Bank Emirates Bank Habib Bank AG zurich HSBC IFIC Bank Mashreq Bank Psc Rupali Bank Ltd Societe Generali Standard chartered Bank The Bank of Tokyo 1997

Foreign Banks ABN Amro bank

ABN Amro bank Al barka islamic bank Ltd American express bank ANZ Grindlays Citi bank N.A Credit agricole indosuez Deutsche Bank AG Doha Bank Emirates Bank Habib Bank AG zurich HSBC IFIC Bank Mashreq Bank Psc Rupali Bank Ltd Societe Generali Standard chartered Bank The Bank of Tokyo 1995

American express bank ANZ Grindlays Citi bank N.A Credit agricole indosuez Deutsche Bank AG Doha Bank Emirates Bank Habib Bank AG zurich HSBC IFIC Bank Mashreq Bank Psc Rupali Bank Ltd Standard chartered Bank The Bank of Tokyo

1994

40
Bank of Khyber Bank of Punjab First women bank Habib bank Ltd National bank Ltd united bank Ltd Privatized Banks Allied bank Ltd Muslim commercial bank Domestic Private Banks Askari commercial bank Bank Alfalah Ltd Bank alhabib Ltd Bolan Bank Gulf commercial bank Metropolitan bank Prime commercial bank Bank of Khyber Bank of Punjab First women bank Habib bank Ltd National bank Ltd united bank Ltd Allied bank Ltd Muslim commercial bank Askari commercial bank Bank alfalah Ltd Bank alhabib Ltd Bolan Bank Faysal Bank Ltd Gulf commercial bank metropolitan bank Platinum commercial bank Prime commercial bank Prudential commercial bank Soneri bank united bank Ltd ABN Amro bank Al Barka islamic bank Ltd American express bank ANZ Grindlays Bank of Ceylon Citi bank N.A Credit agricole indosuez Deutsche Bank AG Doha Bank Emirates Bank Habib Bank AG zurich HSBC IFIC Bank Mashreq Bank Psc Rupali Bank Ltd Societe Generale Standard chartered Bank The Bank of Tokyo Bank of khyber Bank of punjab First women bank Habib bank Ltd National bank Ltd united bank Ltd Allied bank Ltd Muslim commercial bank Askari commercial bank Bank alfalah Ltd Bank alhabib Ltd Bolan Bank Faysal Bank Ltd Gulf commercial bank metropolitan bank Platinum commercial bank Prime commercial bank Prudential commercial bank Soneri bank united bank Ltd ABN Amro bank Al Barka islamic bank Ltd American express bank ANZ Grindlays Bank of ceylon Citi bank N.A Credit agricole indosuez Deutsche Bank AG Doha Bank Emirates Bank Habib Bank AG zurich HSBC IFIC Bank Mashreq Bank Psc Oman international Bank Rupali Bank Ltd Societe Generale Standard chartered Bank Bank of khyber Bank of punjab First women bank Habib bank Ltd fNational bank Ltd united bank Ltd Allied bank Ltd Muslim commercial bank Askari commercial bank Bank alfalah Ltd Bank alhabib Ltd Bolan Bank Faysal Bank Ltd Gulf commercial bank metropolitan bank Platinum commercial bank Prime commercial bank Prudential commercial bank Soneri bank united bank Ltd ABN Amro bank Al Barka islamic bank Ltd American express bank ANZ Grindlays Bank of ceylon Citi bank N.A Credit agricole indosuez Deutsche Bank AG DohaBank Emirates Bank Habib Bank AG zurich HSBC IFIC Bank Mashreq Bank Psc Oman international Bank Rupali Bank Ltd Societe Generale Standard chartered Bank

Soneri bank united bank Ltd

Foreign Banks ABN Amro bank Al Barka Islamic bank Ltd American express bank ANZ Grindlays Citi bank N.A Credit agricole indosuez Deutsche Bank AG Doha Bank Emirates Bank Habib Bank AG zurich HSBC IFIC Bank Mashreq Bank Psc Rupali Bank Ltd Societe Generale Standard chartered Bank The Bank of Tokyo

41
The Bank of Tokyo 2000 Bank of khyber Bank of punjab First women bank Habib bank Ltd National bank Ltd united bank Ltd Allied bank Ltd Muslim commercial bank The Bank of Tokyo 2001 Bank of khyber Bank of punjab First women bank Habib bank Ltd National bank Ltd united bank Ltd Allied bank Ltd Muslim commercial bank

1998 Public sector Banks Bank of Khyber Bank of Punjab First women bank Habib bank Ltd National bank Ltd united bank Ltd Privatized Banks Allied bank Ltd Muslim commercial bank Domestic Private Banks Allied bank Ltd Askari commercial bank Bank alfalah Ltd Bank alhabib Ltd Bolan Bank Faysal bank Gulf commercial bank

1999 Bank of Khyber Bank of Punjab First women bank Habib bank Ltd National bank Ltd united bank Ltd Allied bank Ltd Muslim commercial bank

Askari commercial bank Bank alfalah Ltd Bank alhabib Ltd Bolan Bank Gulf commercial bank metropolitan bank Platinum commercial bank Prime commercial bank Prudential commercial bank Soneri bank Union bank Ltd

Askari commercial bank Bank alfalah Ltd Bank alhabib Ltd Bolan Bank Gulf commercial bank metropolitan bank Platinum commercial bank Prime commercial bank Prudential commercial bank Soneri bank Union bank Ltd

Askari commercial bank Bank alfalah Ltd Bank alhabib Ltd Bolan Bank Gulf commercial bank metropolitan bank Platinum commercial bank Prime commercial bank Prudential commercial bank Soneri bank Union bank Ltd

metropolitan bank Muslim commercial bank Platinum commercial bank Ltd Prime commercial bank Prudential commercial bank Soneri bank Union bank Ltd Foreign Banks ABN Amro Bank Al Barka Islamic bank Ltd American express bank ANZ Grindlays Bank of Ceylon Citi bank NA Credit agricole indosuez Indosueze Deutsche Bank AG Doha Bank Emirates Bank

ABN Amro Bank Al Barka islamic bank Ltd American express bank ANZ Grindlays Bank of Ceylon Citi bank NA Credit agricole indosuez Indosueze Deutsche Bank AG Doha Bank Emirates Bank

ABN Amro Bank Al Barka islamic bank Ltd American express bank ANZ Grindlays Bank of ceylon Citi bank NA Credit agricole indosuez Indosueze Deutsche Bank AG Doha Bank Emirates Bank

ABN Amro Bank Al Barka islamic bank Ltd American express bank Bank of ceylon Citi bank NA Indosueze Deutsche Bank AG Doha Bank Emirates Bank

42
Habib Bank AG zurich HSBC IFIC Bank Mashreq Bank Psc Oman international Bank Rupali bank Ltd Societe Generale Standard chartered Bank The Bank of Tokyo Habib Bank AG zurich HSBC IFIC Bank Mashreq Bank Psc Oman international Bank Rupali bank Ltd Societe Generale Standard chartered Bank The Bank of Tokyo Habib Bank AG zurich HSBC IFIC Bank Mashreq Bank Psc Oman international Bank Rupali bank Ltd Societe Generale Standard chartered Bank The Bank of Tokyo HSBC Ltd IFIC Bank Mashreq Bank Psc Oman international Bank Rupali bank Ltd Societe Generale Standard chartered Bank Standard chartered Bank Grindlays bank The Bank of Tokyo

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