Comparative Analysis

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 Commerce
Faculty of Social Sciences and Humanities Allama Iqbal Open University
Islamabad
Year of Completion 2014
A FINANCIAL PERFORMANCE
COMPARISON OF PUBLIC AND
A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

EMPIRICAL INVESTIGATION FROM COMMERCIAL BANKING SECTOR OF PAKISTAN
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 Commerce
Faculty of Social Sciences and Humanities Allama Iqbal Open University
Islamabad
Year: 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.

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Title of Project: A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND

PRIVATE BANKS: AN EMPIRICAL INVESTIGATION FROM COMMERCIAL
BANKING SECTOR OF PAKISTAN
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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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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
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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
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DEDICATION
This work is nicely dedicated to my parents for their hard work.
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ACKNOWLEDGEMENTS
I 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.
Student Name

TABLE OF CONTENTS
ABSTRACT:................................................................................................................ 10
1
INTRODUCTION:................................................................................................. 12
1.1
BACKGROUND.............................................................................................. 12
1.2
Public Sector or Private Sector Banks.....................................................................13
1.3
THE NEED OF BANKING SYSTEM..................................................................14
1.4
DEVELOPMENT OF BANKING INDUSTRY IN PAKISTAN:..................................15
1.4.1
Controlling Reforms and Banking Overview in Pakistan.........................18
1.4.2
RECENT GROWTH TRENDS....................................................................19
1.5
SIGNIFICANCE AND SCOPE OF STUDY..........................................................25
1.6
OBJECTIVES OF Research.............................................................................25
1.7
LIMITATIONS OF THE STUDY.........................................................................25
1.8
Structure of thesis........................................................................................ 26
REVIEW OF LITERATURE..................................................................................... 27
RESEARCH METHODOLOGY................................................................................ 31
3.1
DATA SOURCES............................................................................................ 31
3.2
SAMPLE AND SAMPLING TECHNIQUE...........................................................32
3.3
RELIABILITY AND VALIDITY...........................................................................32
3.4
MODE OF ANALYSIS...................................................................................... 33
3.4.1
Bank Size or Total Assets.......................................................................34
3.4.2
Efficiency / Profitability Ratios...............................................................34
3.4.3
Liquidity Ratios...................................................................................... 34
3.4.4
Capital / Leverage Ratios.......................................................................34
3.4.5
Asset Quality Ratios............................................................................... 34
RESULTS AND DISCUSSIONS...............................................................................35
Conclusions........................................................................................................ 52
5.1
Recommendations....................................................................................... 53
References......................................................................................................... 54
APPENDIXS......................................................................................................... 59
10

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 20062012. 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
11

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
12

CHAPTER-I
1 INTRODUCTION:
1.1 BACKGROUND
Today, 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
13

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.
1.2
PUBLIC SECTOR OR PRIVATE SECTOR BANKS
The 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
14

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.
1.3 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 21 st 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.
15

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 the
Ahmad, 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.
1.4 DEVELOPMENT OF BANKING

INDUSTRY IN PAKISTAN:
16

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
17

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
18

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).
1.4.1 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
19

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.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.
1.4.2 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
1 During 2000-02 six commercial banks completed merger and acquisitions.
20

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 ASSETS
Indicators
CY07
EARNINGS
Return on Assets (After Tax)
Public Sector Commercial
2.5
Banks
Local Private Banks
1.4
Foreign Banks
0.7
Commercial Banks
Specialized Banks
All Banks
1.6
0.7
1.5
CY08
CY09
CY10
CY11
CY12
CY13*2
Percent
0.5
1.3
1.3
1.4
1.2
0.725
0.9
0.3
0.9
-0.3
0.9
0.4
1.5
1.5
1.4
-0.1
1.175
1.025
0.8
1.8
0.8
0.9
1.2
0.9
0.9
1.2
1
1.5
1.6
1.5
1.3
1.8
1.3
1.1
1.575
1.1
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.
21

RETURN ON ASSETS (ROA)

(After Tax)
All Banks
1.5
Specialized Banks 0.7

Commercial Banks
0.8
1.8
1.6
Foreign Banks
0.7
Local Private Banks
1.4
Public Sector Commercial Banks
CY08
1.2
0.8
1.5
1.2
0.9
1.6
0.9
0.9
2.5
0.5
20%
CY09
0.9
1.3
CY10
-0.1
1.4
1.03
1.18
1.2
60%
CY12
1.1
1.4
1.3
CY11
1.58
1.3
1.5
40%
1.1
1.8
1.5
0.9
1.3
1.5
0.3 -0.3 0.4
0%
CY07
0.9
0.73
80%
100%
CY13
Figure 1.4.1
The 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 EQUITY
Indicators
CY07
CY08
CY09
CY10
CY11
CY12
CY13
EARNINGS
ROE (Avg. Equity& Surplus) (Before Tax)
Public Sector
Commercial Banks
Local Private Banks
Foreign Banks
Commercial Banks
Specialized Banks
All Banks
27.2
20.4
13.1
21.8
22.6
5.2
12.9
0
10.6
11.4
13.3
15.2
18
13.2
-2.4
12.4
13.2
15.6
5.8
15
15.5
24.7
14.5
22.7
23
15.6
10.975
24.1
2.2
21.2
21.15
9.95
18.475
21.4
18.575
22

RETURN ON EQUITY (ROE)

(Avg. Equity& Surplus) (Before Tax)
All Banks
22.6
Specialized Banks 0
21.8
Foreign Banks
15.5
20.4
Public Sector Commercial Banks

0%
15
22.7
0
-2.4 5.8
5.2 13.3
20%
CY09
2.2
24.7
24.1
15.2
40%
CY10
21.2
14.5
12.9 13.2 15.6
27.2
23
18.58
10.6 12.4
13.1
Local Private Banks
CY08
13.2
21.4
Commercial Banks
CY07
11.4
CY11
18
60%
CY12
18.48
9.95
21.15
15.6 10.98
80%
100%
CY13
Figure 1.4.2
Many events were in use to reinforce the traditions to strengthen the banking sector in 19922002. 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 Nonperforming 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 nonperforming. 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 QUALITY
CY07
CY08
CY09
CY10
CY11
CY12
Mar-13
Jun-13
Sep-13
Dec-13
Advance
s
NPLs
2,875,68
6
217,998
3,422,54
9
359,238
3,551,33
1
446,005
3,729,00
3
555,968
3,759,23
5
591,579
4,243,56
1
614,929
4,171,69
6
612,609
4,177,87
5
616,470
4,210,33
7
603,770
4,505,49
5
585,124
Provisio
n
187,603
249,914
311,588
370,778
410,016
439,421
440,416
451,136
461,732
458,908
23

Advance
s (net)
Net
NPLs
2,688,08
7
30,395
3,172,63
6
109,324
3,239,74
4
134,417
3,358,22
5
185,190
3,349,21
9
181,563
3,804,14
0
175,541
3,731,28
0
172,193
3,726,73
8
165,334
3,748,60
5
142,038
4,046,58
7
126,216
Source: State Bank of Pakistan, 2013
Chart Title
5,000,000
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
Advances
NPLs
Provision
Advances (net)
CY07
CY08
CY09
CY10
CY11
CY12
Mar-13
Jun-13
Sep-13
Dec-13
Net NPLs
Figure 1.4.3
Table 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
24

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 INDICATORS
Growth Rates
Assets
Loans (Net)
Deposits
Investments (Net)
Equity
KEY FSIs:
Capital Adequacy Ratio
Capital to Total Assets
NPLs to Loans (Gross)
Net NPLs to Net Loans
ROA (Before Tax)
ROE^ (Before Tax)
Liquid Assets/ Total Deposits
Advances to Deposit Ratio
CY07
18.8
10.7
18.4
53.1
35.3
CY07
12.3
10.5
7.6
1.1
2.2
22.6
45.1
CY08
8.8
18
9.4
-14.8
3.4
CY08
12.2
10
10.5
3.4
1.2
11.4
37.7
CY09
15.8
2.1
13.5
59.9
17.3
CY09
14
10.1
12.6
4.1
1.3
13.2
44.5
CY10
9.2
3.7
13.9
24.2
5.2
CY10
13.9
9.8
14.9
5.5
1.5
15.5
47.1
CY11
14.8
-0.3
14.5
41.6
12.9
CY11
15.1
9.6
15.7
5.4
2.2
23
59.5
CY12
18.9
12.9
16.8
31.4
12.5
CY12
15.6
9.1
14.5
4.6
2
21.4
64.5
61.675
69.7
75.2
67.7
61.6
53.6
52.2
49.25
^ Based on Average Equity plus Surplus on Revaluation
CY13
11.95
6.575
14.15
18.65
8.3
CY13
15.25
9
14.2
3.975
1.725
18.9
25

GROWTH RATE VARIABLES
KEY FINANCIAL SOUNDNESS INDICATORS

80
70
60
50
40
30
20
10
0
70
60
50
40
30
20
10
0
-10
-20
CY07
CY08
CY09
CY11
CY12
CY13
Figure 1.4.4 (a)
CY10
CY07
CY08
CY09
CY11
CY12
CY13
CY10
Figure 1.4.4 (b)
1.5 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.
1.6 OBJECTIVES OF RESEARCH
26

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
ii.
commercial banks situated in Pakistan

To advice to the state and private sector banks on financial performance
1.7 LIMITATIONS 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.
1.8 STRUCTURE
OF THESIS
27

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-II
2 REVIEW 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
28

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
29

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: 199798 - 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
30

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
31

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-III
3 RESEARCH METHODOLOGY
32

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.
3.1 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
33

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.
3.2 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.
3.3 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.
34

3.4 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.
35

3.4.1 Bank Size or Total Assets
3.4.2 Efficiency / Profitability Ratios
3.4.2.1 Spread Ratio
3.4.2.2 Net Interest Margin Ratio
3.4.2.3 Return on Owners Equity Ratio
3.4.2.4 Return on Total Assets Ratio
3.4.2.5 Non-Interest Expense to Total Income Ratio
3.4.3 Liquidity Ratios
3.4.3.1 Cash and Cash Equivalents to Total Assets Ratio
3.4.3.2 Investment to Total Assets Ratio
3.4.3.3 Advances to Total Assets Ratio
3.4.3.4 Total Liabilities to Total Assets Ratio
3.4.4 Capital / Leverage Ratios
3.4.4.1 Capital Ratio
3.4.4.2 Breakup value per share
3.4.4.3 Deposits to Equity Ratio
3.4.5 Asset Quality Ratios
3.4.5.1 NPLs to Gross Advances
3.4.5.2 NPLs to Equity Ratio
36

CHAPTER-IV
4 RESULTS AND DISCUSSIONS
Comparison of Public and Private Banks on the basis of Bank size and Financial Ratios:
Table-01
Table-01 Total Assets (Rs.)

Type
of
Bank
Public
Bank
2006
2007
2008
2009
2010
2011
2012
Average
836160462
103589308
1
1,042,310,15
6
1,181,231,01
9
1,330,647,70
4
1,568,139,23
8
1,845,230,46
8
126280173
3
Privat
e
Bank
298246426
0
383571920
0
4,235,919,78
4
4,978,942,58
8
5,476,362,63
5
6,321,782,63
8
7,644,196,77
3
506791255
4
Figure-01
Avg. Total Assets

6000000000
5000000000
4000000000
3000000000
2000000000
1000000000
0
Public Bank
Private Bank
Avg. Total Assets
37

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-02
Type of
Bank
Public
Bank
Private
Bank
2006
2007
Table-02 Spread Ratio (%)

2008
2009
2010
2011
2012
Average
60.57
53.78
48.28
40.24
39.85
39.77
36.97
56.71
52.12
48.90
48.03
46.67
46.96
43.48
45.6371428
6
48.9814285
7
Figure-02
Avg.spread ratio
49
48
47
46
45
44
43
Public Bank
Private Bank
Avg.spread ratio
38

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-03
Type of
Bank
Public
Bank
Private
Bank
Figure-03
Table-03 Net Interest Margin Ratio (%)

2008
2009
2010
2011
2006
2007
4.23
3.7
3.82
3.41
3.37
4.02
3.91
4.28
4.27
4.14
2012
Average
3.29
2.82
4.35
3.55
3.52000000
0
4.07428571
4
39

Avg. net interest margin ratio
4.1
4
3.9
3.8
3.7
3.6
3.5
3.4
3.3
3.2
Public Bank
Private Bank
Avg. net interest margin ratio
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-04
Type of
Bank
Public
Bank
Private
Bank
2006
2007
Table-04 Return on Equity (%)

2008
2009
2010
2011
0.31
0.26
6.05
6.24
21.25
15.57
14.48
0.21
0.15
9.03
9.06
9.84
14.88
15.13
2012
Average
9.16571428
6
8.32857142
9
40

Figure-04
Avg. ROE
9.2
9
8.8
8.6
8.4
8.2
8
7.8
Public Bank
Private Bank
Avg. ROE
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
Type of
Bank
Public
Bank
2006
2007
Table-05 Return on Assets (%)

2008
2009
2010
2011
2.53
2.3
0.54
0.56
1.68
1.27
2012
Average
1.08
1.42285714
3
41

Private
Bank
1.79
1.34
0.82
0.82
0.85
1.42
1.30
1.19142857
1
Figure-05
Avg. ROA
1.45
1.4
1.35
1.3
1.25
1.2
1.15
1.1
1.05
Public Bank
Private Bank
Avg. ROA
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-06
Type of
Bank
Public
Bank
2006
Table-06 Non-Interest expense to total income (%)

2007
2008
2009
2010
2011
2012
21.91
19.31
22.97
22.66
24.65
22.51
18.88
Average
21.8414285
7
42

Private
Bank
26.88
27.42
1.66
1.41
1.38
1.28
1.37
8.77142857
1
Figure-06
Non-Interest expense to total income
25
20
15
10
5
0
Public Bank
Private Bank
Non-Interest expense to total income
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-07
Table-07 Cash and Cash equivalent to Total Assets (%)
43

Type of
Bank
Public
Bank
2006
2007
2008
2009
2010
2011
2012
Average
17.15
14.94
15.70
13.85
12.91
11.99
11.89
14.0614285
7
Private
Bank
12.42
10.73
10.00
10.00
10.06
10.24
10.08
10.5042857
1
Figure-07
Cash and Cash equivalent to Total Assets
16
14
12
10
8
6
4
2
0
Public Bank
Private Bank
Cash and Cash equivalent to Total Assets
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
44

higher proportionate than private banks that explains the public banks have more liquid assets
than private banks.
Table-08
Type of
Bank
Public
Bank
2006
Table-08 Investment to Total Assets (%)

2007
2008
2009
2010
2011
21.51
28.61
19.65
22.21
28.61
30.57
31.87
26.1471428
6
Private
Bank
18.7
24.42
19.97
27.77
31.06
39.02
44.04
29.2828571
4
2012
Average
Figure-08
Investment to Total Assets
29.5
29
28.5
28
27.5
27
26.5
26
25.5
25
24.5
Public Bank
Private Bank
Investment to Total Assets
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
45

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
Type of
Bank
Public
Bank
2006
Table-09 Advances to Total Assets (%)

2007
2008
2009
2010
2011
51.39
47.06
53.79
52.67
46.91
44.16
46.87
48.9785714
3
Private
Bank
56.86
53.03
57.53
49.53
48.07
40.88
37.38
49.0400000
0
Figure-09
Advances to Total Assets
49.04
49.03
49.02
49.01
49
48.99
48.98
48.97
48.96
48.95
48.94
Public Bank
Private Bank
Advances to Total Assets
2012
Average
46

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
Type of
Bank
Public
Bank
2006
Table-10 Total Liabilities to Total Assets (%)

2007
2008
2009
2010
2011
87.8
86.26
89.26
88.86
89.07
89.20
89.52
88.5671428
6
Private
Bank
90.65
89.84
89.93
89.88
90.58
90.70
91.26
90.4057142
9
Figure-10
2012
Average
47

Total Liabilities to Total Assets
90.5
90
89.5
89
88.5
88
87.5
Public Bank
Private Bank
Total Liabilities to Total Assets
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
Type of
Bank
Public
2006
2007
Table-11 Capital Ratio (%)

2008
2009
2010
2011
2012
Average
8.06
8.78
8.95
8.15
7.42
8.33285714
9.06
7.91
48

Bank
Private
Bank
3
8.34
8.75
9.10
9.00
8.60
9.52
8.58
8.84142857
1
Figure-11
Capital Ratio
8.9
8.8
8.7
8.6
8.5
8.4
8.3
8.2
8.1
8
Public Banks
Private bank
Capital Ratio
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
49

Type of
Bank
Public
Bank
2006
Table-12 Breakup Value per Share (%)

2007
2008
2009
2010
2011
54.87
54.57
50.28
50.15
43.81
30.86
0.07
40.6585714
3
Private
Bank
21.16
18.32
18.28
17.87
17.11
16.86
17.94
18.2200000
0
2012
Average
Figure-12
Breakup Value per Share
45
40
35
30
25
20
15
10
5
0
Public Bank
Private Bank
Breakup Value per Share
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.
50

Table-13
Type of
Bank
Public
Bank
2006
Table-13 Deposits to equity Ratio (%)

2007
2008
2009
2010
2011
9.88
8.94
8.79
8.66
10.33
9.77
10.33
9.52857142
9
Private
Bank
9.14
8.67
8.42
8.25
9.02
8.13
8.87
8.64285714
3
2012
Average
Figure-13
Deposits to equity Ratio
9.6
9.4
9.2
9
8.8
8.6
8.4
8.2
Public Bank
Private Bank
Deposits to equity Ratio
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,
51

depicts that the account holders more largely deposit their money in public banks as compare to
private banks.
Table-14
Table-14 Non performing Loans to Gross advance (%)
2007
2008
2009
2010
2011
2012
Type of
Bank
Public
Bank
2006
Average
8.36
10.92
11.45
13.07
12.29
10.63
10.8171428
6
Private
Bank
5.27
6.01
5.64
7.45
8.74
9.67
9.33
7.44428571
4
Figure-14
Non performing Loans to Gross advance
12
10
8
6
4
2
0
Public Bank
Private Bank
Non performing Loans to Gross advance
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
52

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-15
Type of
Bank
Public
Bank
2006
Table-15 Non performing Loans to equity Ratio (%)

2007
2008
2009
2010
2011
2012
62.11
48.42
110.07
110.76
160.37
130.29
119.32
105.905714
3
Private
Bank
37.27
38.17
47.89
60.44
74.64
60.56
59.97
54.1342857
1
Figure-15
Non performing Loans to equity Ratio
120
100
80
60
40
20
0
Public Bank
Private bank
Non performing Loans to equity Ratio
Average
53

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 Ratios
Private
Banks
A
2. Net Interest Margin Ratio
3. Return on Owners Equity
4. Return on Total Assets
1. Cash & Cash Equivalents to Total

Assets
2. Investment to Total Assets
3. Advances to Total Assets
4. Total Liabilities to Total Assets
1. Capital Ratio
2. Break up value per share
3. Deposits to Equity Ratio
Bank size
Public Banks
Efficiency / Profitability Ratios:

1.
Spread ratio
5. Non-Interest Expenses to Total

Income
Liquidity Ratios:
Capital / Leverage Ratios:
Asset Quality Ratios:

1. NPLs to Gross Advances
54

2. NPLs to Equity Ratio
CHAPTER-V
5 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
55

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.
5.1 RECOMMENDATIONS
The 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
o
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.
56

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61

7 APPENDIXS
APPENDIX-01: List of banks operating till December, 31 st 2012
Sr. No.
Bank Name
Public Sector Banks

1
First Women Bank
2
3
National Bank of Pakistan

Sindh Bank Ltd.
4
5
The Bank of Khyber

The bank of Punjab
Private Sector Banks

1
2
Albarka Bank (Pakistan) Limited

Allied Bank Ltd.
3
4
Askari Bank Ltd.

Bank Al-Habib Ltd
5
6
Bank Alfalah Ltd.

Bank Islami Pakistan Ltd.
Burj Bank Ltd.
8
9
Dubai Islamic Bank Pakistan Ltd.

Faysal Bank Ltd.
10
11
Habib Bank Ltd.

Habib Metropolitan Bank Ltd.
12
13
JS Bank Ltd.
KASB Bank Ltd.
14
MCB Bank Ltd.
15
16
Meezan Bank Ltd.

NIB Bank Ltd.
17
18
Samba Bank Limited

Silk Bank Limited
19
20
Soneri Bank Ltd.

Standard Chartered Bank (Pakistan) Ltd.
21
Summit Bank Limited
22
United Bank Ltd.
Retrieved from official web site of State bank of Pakistan
62


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A FINANCIAL PERFORMANCE COMPARISON OF

PUBLIC AND PRIVATE BANKS: AN EMPIRICAL

MASTER OF COMMERCE (M.COM)

Name: Muhammad Asim

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

PRIVATE BANKS: AN EMPIRICAL

Name: Muhammad Asim

This Project is submitted to Department of Commerce, Faculty of Social Sciences and

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

Title of Project: A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND

VIVA VOCE COMMITTEE

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

The Project entitled A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND

has been completed under my guidance and I am satisfied with

the quality of students research work.

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

University, solemnly declare that my research project entitled A

FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS:

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

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

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

Public Sector or Private Sector Banks.....................................................................13

THE NEED OF BANKING SYSTEM..................................................................14

DEVELOPMENT OF BANKING INDUSTRY IN PAKISTAN:..................................15

Controlling Reforms and Banking Overview in Pakistan.........................18

RECENT GROWTH TRENDS....................................................................19

SIGNIFICANCE AND SCOPE OF STUDY..........................................................25

LIMITATIONS OF THE STUDY.........................................................................25

SAMPLE AND SAMPLING TECHNIQUE...........................................................32

RELIABILITY AND VALIDITY...........................................................................32

Bank Size or Total Assets.......................................................................34

Efficiency / Profitability Ratios...............................................................34

Capital / Leverage Ratios.......................................................................34

Asset Quality Ratios............................................................................... 34

RESULTS AND DISCUSSIONS...............................................................................35

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

Specially, in a developing country like Pakistan, it is

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

PUBLIC SECTOR OR PRIVATE SECTOR BANKS

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

1.3 THE NEED OF BANKING

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

1.4 DEVELOPMENT OF BANKING

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

RETURN ON ASSETS (ROA)

Specialized Banks 0.7

Local Private Banks

Public Sector Commercial Banks

0.3 -0.3 0.4

A FINANCIAL PERFORMANCE COMPARISON OF PUBLIC AND PRIVATE BANKS: AN

RETURN ON EQUITY (ROE)