KARACHI, Nov 28: Smaller private banks are showing robust growth, outperforming their foreign and local peers and defying official concerns that they may not be able to face the fierce market competition, and that they should opt for mergers to acquire stronger corporate identity.

Official figures show that the deposits and advances of private banks exceed and assets are very close to those of foreign banks.

About a dozen or so private banks had a share of 14.2 per cent of the total deposits and 13.8 per cent of the total advances of scheduled banks in year 2000. Foreign banks shares’ in deposits has plummeted from 19.5 per cent in 1997 to 14 per cent in 2000. Their share in advances has fallen simultaneously from 16.9 per cent to 13.6 per cent.

The performance of smaller banks has also to be seen in the background of acquisitions and closure of Indus Bank. In the past few years, 4-5 weaker small banks have changed hands with major stakes acquired by financially stronger groups.

According to the annual report of the State Bank 2000-2001, the total deposits of all scheduled banks were to the tune of Rs1338 billion and advances stood at Rs1014 billion at the end of December 2000. The overall deposits declined to 38.5 per of the GDP in 2000 from 39.4 per cent but advances increased from 28 per cent to 29.2 per cent of the GDP.

In the past few years, most foreign banks have either withdrawn from the Pakistani market or have downsized their operations. Three foreign banks have ceased operations in the local market and another two, according to market reports, are looking for buyers for their local branches.

To improve the profitability of foreign banks, the State Bank has allowed commercial banks to buy and sell foreign exchange in the inter-bank without any back up of commercial transactions. From the next year, the bank profits would be taxed at 50 per cent instead of current 55 per cent.These were conditionalities of the SBA arrangements.

The assets of private banks have grown by 20.3 per cent in 2000 to clinch a share of 14.7 per cent of the total for scheduled banks, nominally lower than those of foreign bank at 14.8 per cent. Although total assets of all scheduled banks increased from Rs1,653 billion to Rs1,752 billion over the year, their ratio dropped from 52 per cent to 50.5 per cent of the GDP.

The nationalized commercial banks (NCBs) continued to dominate the market, though holding marginally lower share of deposits and advances at 53.4 per cent and 45.5 per cent respectively in 2000. Their assets also dropped from 49.1 per cent to 48.5 per cent of the total for all scheduled banks. Gradually, the nationalized commercial banks are losing their share of the overall market, whether it may be deposit, advances or assets.

Similarly, the share of privatized commercial banks in the total deposits of all scheduled banks have fallen from 17.8 per cent in 1999 to 17.2 per cent in 2000 while advances have improved from 14.6 per cent to 14.9 per cent of the total. The share in total bank assets has dropped from 16.1 per cent and 15.6 per cent.

In 2000, the specialised banks held 1.2 per cent of the deposits, 12.2 per cent of the advances and 6.4 per cent of the assets out of the total for all scheduled banks.

The return on assets after tax for different category of banks was as follows: NCBs 0.2 per cent, privatized commercial banks -0.2 per cent (ABL losses), specialized banks -2.3 per cent, private bank 0.3 per cent and foreign banks 0.6 per cent and all banks 0.1 per cent.

Similarly, net interest margin for various banks was: NCBs 3.4 per cent, privatized banks 3.3 per cent, specialized banks 4.2 per cent, private banks 2.8 per cent, foreign banks 3.4 per cent and all banks 3.3 per cent.

Return on assets (ROA) for entire banking industry remained negative during 1997-99 primarily because of heavy losses suffered by nationalized and specialized banks. The ROA moved into positive territory in year 2000. The State Bank report says that “strong earnings and profitability profile of banks reflects the ability to support present and future operations.” Profits have improved cost cutting and increasing weighted average spread between deposit and lending rates that have increased from 8.05 per cent in 1999 to 8.16 per cent in 2000. Currently, it is reported to be at 9 per cent.

The focus of the banks is on the balance-sheet away from the need to provide credit at lower rate of interest to boost economic activity.

The Capital to Risk Weighted Assets (CRWA) ratio for nationalized banks is 10.1 per cent for private banks 11.5 per cent and foreign banks 18 per cent, privatized commercial banks 6.9 per cent, specialized banks -3.3 per cent and the average for all banks 9.7 per cent. In November 1998, the State Bank had advised the commercial banks to maintain capital adequacy ratio of 8 per cent.