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Prior to the independence in 1947, 631 branches of the banks were operating in Pakistan. Immediately after partition, majority of these branches were closed and by June, 1948 the country was left with 195 branches in all (4 Pakistani banks with 23 branches and 34 foreign banks with 172 branches).
The State Bank of Pakistan (SBP) was established in July, 1948. Soon after, a commercial bank in public sector, the National Bank of Pakistan, was established. The banking sector grew with the passage of time and by June, 1973, the country had 17 Pakistani banks with 3,123 branches and equal number of foreign banks with 36 branches (total 34 banks and 3159 branches).
The Pakistan Peoples Party (PPP) took over the reins of the country in December, 1971 and in January, 1974 dislodged owners of the private commercial banks in the name of "nationalization".
In fact, nationalization is a relative term; a country can always nationalize foreign interest but the acquisition of the assets of its own nationals can hardly be described as the "nationalization".
The banking sector, thereafter, comprised 5 public sector banks - the National Bank of Pakistan (NBP), the Habib Bank (HBL), the United Bank (UBL), the Muslim Commercial Bank (MCB), andthe Allied Bank of Pakistan (ABL) and the branches of various foreign banks.
During the first tenure of the Prime Minister Nawaz Sharif (1991-93), smaller banks in the private sector were allowed to be established. About a dozen banks in the private sector were opened.
The experience of the smaller banks in the private sector is not the story of complete success. At least four banks tell the story of failure. The Mehran Bank was eventually merged with the NBP.
The Schon Bank was initially purchased by a middle-Eastern entrepreneur but was finally taken over by the Pakistan Industrial Credit and Investment Corporation (Picic) and renamed as the Picic Commercial Bank.
The Prudential Bank was taken over by the Saudi Pak Industrial and Agricultural Corporation (Sapico), which is 50 per cent owned by the government of Pakistan, and renamed as the Saudi-Pak Commercial Bank.
The licence given to the Indus Bank has been cancelled by the SBP. This bank is not currently functioning and the matter is under litigation in the Supreme Court of Pakistan.
With the government take over in 1971, the public sector banks were thrown away to the mercy of the bureaucracy while political intervention was rampant which resulted in the near collapse of these banks. The government, therefore, had to inject billions of rupees details whereof are as under: Table 1.
The MCB was privatized during the first term of Nawaz Sharif's government while the UBL was sold in late 2001 and the HBL in 2003. The ABL has recently been sold to a local leasing company/group.
The SBP desired that the private sector's smaller banks should merge which did not materialize. Nevertheless, some foreign banks have sold out their branches in Pakistan to Pakistani banks; for instance the Bank of America, the Emirates Bank International branches have been purchased by and merged in the Union Bank Ltd, the branch of the Bangladeshi Bank "IFIC" has been acquired by and merged in the National Development Leasing Company and renamed as the NDLC-IFIC Bank.
Two small French banks' branches e.g. the Societe Generale, the French and International Bank and the Bank Agricole Indosuez were respectively acquired by and merged in the Meezan Bank and the NDLC-IFIC Bank.
Nawaz Sharif's second tenure began with the appointment of the "so-called" professional managements in the NBP, the HBL and the UBL. The prime objective in inducting professional managements was to control the rampant undesirable activities of the labour unions and the recovery of the defaulted loans.
The new managements have, to some extent, overcome the first problem but have utterly failed in the second objective. The prime victims of the so-called professionals were the staff whose strength was drastically reduced during 1997-2003.
The details are: the NBP reduced the staff strength from 23,730 to 13,272, the HBL from 31,099 to 18,800, and the UBL from 21,680 to 8,815 depicting a reduction of 44.07 per cent, 39.55 per cent, and 59.34 per cent, respectively.
The mass reduction in the staff did not bring any relief to concerned banks in the matter of salary and allowances expenditure. The expenditure rather increased (the NBP from Rs4,437 million in 1996 to Rs4,761 million in 2003), (the HBL from Rs 6195 million in 1996 to Rs8,021 million in 2003, (the UBL from Rs2,890 million in 1997 to Rs3,255 million in 2003).
The rise in salary and allowances expenditure resulted in the increase of per capita/per month income of the employees: (The NBP from Rs15,581 in 1996 to Rs29,894 in 2003), (the HBL from Rs16,600 in 1996 to Rs35,552 in 2003) and (the UBL from Rs15,423 in 1997 to Rs30,771 in 2003 - staff strength of the UBL in 1997 was 15,615).
It will be seen from the above that the per capita/per month salaries in the NBP, the HBL and the UBL were doubled or more than doubled. This is by and large because individuals from posh areas are being recruited at high salaries and the doors of these banks have almost been closed for individuals from lower strata. Thus "Brahmanism" has entered into these and other banks in the matter of recruitment.
As mentioned earlier, the public sector banks deteriorated because of the bureaucratic/political interference in the matters of these banks. The smaller banks established in early 1990s were immune from these "ills". Despite that 1/3rd of them failed.
Let us now have a look how others existing in the field are faring and how they compare with the large banks-- the NBP, the HBL, and the UBL. For the purpose of this review, we have taken into consideration the Soneri Bank, the Bank Al-Habib, the Habib Bank AG Zurich, and the Union Bank Ltd based on their 2003 results.
Table 2 contains the details about various aspects of operations of these seven banks. The amounts given in columns A-1,2,4,5,8/ B,C,E,F,G,J,M,N,P,Q are in million rupees while in column "L" the amounts have been given in actual rupees. Table 2.
ANALYSIS OF PROFIT: Among large banks, pre-tax profit of the NBP was the highest at Rs9.009 billion and the return on equity was also the highest at 63.09 per cent, followed by the UBL and the HBL where this ratio was 51.88 per cent and 44.56 per cent respectively.
However, 22.94 per cent of the NBP's pre-tax profit came from capital gain on the sale of shares. Comparatively, the HBL and the UBL also got 48.6 per cent and 43.72 per cent of their pre-tax profits from the same source.
It may not be impertinent to point out here that the HBL's 31/12/2002 equity given in the Table I is net of the accumulated losses of the earlier years amounting to Rs8.932 billion.
If the profit/equity ratio is worked out after adjusting the said losses, it will fall from 44.56 per cent to 25.54 per cent. Among small banks, pre-tax profit of the Bank Al-Habib was the highest at Rs1.513 billion representing the return on equity at 83.04 per cent, followed by the Soneri Bank, the Habib Bank AG Zurich and the Union Bank where this ratio was 45.42 per cent, 28.08 per cent and 25.23 per cent, respectively.
The Soneri Bank, the Habib Bank AG Zurich and the Union Bank Ltd did not appear to have indulged in share trading, while 10.57 per cent, 15.38 per cent and 124.91 per cent of their respective pre-tax profit came from capital gain on the sale of securities. In the case of the Bank Al-Habib, 53.93 per cent of the pre-tax profit came from the capital gain on the sale of shares and securities.
A peculiar feature about the Union Bank Ltd is that while its pre-tax profit was merely Rs566 million, its capital gain was Rs707 million. How to interpret this? Does this not reflect that had the bank not earned heavy amount on account of capital gain, it would have sustained losses in 2003?
What about the prospects of profits in 2004? The large banks the NBP, the HBL, the UBL and the Bank Al-Habib earned substantial portion of their profits from stock trading as there was no monetary limit on the investment in stocks.
This facility will not be now available as the SBP has imposed a limit of 20 per cent of the amount of capital and reserves for investment in the stocks and banks are required to bring their stock investment in the prescribed limit by end-October, 2004. Hence, the profits of banks which earned a lot from this avenue in 2003 are likely to come down in 2004.
As for the HBL specifically, in 2003, its administrative expenses stood reduced by Rs2.23 billion because of the write-back on account of the "defined benefit plan and other benefits" which the President of the Bank, in his review appearing on page 8 of the annual report for 2003, has termed as "one time adjustment of provisions/reversals". Because of this, administrative expenditure will inflate in 2004 which will also have negative impact on (2004) profits of the Bank.
DEPLOYMENT OF THE DEPOSITS: The core banking functions comprise mobilization of deposits and advancing of loans. As will be seen from the table 2, the large banks have been able to advance between 40.70 per cent and 54.4 per cent of their deposits.
The performance of smaller banks had been much better as their lending constitute between 62.25 per cent and 80 per cent of their deposits. Here the Union Bank seems to be at the top because advancing of more than 80 per cent of the deposits is not possible as the remaining 20 per cent amount is required to be kept invested with the SBP under Statutory Reserve/Statutory Liquidity Reserve.
LENDING/DEPOSIT RATES AND THE INTERMEDIATION COST: The weighted average lending rates range between 4.02 per cent p.a. (minimum) charged by the Bank Al-Habib to 6.12 per cent p.a. (maximum) charged by the Union Bank.
The large banks have squeezed the depositors more by paying interest at 0.92 per cent p.a. (the UBL-minimum) to 1.67 per cent p.a. (the NBP-maximum). The deposit rates of the smaller banks ranged between 2.05 per cent (the Bank Al-Habib minimum) and 4.25 per cent (the Habib Bank AG Zurich maximum).
Consequently, the intermediation cost of large banks was much higher (3.38 per cent to 4.17 per cent) than that of the small banks (0.86 per cent to 2.60 per cent). In the context of the intermediation cost, the Union Bank falls in line with the large banks.
The lowest intermediation cost was of the Habib Bank AG Zurich which was 0.86 per cent and it appears that the said bank spent more amount on payment of interest to depositors than it earned on its advances.
NON-PERFORMING LOANS: As mentioned earlier, the public sector banks were under the bureaucratic/political trap soon after the government take-over in January,1974, the privately established banks during the first tenure of Nawaz Sharif's government were immune from these ills.
Despite that four of them failed. Others are, however, better in this respect as would be evident from the Table 2. The quantum of non-performing loans (NPLs) of the NBP and the HBL, respectively constitute 24.70 per cent and 25.99 per cent of their deposits as appearing in the balance sheets. The NPLs of the UBL work out to 18.72 per cent of deposits.
The explanation for the reduced quantum of the UBL's NPLs is that in 2001, the government had provided a sum of Rs7.2 billion to this bank to enable it to write-off like amount of the loans becoming bad in the Middle East. Sans the generosity of the government, the UBL also stands in the line of the NBP/the HBL with quantum of the NPLs standing at 25.69 per cent.
The NPLs of the small banks are nominal at below 2 per cent of their advances. The case of the Union Bank is exceptional where the NPLs constitute 7.09 per cent of the advances.
Here, it can be argued that since the amounts of advances recorded in balance sheets are net of the "provisions against the NPLs", the NPLs based thereon will be on the higher side. Therefore, the NPLs based on the amounts of the advances recorded in the notes accompanying to the annual reports are calculated in TABLE 3.
It will be seen that even on the basis of the second formula, the NPLs of the large three banks are above 21 per cent of the deposits. The revised calculations have not brought much difference for the small banks.
