KARACHI, Sept 25: Initiated in 1997, reforms have changed the banking landscape with new private banks set up in the 1990s, outperforming their major local and foreign peers to clinch a growing market share recorded at 28 per cent for the year 2003.

Though latecomers (set up in late 1990s) but more dynamic, they have made a major inroad in the middle market segment. Some of them are emerging as community banks. It is entrepreneurship and not so much the size of the financial assets that is responsible for their outstanding performance.

The new private banks now hold more than double the market share of foreign banks put at 12 per cent. They have filled in the vacuum created by shrinking operations of huge debt-carrying nationalized commercial banks (NCBs) and closure of seven scheduled banks mainly foreign branches. Majority of the bank branches were acquired and merged in locally-incorporated entities (one liquidated) that reduced the number of banks from 42 to 35 during 1997-2003.

Of the 30 per cent market share conceded by major banks (NBP and four privatized banks) over the years, two per cent has been clinched by foreign banks and the rest by small private banks. Currently, the market share of foreign banks is declining. Some banks with majority stakes by foreigners are now locally incorporated.

In mid-1970s, when commercial banks were nationalized, 90 per cent of the market share was held by state-owned banks. Now the situation is reversed with the only state-run National Bank holding a 20 per cent share. Yet, NBP continues to remain the market leader among five major local banks, four of which have been privatized.

For private banks, the ratio of intermediation costs is the lowest - 2.5 per cent - and has almost remained unchanged for the past four years, below the costs for major banks that match those with foreign banks, says a Taurus Securities study. The study divides the banks into three categories - private banks, major local (NBP plus four privatized banks) and foreign banks.

Private banks contributed to the highest increase in advances portfolio, up by 64 per cent. But for advances in the group of major banks, Habib Bank was the market leader. HBL enjoys the highest net interest income and non-interest income with a share 22 per cent and 17 per cent of all banks, respectively.

The study reveals that there has been a shift in deposits towards private banks, where average annual growth is 33 per cent compared to 10 per cent in major banks and only four per cent in foreign banks during the past four years.

An analysis by the security house shows that earning assets to deposit ratio exceeded 100 per cent for private and foreign banks. In 2003, the ratio declined slightly for foreign banks and major banks but it rose for private banks. Bank-wise, the earning assets ratio was the highest for Metropolitan Bank (136 per cent).

Private banks also have slight advantage over the other two groups in posting high return on equity, return of assets and return of deposits though with smaller network of branches, they offer better mark-up rates to depositors than large banks. Their cost of funds is higher.

Analysts at the Taurus Securities say that the new private banks have compelled state-managed units to improve their efficiency. The increasing competition is likely to improve quality, standard and range of banking services.