The Impact of Privatization on the Financial Performance of Banking Sector in Pakistan

American Journal of Scientific Research ISSN 1450-223X Issue 53 (2012), pp. 122-140 EuroJournals Publishing, Inc. 2012 http://www.eurojournals.com/ajsr.htm The Impact of Privatization on the Financial Performance of Banking Sector in Pakistan Muhammad Ilyas Institute of Business and Management Sciences Agricultural University, Peshawar, Pakistan E-mail: milyas_85@yahoo.com Sabeeh Ullah Corresponding Author Institute of Business and Management Sciences Agricultural University, Peshawar, Pakistan E-mail: sabehmath@yahoo.com Tel: +92 91 3339167001 Obaid Ullah Institute of Business and Management Sciences Agricultural University, Peshawar, Pakistan E-mail: obaidaup@yahoo.com Mohammad Fayaz Department of Agricultural Economics Agricultural University, Peshawar, Pakistan Abstract This study investigates the impact of privatization on financial performance of banking sector in Pakistan. For this purpose we use ten years secondary data (five years pre and post-privatization time) and tools of ratio analysis, paired t-test statistical method and trend analysis. Results of ratio analysis in case of Habib Bank Limited and United Bank Limited are in favor of privatization because the financial performances are improved after privatization. Paired t-test analysis results provide more fruitful evidence in case of Habib Bank Limited, eight out of fifteen ratios support the privatization has positive impact on the financial performance, its results are significant with 53.33%, while in case of United Bank Limited results are poor in favor of privatization only four ratios results are significant with 26.67 %. The trend analyses except in few ratios are also providing the good results in favor of privatization for Habib Bank Limited and United Bank Limited. Keywords: Privatization, Financial Performance, Financial Ratios, Paired t-statistic. JEL Classification Codes: G2, G21

The Impact of Privatization on the Financial Performance of Banking Sector in Pakistan 123 1. Introduction The financial sector plays a crucial role in the economic development of developed as well as developing economies. All sort of businesses need the help of financial institutions and these institutions are competing with each other for attracting the customers. In the emerging and developing countries the strengthening of financial system is one of the main issues. Well developed financial system is an important way of accomplishing the economic growth by mobilizing the financial saving. Put these saving into productive activities though sharing different risks. In many countries the financial liberalization, entry deregulation, minimum requirement of reserve, and removal of credit allocation procedures are introduced. Domestic banks can easily access to cheap loan sources of abroad, these resources in turn are used for the economy productive sectors (Shirai, 2001). The basic functions of the bank are to provide the resources and credit facility to the most productive and efficient sectors to accelerate the growth. Banking system also focuses on the performance, governance of businesses and supports the payment system. The governments also focus on the close supervision of banks through regulations to ensure the efficient performance of financial sector; the public banks also exist along privatized banks (Barth, et al., 2000). Privatization is the transfer of State Owen Enterprises (SOEs) to private shareholders which resulted as important structural changes worldwide over the last two decades. Privatization is instrumental processes that reduce the State ownership in many different countries and in many different sectors. When a very close look of privatization has taken in different countries and industries, there are different ways of privatization. In developing countries the focus is made on the competitive firms rather than strategic sectors such as utilities, telecommunication and banking (Narjees, 2005). This study is not only focused on a bank but study two banks pre and post privatization financial performances. That s why its results will provide a clear picture of privatization effect to parties interested in banks privatization process. 2. Previous Studies In this section, a review of the past studies has been undertaken. This review develops the theoretical guidelines for help in future progression. Bishop and John (1989) found that a large number of industries improved in their performance after privatization than those that are still under the control of government. They at last concluded that before privatization these firms could not performed so positively. Karatas (1995) examined the preprivatization and post-privatization performance of companies. For this purpose he used the financial tools such as ratios of turnover, profit margins and productivity. The final results concluded that it is not possible to find that changes occurred in the performance cause of privatization. Asante (1998) examined in his study the privatization affect on Ashanti Goldfields Company Limited as a largest privatization in the African country and Ghana Commercial Bank, for result finding he used accounting ratios analysis tool. At the end he find out that financial ratio proved the performance after privatization improved, while the statistical model shows insignificant results. Boubakri and Cosset (1998) in the report of The financial and operating performance of newly privatized firms studied the pre and post privatization performance of firms. They studied firms from 21 developing countries more of them are middle income countries including Bangladesh, Jamaica, Nigeria, Pakistan and Philippine. The 79 privatized firms were selected, and results provide the evidence of profitability, operating efficiency, capital investment spending, output, employment and increased dividend and decline in leverage in most of the firm s. D'Souza and Megginson (1999) in their research study examined the financial and operating performance of firms before and after privatization, they studied 85 firms and find out that there is increase in output, operating efficiency, profitability and dividend payment also increase, while the

124 Muhammad Ilyas, Sabeeh Ullah, Obaid Ullah and Mohammad Fayaz leverage declined. Verbrugge et al., (1999) in this research report examined the performance of privatized banks in 25 developed and emerging economies. Results show that performances after privatization are not so fruitful. The reason of this low performance is the State shares in these privatized banks. Megginson and Netter (2001) examined the effect of privatization on the financial and operating performance of firms in case of developed, developing and in transitional economies. For this purpose they conducted 38 studies. In all these reports the results showed that performance of firms increased after the process of privatization. Canhoto and Dermine (2002) examined the performance of Portugal banking system after the deregulation process, they provides the information that these combined efforts of banking system increase the operational efficiency. Due to such efficiency the profitability of banking system improved. Jia et al, (2003) find out that privatization cannot improve the profitability of firms, for this study they observed 41 companies in china. The privatizations of these businesses are made during the period of 1993 to 1998, observed the five years data for findings. Márcio and Weintraub (2003) studied 242 commercial banks of Brazil from 1990 to 2002; the results suggest that the private banks are more productive and also privatization improves the productivity. Beck and Jerome s (2005) research findings show that state owned banks have poor performance in different countries especially in the developing countries. Privatization could improve the performance and efficiency of banks. Results of Privatization are different in different countries, as in Mexico the early phase failed but the second phase after re-nationalization when the foreign participants were involved in that process was positive. Similarly in Czech Republic and Poland it failed because of the major share was hold by the state and discourage the foreigner investors. Megginson (2005) in his experimental result found that privatized banks are more efficient then state banks, State impose great penalties on their owned banks. The bank which are partially privatized not show clear result, bank privatization improve performance but less than as in other industries. The privatization participation of foreigners in banks is positive, improve results economically but problematic politically. Lemma (2005) found that potential benefits of bank privatization are that the government is not a benevolent social guardian and state-owned banks can be used for political personal gains. Privatization improves bank governance, competition, efficiency and performance, and foster stability. Tarawneh (2006) studied five Omani commercial banks with 260 branches. The research studies indicate that the large financial performance will lead to the more functions and activities of organizations. The arguments show that three important factors are responsible for the financial performance of the financial institutions i-e institution size, asset management and operational efficiency. Omran (2007) in this study examined the sample of 12 Egyptian banks financial and operating performance from 1996 to 1999, during this period the ownership was transfer from government to private sector. Results show that the profitability and liquidity ratios of the privatized banks were declining more while the rest of performance remains the same. The results provide evidence that the relative performance was improved as compare to banks of majority shares of government, but low than other ownership banks as private, State owned and mixed private. Final conclusion proved the banks of private majority ownership were performed very well. Otchere (2009) examined the case of middle and low income countries and provide a combined result. His results suggest that risk taking behavior are existed in the privatized banking business in developing countries, because these banks have a large assets as non-performing while the improvement occurred in developed countries due to the improvements in assets rather than the decrease in employments. Fiorentino et al., (2009) examined the case of Italian and German banking industry. They provide mix result which proved that the technical changes, efficiency changes and scale of economies are increased with the privatization in these countries.burki and Ahmad (2009) discussed the performance effects of banks governance reforms in Pakistan by applying the stochastic frontier and inefficiency effect model on the panel data which composed from the 1991 to 2005. The

The Impact of Privatization on the Financial Performance of Banking Sector in Pakistan 125 results showed that the private banks are more cost efficient than foreign and state banks. In initial stages privatized banks suffered from efficiency losses and then improved. When this trend continues in reforms, the private banks must avail the profit earning opportunities.tecles and Tabak (2010) examined the banks efficiency of the post-privatization of Brazilian banking industry from 2000 to 2007.The study shown that the large banks are most cost efficient and profit efficient than other banks. The foreign banks had shown the good results in forming new affiliates and by acquisition process. Final result of efficiency of capitalization, the public banks are cost efficient but less profit efficient. 3. Research Methodology This study are link with the pre and post privatization financial performance of privatized banks, it provides a clear picture of financial performance before and after privatization. For this purpose, in this study computing financial ratios and comparative analyses between the two periods will undertaken through statistical t distribution as the same method was used by Paul Asquith & E. Han Kim (1981). (Taking α = 0.05). 3.1. Data and Source of Data The data use in this study are based on secondary data, the sources of these data are the specified web sites of these banks and www.paksearch.com etc. Hypothesis (i) H 0 : The privatization process does not improve the financial performance of Habib Bank Ltd. H A : The privatization process improves the financial performance of Habib Bank Ltd. (ii) H 0 : The privatization process does not improve the financial performance of United Bank Ltd. H A : The privatization process improves the financial performance of United Bank Ltd. 3.2. Statistical Model When the observations from two samples are paired either naturally or by design, we find the difference between two observations of each pair. Treating the differences as a random sample from a normal population with mean µ D = µ 1 -µ 2 and unknown standard deviation δ D, we perform a onesample t-test on them. This is called a paired difference t-test or a paired t-test. Testing the hypothesis H o µ 1 = µ 2 against H 1 : µ 1 µ 2 is equivalent to H o : µ D = 0 against H1: µ D 0. Let d i = x 1i x 2i denote the difference between the two sample observations in the ith pair. Then the sample mean and standard deviation of the differences are 2 di ( di d) d = and sd = where n represents the number of pairs. n n 1 Assuming that (i) d 1, d 2,...d n is a random sample of differences and (ii) the differences are normally distributed, the test-statistic d t = sd / n Follows a t-distribution with = n 1 degrees of freedom. The rest of the procedure for testing the null hypotheses H o : µ D = o is the same (Chaudhry and Kamal 2007). 4. Results In this section we highlight final results of financial, trend and statistical analysis of Habib and United Banks Limited in light of the objectives stated for the study.

126 Muhammad Ilyas, Sabeeh Ullah, Obaid Ullah and Mohammad Fayaz 4.1. Financial Analysis of Habib Bank Limited 4.1.1. Liquidity Ratios of Habib Bank Limited Table 4.1: Liquidity Ratios of Habib Bank Limited in Pre and Post Privatization Years/Ratios 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Current Ratios T* 1.65 1.66 1.91 0.87 0.82 0.72 0.76 0.79 0.83 0.87 Quick Ratios T* 0.37 0.27 0.40 0.15 0.12 0.14 0.12 0.13 0.13 0.15 Source: Annual Reports of Habib Bank Limited (1999-2008). T* Times In Table 4.1 the pre-privatization in the first three years the performances were improved as 1.65, 1.66 and 1.91 times in 1999, 2000 and 2001 respectively. It start decline in 2002 and 2003 to 0.87 and 0.82 times. In the first year after privatization the ratio decline from pre-privatization last year to 0.72 times and then increase continuously to 0.76, 0.79, 0.83 and 0.87 times in the last four years of post-privatization in 2005, 2006, 2007 and 2008 respectively. The overall findings of this ratio are not satisfactory in the post-privatization period as compare to pre-privatization. In the pre-privatization only the first three years performances are better as compare to the standard of current ratio. The last results are shows the current ratios are show the less liquid position of the Habib Bank Ltd. The quick ratios in the first year of this study are 0.37 times in 1999 and then decline to 0.27 times in 2000 and again rise to 0.40 times in 2001. In the last two years of pre-privatization ratio decline to 0.15 and 0.12 times in 2002 and 2003 respectively. In the post-privatization ratio in 2004 is 0.14 times, decline in 2005 to 0.12 times. Remain 0.13 times in 2006 and 2007, start increase to 0.15 times. The overall results provide the post-privatization performances are weak as compare to the preprivatization except the 2003 in pre-privatization. The overall results are not positive because the ratio results are less than 1. 4.1.2. Profitability Ratios of Habib Bank Limited Table 4.2: Profitability Ratios of Habib Bank Limited in Pre and Post Privatization Years/Ratios 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 ROE Ratio % (209.73) 4.86 8.68 10.32 16.94 18.05 22.83 23.76 15.94 16.38 ROA Ratio % (2.90) 0.18 0.33 0.50 0.92 1.16 1.76 2.13 1.45 1.44 Net Profit Ratio % (151.45) 7.60 9.84 16.43 29.53 41.51 36.69 41.67 32.19 29.48 Operating Profit Ratio % 185.40 180.88 125.18 129.70 116.72 154.91 117.08 118.65 106.14 105.68 Admin Exp Ratio % 198.67 150.49 103.72 95.40 71.90 100.70 55.01 56.26 58.40 58.14 Source: Annual Reports of Habib Bank Limited (1999-2008). In Table 4.2 the pre-privatization ratio of ROE is negative in 1999 as (209.73%) and then start improvement continuously in the proceeding period as 4.86%, 8.68%, 10.32% and 16.94% in 2000, 2001, and 2002 and in 2003. In post-privatization the first three years ratios increase from 18.04, 22.83 and 23.76% in 2004 to 2006, and then decline to 15.94% in 2007 and improve to 16.38% in 2008. The overall result in the first three years in post-privatization are improve and the last two years are not satisfactory as compare to the first three years and only one year of pre privatization is high as of 2003. In the first year ROA ratio is very low as (2.90%), and then increase continuously up to 0.18, 0.33, 0.50 and 0.92% in the pre-privatization. In first three years of privatization its ratios improves to 1.16%, 1.76% and 2.13% in 2004, 2005 and 2006 respectively, and then decline to 1.45% and 1.44% in 2007 and 2008 respectively. Net profit ratio in the pre-privatization is (151.45%) in 1999, and then continuously improve from 7.06, 9.84, 16.43 and 29.53% in 2000, 2001, 2002 and 2003 respectively. In the first year of postprivatization the ratio is improve to 41.51%, then decline to 36.69% and again rise to 41.67% and in the last two years the ratio decline to 32.19 and 29.48 % in 2007 and 2008 continuously. The net result

The Impact of Privatization on the Financial Performance of Banking Sector in Pakistan 127 finding is post-privatization performance of Habib Bank Limited is positive as compare to the preprivatization. Operating profit ratio in 1999 is 185.40% which is not a good sign for Habib Bank Limited ratio decline in 2000 and 2001 to 180.88 and125.18% continuously. Increase in 2002 to 129.70% and then again decline to 116.72% in 2003. In the first year of post-privatization the ratio rise to 154.91% in 2004 and then reduce to 117.08% in 2005 and again rise to 118.65 % in 2006, in the last two years decline to 106.14 and 105.68% in 2007 and 2008 respectively. The result of the post-privatization are positive except in the 2004 it is very high as compare to pre-privatization, but the overall result are not so satisfactory because more of the sale is expend on the operating activities. The administrative expenses ratio is 198.67% in 1999 and then continuously reduces in the other four years of pre-privatization in 2000, 2001, 2002 and 2003 into 150.49, 103.72, 95.40 and 71.90% continuously. In the first year of privatization the ratio is increase again from 2003 to 100.70% in 2004 and decline in 2005 to 55.01% and rise to 56.26 and 58.40% in next two years 2006 and 2007 respectively and in last year decline to 58.14% in 2008. The results of administrative expense ratio are positive in post-privatization as compare to the pre-privatization except the only first year of privatization as in 2004 is 100.70%. 4.1.3. Debt Ratios of Habib Bank Limited Table 4.3: Debt Ratios of Habib Bank Limited in Pre and Post Privatization Years/Ratios 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Debt to Assets Ratio % 98.61 96.09 96.16 95.11 94.54 93.53 92.28 91.00 90.86 91.15 Equity to Assets Ratio % 1.38 3.90 3.83 4.88 5.45 6.46 7.71 9.00 9.13 8.84 Debt to Equity Ratio T* 71.07 24.6 25.04 19.45 17.33 14.47 11.96 10.11 9.94 10.30 Fixed Assets to Equity Ratio T* 24.67 8.50 11.70 4.72 4.76 5.42 4.31 3.34 2.30 2.69 Current liabilities to Equity Ratio T* 28.80 9.42 10.30 18.14 16.42 13.81 11.35 9.74 9.48 9.90 Source: Annual Reports of Habib Bank Limited (1999-2008), T* Times In Table 4.3 the debt to asset ratio is 98.61% in 1999 and become 96.09% in 2000, slight rise in 2001 to 96.16%. In the next two years decline to 95.11 and 94.54% in 2002 and 2003 continuously, in the post-privatization decline the ratio to 93.53, 92.28, 91.00 and 90.86% in 2004 to 2007 and slightly increase to 91.15% in 2008. As compare to the pre-privatization ratio results are improve, and is a good sign of privatization effect on bank performance that the debt in bank capital reduce. Equity to assets ratio in 1999 is 1.38% and start improving in 2000 to 3.90% and slightly decline to 3.83% in 2001 and rise to 4.88 and 5.45% in 2002 and 2003 respectively. In postprivatization the ratio start improvement from pre-privatization in 2004 is 6.46%, 7.71, 9.00 and 9.13% are in 2005, 2006 and 2007 respectively and decline to 8.84% in 2008. The last conclusion is postprivatization is well as compare to pre-privatization, because it creates the good opportunity for the shareholders. In 1999 debt to equity ratio is very high in research finding as 71.07 times and then come to 24.60 times in 2000. Increase to 25.04 times in 2001 and reduce ratio to 19.45 and 17.33 times in the period of 2002 and 2003. In post-privatization it further decline to 14.47, 11.96, 10.11 and 9, 94 times continuously in the first four years of privatization and in 2008 increase to 10.30 times. The results of the ratios provide that the post-privatization performance are improve and positive sign for the bank. A fixed asset to equity ratio in1999 is 24.67 times and decline to 8.50 times in 2000. It increase to 11.70 times in 2001 and start decline in 2002 and 2003 to 4.72 and 4.76 times respectively. In the post-privatization rise to 5.42 times in 2004 and then reduce to 4.31, 3.34, 2.30 in 2005, 2006 and 2007, and slightly rise to 2.69 times in 2008. The ratios provide the evidence as the pre-privatization performance is good as compare to the post-privatization. Current liability to equity ratio is very high in 1999 as 28.28 times, and reduces in 2000 to 9.42 times. In the next two years the ratio again rises to 10.30 and 18.14 times in 2001 and 2002

128 Muhammad Ilyas, Sabeeh Ullah, Obaid Ullah and Mohammad Fayaz respectively. In 2003 reduce to 16.42 times. In post-privatization the ratio in 2004 is 13.81 times and start decline to 11.35, 9.74 and 9.48 times in 2005, 2006 and 2007 respectively, and decline in 2008 to 9.90 times. The mixed results in both period provides by the ratios and the post-privatization are positive improvement as compare to pre-privatization, only two years of pre-privatization are good then post-privatization. 4.1.4. Activity Ratios of Habib Bank Limited Table 4.4: Activity Ratios of Habib Bank Limited in Pre and Post Privatization Years/Ratios 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Fixed Assets T/O Ratio T* 0.05 0.07 0.07 0.13 0.12 0.08 0.14 0.17 0.16 0.20 Current Assets T/O Ratio T* 0.02 0.04 0.04 0.03 0.04 0.04 0.07 0.07 0.06 0.06 Total Assets T/O Ratio T* 0.01 0.02 0.03 0.03 0.03 0.02 0.04 0.05 0.04 0.04 Source: Annual reports of Habib Bank Limited (1999-2008), T* Times In Table 4.4 the Fixed assets turnover ratios are improving as from 0.05, 0.07, 0.07 and 0.13 times in the four years of this study in the pre-privatization (1999-2003), slightly decline to 0.12 times in 2003. In the post-privatization ratio in 2004 decline to 0.08 times but start rise to 0.14 and 0.17 times in 2005 and 2006. Become 0.16 times and jump to 0.20 times in 2008. The result of post-privatization are improve then the pre-privatization, means the bank convert in post-privatization fixed assets more to sale and generate more for the bank. Current assets turnover in 1999 is 0.02times and then rise to 0.04 times in 2000 and 2001, decline to 0.03 times in 2002 and slightly rise to 0.04 times in 2003. In the post-privatization ratio is 0.04 times in 2004 increase to 0.07 times in 2005 and 2006, remain 0.06 times in 2007 and 2008. The final decision is prove that the post-privatization performances are improved. Total assets turnover ratio continuously rises from 0.01, 0.02, 0.03 times in 1999, 2000 and 2001 remain 0.02 times and 0.03 times in 2002 and 2003. In the post-privatization improve from 0.02, 0.04, 0.05 times in 2004, 2005 and 2006 respectively. Remain 0.04 times in 2007 and 2008. Conclusion derive that the post-privatization performance are good as compare to pre-privatization. 4.2. Financial Analysis of United Bank Limited 4.2.1. Liquidity Ratios of United Bank Limited Table 4.5: Liquidity Ratios of United Bank Limited in Pre and Post Privatization Years/Ratios 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Current Ratios T* 0.74 1.27 1.37 1.27 1.13 2.17 2.14 0.80 0.90 0.93 Quick Ratios T* 0.18 0.34 0.30 0.37 0.42 0.44 0.47 0.16 0.19 0.16 Source: Annual Reports of United Bank Limited (1998-2007), T* Times In Table 4.5 the pre-privatization of United Bank Limited in 1998 has current ratio 0.74 times it increases in 1999 & 2000 to 1.27 & 1.37 times respectively, while it starts decline again in 2001 & 2002 to 1.27 & 1.13 times respectively. In the case of post-privatization in 2003 the current ratio is 2.17 times is high as compare to 2002. It start decline in 2004 and 2005, and improved in the period of 2006 and 2007. The overall results show that after privatization in first two years the performance improve but in case of 2005 to 2007 is very low as compare to first two years of post-privatization and low from the pre-privatization except the 1998 result. In the first two years of this study in pre-privatization the Quick ratio increases from 0.18 times to 0.34 times and then decline in 2002. Again start increasing in 2001 & 2002 in case of preprivatization. In the first two years of privatization the ratio increases to 0.44 times to 0.47 times,

The Impact of Privatization on the Financial Performance of Banking Sector in Pakistan 129 decline to 0.16 times in 2005 and increase to 0.19 times in 2006, decline again to 0.16 times in 2007. The overall results finding show that in first two years post-privatization performance little bit improves, the quick ratio results in the pre-privatization are better and not satisfactory in the postprivatization period. 4.2.2. Profitability Ratios of United Bank Limited Table 4.6: Profitability Ratios of United Bank Limited in Pre and Post Privatization Years/Ratios 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 ROE Ratio % 37.69 6.30 7.57 (604.74) 11.76 18.09 19.71 25.41 31.70 19.80 ROA Ratio % 2.17 0.32 0.42 (4.64) 0.76 1.25 1.35 1.72 2.23 1.58 Net Profit Ratio % 177.73 18.33 18.15 (147.77) 24.75 38.40 48.60 42.44 45.37 34.86 Operating Profit Ratio % 260.08 211.27 54.78 131.28 146.98 159.69 156.76 127.00 122.19 110.66 Admin Exp Ratio % 255.51 163.32 140.36 90.10 99.47 90.47 93.45 57.92 52.49 55.66 Source: Annual Reports of United Bank Limited (1998-2007) In Table 4.6 in 1998 the ROE is 37.69% and decline it in 1999 to 6.30%. Again increase to 7.57% in 2000 and in the period of 2001 provides negative value. In 2002 rise to 11.76% show the more fluctuating positions in pre-privatization. In post-privatization the ROE continuously improve from 18.09% in 2003, 19.71% in 2004, 25.41% in 2005 and 31.70% in 2006 and decline in 2007 to 19.08%. After the privatization process the ROE of United Bank Limited are very well except the last year of operation 2007. Pre-privatization ratio in 1998 of ROA is 2.17% decline in 1999 to 0.32%, in 2000 increase to 0.42%. In 2001 it has very poor performance with (4.64%), in 2002 it increase to 0.76%. In the situation of post-privatization the performance improve continuously up to 2006 as in 2003 1.25%, in 2004 1.35%, in 2005 1.72% and in 2006 is 2.23% and low in 2007 as 1.58%. The final result shows the overall performances are positive in post-privatization as compare to the pre-privatization. In first year of study before privatization the value is 177.73% then start decline in 1999, 2000 and 2001 to 18.33%, 18.15% and (147.77%). Again improved ratio in 2002 to 24.75%, in the time of pre-privatization the situation of United Bank Limited are not so favorable. In the first year of postprivatization improvement start in 2003 as 38.40%, increase to 48.60% in 2004. Decline in 2005 to 42.44% and again rise to 45.37% in 2006 and decline to 34.86% in 2007. In post-privatization performance are fluctuate but its performance are very well as compare to pre-privatization except first year of pre-privatization as 177.73%. In pre-privatization period the operating profit ratio is 260.08% and then reduces to 211.27% in 1999, further reduce to 54.78% in 2000. In the last two years of pre-privatization increase to 131.28% and 146.98% respectively. In the situation of post-privatization the operating profit ratio continually decline and that is a good sign. As from the 2003 to 2007 the value are 159.69%, 156.69%, 127.00%, 122.19% and 110.66%. The overall performances of this ratio are positive after privatization. In the first year of this study in pre-privatization the administrative expenses decline from the 1998 to 2001 255.51%, 163.32%, 140.36% and 90.10% and increase in 2002 to 99.47%. The results are improves in this time but last year of pre-privatization is not show the good point. In postprivatization in 2003 the ratio is 90.47%, in 2004 the ratio increase to 93.45% and then decline in 2005 and 2006 to 57.92% and 52.49% respectively, increase again in 2007 to 55.66%. Final result prove that the administrative expense ratio are positive in post-privatization as compare to the pre-privatization, the profitability improve due to low administrative expenses ratios.

130 Muhammad Ilyas, Sabeeh Ullah, Obaid Ullah and Mohammad Fayaz 4.2.3. Debt Ratios of United Bank Limited Table 4.7: Debt Ratios of United Bank Limited in Pre and Post Privatization Years/Ratios 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Debt to Assets Ratio % 94.21 94.80 94.32 99.23 93.51 93.09 93.13 93.22 92.94 92.00 Equity to Assets Ratio % 5.78 5.20 5.67 0.76 6.48 6.90 6.86 6.77 7.05 8.00 Debt to Equity Ratio T* 16.30 18.21 16.63 129.08 14.42 13.47 13.56 13.75 13.17 11.50 Fixed Assets to Equity Ratio T* 6.55 8.41 7.69 53.21 8.05 3.23 4.82 4.70 4.43 4.01 Current liabilities to Equity Ratio T* 14.43 8.48 7.23 60.20 6.47 5.16 4.54 12.61 10.75 9.04 Source: Annual Report of United Bank Limited (1998-2007), T* Times In Table 4.7 the pre-privatization debt to assets ratio result indicate more fluctuation, in1998 the ratio is 94.21%, increase in 1999 to 94.80% then decline in 2000 to 94.32% and in the next year increase to 99.23% and in the last year of pre-privatization decline to 93.51%. After privatization ratio decline from pre-privatization but increase in the first three years to 93.09%, 93.13% and 93.22% in 2003, 2004 and 2005 respectively. In the last two years of privatization the ratios are decline to 92.94% and to 92.00% respectively. Overall performances are very well after privatization process as compare to pre-privatization. In pre-privatization equity to assets ratio in 1998 is 5.78%, then decline in 1999 to 5.20%, again rise to 5.67% in 2000, in the case of 2001 it is 0.76% and rise positively to 6.48%. In the time of postprivatization situation the ratio improves to 6.90% in 2003 and then decline to 6.86% and 6.77% in 2004 and 2005 respectively. In time of 2006 and 2007 ratio improve to 7.05% and 8.00%. The net results of this ratio are positive in post-privatization and have a good sign for common stockholders. In 1998 debt to equity ratio is 16.30 times, increase in 1999 to18.12 times, and decline to 16.63 times in 2000. Rise to 129.08 times and come down to the 14.42 times. In first three years of privatization the ratio rise to 13.47 times, 13.56 times and 13.75 times, come to 13.17 times in 2006 and further decline to the 11.50 times. The net finding shows that the ratios are low in the postprivatization this is a good sign because the debt are less as compare to the pre-privatization. In 1998 fixed assets to equity ratio is 6.55 times, in 1999 rise to 8.41 times and again decline in 2000 to 7.69 times. In 2001 rise to the 53.21 times and decline in 2002 to 8.06 times. The ratio is very low in post-privatization times in 2003 is 3.23 times a slight rise to 4.82 times in 2004 and then again continuously decline in 2005, 2006 and 2007 to 4.70 times, 4.43 times and 4.01 times respectively. The overall position explains that after privatization ratio are not favorable for the United Bank Limited in long term survival. In first three years of this study pre-privatization ratio of current liabilities to equity ratio show result decline in the pre-privatization in 1998, 1999 and 2000 from14.43, 8.48 and 7.23 times respectively. In post-privatization ratio are 5.16 times and then decline to 4.54 times in 2003 and 2004, in 2005 rise to 12.61 times. And fall to 10.75 times and 9.04 times in 2006 and 2007 respectively. The results are mix in this ratio in pre and post privatization first two years of privatization are show the good position of the bank, and the pre-privatization are positive in the 1999, 2000 and 2002 as compare to pre and post privatization performance. 4.2.4. Activity Ratios of United Bank Limited Table 4.8: Activity Ratios of United Bank Limited in Pre and Post Privatization Years/Ratios 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Fixed Assets T/O Ratio T* 0.03 0.04 0.05 0.07 0.05 0.14 0.08 0.12 0.15 0.14 Current Assets T/O Ratio T* 0.01 0.03 0.04 0.05 0.06 0.04 0.04 0.05 0.07 0.06 Total Assets T/O Ratio T* 0.01 0.01 0.02 0.03 0.03 0.03 0.02 0.04 0.05 0.05 Source: Annual Report of United Bank Limited (1998-2007), T* Times

The Impact of Privatization on the Financial Performance of Banking Sector in Pakistan 131 In Table 4.8 Fixed turnover ratio continuously improves in the four years of pre-privatization from 0.03 times to 0.07 times but in 2002 decline to 0.06 times. In post-privatization first year ratio is 0.14 times then decline to 0.08 times in 2004, and again improve to 0.12 times in 2005 and to 0.15 times in 2006, in 2007 it decline to 0.14 times. Overall results provide positive improvement in the post-privatization as compare to pre-privatization. Current assets turnover ratio increase continuously from 0.01 times to 0.06 times in 1998 to 2002 in the pre-privatization. In post-privatization the first two years ratio are 0.04 times and then increase to 0.05 times in 2005 and 0.07 times in 2006, it decline to 0.06 times in 2007. In postprivatization only one year performance is very positive as of 2006 the remaining performance are somewhat same to pre-privatization, it means the post-privatization performance are not improve very well. Pre-privatization results of total assets turnover are shows in first year and second year of the study ratios are 0.01 times and increase in 2000 to 0.02 times and further increase to 0.03 times in 2001 and 2002. As in first year of post-privatization it remain same as 0.03 times and then decline to 0.02 times in 2004, and increase to 0.04 times in 2005 and improve in 2006 and 2007 to 0.05 times. Postprivatization results are positive as compare to pre-privatization except of one year in 2004. 4.3. Habib Bank Limited Statistical Data Analysis 4.3.1. Liquidity Ratio of Habib Bank Limited Table 4.9: Statistical Analysis of Liquidity Ratios of Habib Bank Limited in Pre and Post Privatization S.no Ratios Pre Mean Post Mean Diff. Mean s.d tcal d.f P-value Results 1 Current Ratio 1.38 0.79 0.58 0.54 2.39 4 0.07 Insignificant 2 Quick Ratio 0.26 0.13 0.12 0.13 2.20 4 0.09 Insignificant In Table 4.9 of liquidity ratio the means of current and quick ratios decline from 1.38 and 0.26 to 0.79 and 0.13 times in pre-privatization to post-privatization. Means differences are 0.58 and 0.12 of current and quick ratios, results are insignificant as p value > α value, mean privatization has no significant affect on the liquidity performances Habib Bank Limited. 4.3.2. Profitability Ratio of Habib Bank Limited Table 4.10: Statistical Analysis of Profitability Ratios of Habib Bank Limited in Pre and Post Privatization S.no Ratios Pre Mean Post Mean Diff. Mean s.d tcal d.f P-value Results 1 ROE (33.78) 19.39 (53.17) 97.88 (1.21) 4 0.29 Insignificant 2 ROA (0.19) 1.58 (1.78) 1.37 (2.90) 4 0.04 Significant 3 Net Profit Ratio (17.61) 36.30 (53.91) 78.74 (1.53) 4 0.20 Insignificant 4 Operating profit ratio 147.58 120.49 2.70 22.64 2.67 4 0.05 Significant 5 Admin expense ratio 124.04 65.70 58.33 37.11 3.51 4 0.02 Significant Table 4.10 of profitability ratios provides information s as investigator find out means of ROE, ROA, net profit and administrative expenses ratio increase from (33.78), (0.19), (17.61) and 1.47 to 19.39, 1.58, 36.30 and 65.70 percent respectively, while only mean value of operating profit ratio reduce from 1.47 to 1.20 percents. P values of ROE, net profit and operating profit ratios are greater then α-value and mention insignificant results and privatization has no significant affect on the financial performances of Habib Bank Limited. On other side p-values of ROA and administrative expense ratios are less then α-value, and final result effects are significant and prove by researcher study that privatizations has positive effect on these performances.

132 Muhammad Ilyas, Sabeeh Ullah, Obaid Ullah and Mohammad Fayaz 4.3.3. Debt Ratios of Habib Bank Limited Table 4.11: Statistical Analysis of Debt Ratios of Habib Bank Limited in Pre and Post Privatization S.no Ratios Pre Mean Post Mean Diff. Mean s.d t P- cal d.f value Results 1 Debt to Assets 96.10 91.76 4.33 0.77 12.49 4 0.00 Significant 2 Equity to Assts 3.88 8.22 (4.34) 0.77 (12.45) 4 0.00 Significant 3 Debt to Equity 31.49 11.35 201.42 20.60 2.18 4 0.09 Insignificant 4 Fixed Asset to Equity 10.87 3.61 7.25 7.15 2.26 4 0.08 Insignificant 5 Current Liability To Equity 16.61 10.85 5.76 6.71 1.91 4 0.12 Insignificant In Table 4.11 the debt ratios of Habib Bank Limited out of five above mention ratios three ratios results are insignificant and show there is no positive affect of privatization on financial performances, p-values are greater then the α-value. Means of these three ratios debt to equity, fixed assets to equity and current liability to equity are decline from 31.49, 10.87 and 16.61 to 11.35, 3.61 and 10.61pecents. Mean of debt to equity also decline from 96.10 to 91.76, but p-value is less then α- value and show positive effect after privatization. Mean of equity to assets is jumped from 3.88 to 8.22 and p-value is less then α-value which is significant and positive affect on the performance of Habib Bank Limited. 4.3.4. Activity Ratios of Habib Bank Limited Table 4.12: Statistical Analysis Activity Ratios of Habib Bank Limited in Pre and Post Privatization S.no Ratios Pre Mean Post Mean Diff. Mean s.d tcal d.f P-value Results 1 Fixed Asset TO 0.08 0.15 (0.06) 0.03 (4.45) 4 0.01 Significant 2 Current Assets T/O 0.03 0.06 (0.02) 0.00 (10.61) 4 0.00 Significant 3 Total Asset T/O 0.02 0.03 (0.01) 0.00 (5.71) 4 0.00 Significant In Table 4.12 of activity ratios means values increase from 0.08, 0.03 and 0.02 to 0.15, 0.06 and 0.03 times, of fixed, current and total assets turnover, p-values of all ratios are less then the α-values and prove significant results, which prove privatization has good effect on the financial activity ratio portion of Habib Bank Limited. 4.4. United Bank Limited Statistical Data Analysis 4.4.1. Liquidity Ratio of United Bank Limited Table 4.13: Statistical Analysis Liquidity Ratios of United Bank Limited in Pre and Post Privatization S.no Ratios Pre Mean Post Mean Diff. Mean s.d tcal d.f P-value Results 1 Current Ratio 1.15 1.38 (0.23) 0.87 (0.59) 4 0.58 Insignificant 2 Quick Ratio 0.32 0.28 0.03 0.22 0.38 4 0.72 Insignificant In Table 4.13 of liquidity ratio table mean of current ratio increase from 1.15 to 1.38 times, on other side quick ratio mean decline from 0.32 to 0.28 times. P-values of both ratios are greater then α- value, which is insignificant and research finding prove that privatization not positively affect Habib Bank Limited performances.

The Impact of Privatization on the Financial Performance of Banking Sector in Pakistan 133 4.4.2. Profitability Ratio of United Bank Limited Table 4.14: Statistical Analysis Profitability Ratios of United Bank Limited in Pre and Post Privatization S.No Ratios Pre Mean Post Mean Diff. Mean s.d tcal d.f P-value Results 1 ROE (108.2) 22.94 (131.2) 282.79 (1.08) 4 0.35 Insignificant 2 ROA (0.19) 1.62 (1.82) 2.95 (1.37) 4 0.24 Insignificant 3 Net profit 18.23 41.93 (2.36) 117.81 (0.45) 4 0.67 Insignificant 4 Operating Profit 160.88 135.26 25.61 64.00 0.89 4 0.42 Insignificant 5 Admin expense ratio 149.75 69.99 79.75 51.10 3.49 4 0.02 Significant In Table 4.14 the means of ROE, ROA, net profit and administrative expenses increase from (1.08), (0.19), 18.23 and 1.49 to 22.94, 1.62, 41.93 and 69.99 percent respectively and the only value of mean of operating profit decline from 1.60 to 1.35 percent. P-value of ROE, ROA, net profit and operating profit ratios are greater then α-value and show insignificant results, this is point to provide clear picture of after privatization. Only administrative expense ratio shows significant result in profitability ratio because its p-value less then α-values and this is privatization positive affect on financial performance. 4.4.3. Debt Ratios of United Bank Limited Table 4.15: Statistical Analysis Debt Ratios of United Bank Limited in Pre and Post Privatization S.no Ratios Pre Mean Post Mean Diff. Mean s.d t P- cal d.f value Results 1 Debt to Assets 95.21 92.87 2.33 2.22 2.35 4 0.07 Insignificant 2 Equity to Assts 4.77 7.11 (2.33) 2.22 (2.35) 4 0.07 Insignificant 3 Debt to equity 38.92 13.09 25.83 50.36 1.14 4 0.31 Insignificant 4 Fixed asset to equity 16.78 4.23 12.54 20.26 1.38 4 0.23 Insignificant 5 Current liability to equity 19.36 8.42 10.94 22.26 1.09 4 0.33 Insignificant In Table 4.15 of debt ratios mean values of debt to assets, debt to equity, fixed assets to equity and current liability to equity jumped downward from 95.21, 38.92, 16.78 and 19.36 to 92.21, 13.92, 4.23 and 8.42 respectively. On other side mean of equity to assets increase from 4.77 to 7.11. Final statistical results of all these ratios are insignificant, because p-values are greater then α-value and final conclusion is that privatization has not affect financial performances in case of debt ratios. 4.4.4. Activity Ratios of United Bank Limited Table 4.16: Statistical Analysis Activity Ratios of United Bank Limited in Pre and Post Privatization S.no Ratios Pre Mean Post Mean Diff. Mean s.d tcal d.f P-value Results 1 Fixed Assets T/O 0.04 0.12 (0.07) 0.02 (6.73) 4 0.00 Significant 2 Current Assets T/O 0.03 0.05 (0.01) 0.01 (2.74) 4 0.05 Insignificant 3 Total Assets T/O 0.02 0.03 (0.01) 0.00 (9.00) 4 0.00 Significant In Table 4.16 the mean of all three results show upward trend from 0.04, 0.03 and 0.02 to 0.12, 0.05 and 0.03 times of fixed, current and total assets turnover. Final results of fixed and total assets turnover are significant as p vlue < α value, result of current assets turnover is insignificant because p vlue >α value result of fixed and total assets turnover are improved after privatization and not of current assets turnover after privatization.

134 Muhammad Ilyas, Sabeeh Ullah, Obaid Ullah and Mohammad Fayaz 4.5. Trend Analysis 4.5.1. Trend Analysis of Habib Bank Limited 4.5.1.1. Trend Analysis Liquidity Ratios of Habib Bank Limited Table 4.17: Trend Analysis of Liquidity Ratios of Habib Bank Limited in Pre and Post Privatization Years/Ratios 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Current Ratios T* 1.65 1.66 1.91 0.87 0.82 0.72 0.76 0.79 0.83 0.87 Quick Ratios T* 0.37 0.27 0.40 0.15 0.12 0.14 0.12 0.13 0.13 0.15 Source: Annual Reports of Habib Bank Limited (1999-2008), T* Times Figure 4.1: Liquidity Ratios of HBL CurrentRatio Quick Ratio LIQUIDITY RATIOS 2.5 2 1.5 1 0.5 0 1998 2000 2002 2004 2006 2008 2010 YEARS In Figure 4.1 the pre-privatization curve show current ratios first rise as reach to high point in 2001 and then start declining in 2004 come to the low point and again rise until 2008 and has somewhat better trend for the performances, quick ratio is not satisfactory from the point of view of graph, in 2000 decline and jumped in 2002 and start continuously downward fluctuations till 2008. Quick ratio is not good sign and current ratio trend also of 2002 onward not according to the standard. 4.5.1.2. Trend Analysis of Profitability Ratios of Habib Bank Limited Table 4.18: Trend Analysis of Profitability Ratios of Habib Bank Limited in Pre and Post Privatization Years/Ratios 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 ROE Ratio % (209.73) 4.86 8.68 10.32 16.94 18.05 22.83 23.76 15.94 16.38 ROA Ratio % (2.90) 0.18 0.33 0.50 0.92 1.16 1.76 2.13 1.45 1.44 Net Profit Ratio % (151.45) 7.60 9.84 16.43 29.53 41.51 36.69 41.67 32.19 29.48 Operating Profit Ratio % 185.40 180.88 125.18 129.70 116.72 154.91 117.08 118.65 106.14 105.68 Admin Exp Ratio % 198.67 150.49 103.72 95.40 71.90 100.70 55.01 56.26 58.40 58.14 Source: Annual Reports of Habib Bank Limited (1999-2008), Figure 4.2: Profitability Ratios of HBL PROFITABILITY RATIOS ROE ROA Net Profit Operating Profit Admin Expense 400 300 200 100 0-1001997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008-200 -300-400 -500-600 -700 YEARS

The Impact of Privatization on the Financial Performance of Banking Sector in Pakistan 135 Figure 4.2 of net profit and ROE show loss position in 1999 and then rise to gain position in 2000, until 2004 net profit rise and then fluctuate at last in 2008 become low, until 2006 ROE positively slope and become low in 2008. ROA show same pattern and not so satisfactory situation. Administrative expenses in 1999 is high, in 2003 come down and in 2004 reach again to high point in graph, until 2008 it is now become low and has a positive effect on performance because reduce the administrative expenses by management. Operating profit ratio performances are also start decline from 1999 to 2001, fluctuate and reach again to high point in 2004 and start declining again up to 2008. 4.5.1.3. Trend Analysis of Debt Ratio of Habib Bank Limited Table 4.19: Trend Analysis of Debt Ratio of Habib Bank Limited in Pre and Post Privatization Years/Ratios 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Debt to Assets Ratio % 98.61 96.09 96.16 95.11 94.54 93.53 92.28 91.00 90.86 91.15 Equity to Assets Ratio % 1.38 3.90 3.83 4.88 5.45 6.46 7.71 9.00 9.13 8.84 Debt to Equity Ratio T* 71.07 24.6 25.04 19.45 17.33 14.47 11.96 10.11 9.94 10.30 Fixed Assets to Equity Ratio T* 24.67 8.50 11.70 4.72 4.76 5.42 4.31 3.34 2.30 2.69 Current liabilities to Equity Ratio T* 28.80 9.42 10.30 18.14 16.42 13.81 11.35 9.74 9.48 9.90 Sources: Annual Reports of Habib Bank Limited (1999-2008), T* Times Figure 4.3: Debt Ratios of Habib Bank Limited Debt to Assets Equity to assets Debt to equity Fixed assets to equity Current Liabilty to Equity 120 100 DEBT RATIOS 80 60 40 20 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YEARS In Figure 4.3 the Debt to assets, debt to equity and equity to assets are show positive trend debt to equity and debt to assets start decline continuously, and equity to assets is rising positively until 2008 from 1999. Current liability to equity in 1999 is high and decline in 2000, in 2002 rise and then start decline and has a positive sign for the Habib Bank Limited because short term payments reduce, fixed assets to equity is decline in 2002 rise in 2003 and then until 2008 decline and not a good point for Habib Bank Limited future performances as need for success. 4.5.1.4. Trend Analysis of Activity Ratio of Habib Bank Limited Table 4.20: Trend Analysis of Activity Ratio of Habib Bank Limited in Pre and Post Privatization Years/Ratios 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Fixed Assets T/O T* 0.05 0.07 0.07 0.13 0.12 0.08 0.14 0.17 0.16 0.20 Current Assets T/O T* 0.02 0.04 0.04 0.03 0.04 0.04 0.07 0.07 0.06 0.06 Total Assets T/O T* 0.01 0.02 0.03 0.03 0.03 0.02 0.04 0.05 0.04 0.04 Source: Annual Reports of Habib Bank Limited (1999-2008), T* Times

136 Muhammad Ilyas, Sabeeh Ullah, Obaid Ullah and Mohammad Fayaz Figure 4.4: Activity Ratios of Habib Bank Limited Fixed Assets T/O Cuurent Assets T/O Total Assets T/O 0.25 0.2 Turnover Ratio 0.15 0.1 0.05 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Years In Figure 4.4 of activity ratios trend analysis is start positive trend, fixed assets turnover increasing up to 2002 and then decline in 2004 to lowest point and then reach to highest point in 2008, current ratio is also a positive sign but still not most favorable because in table its value less then 1 and at same direction total assets turnover not provide good point it also rise upward but not so much satisfactory from the management point of view for the future good performances. 4.5.2. Trend Analysis of United Bank Limited 4.5.2.1. Trend Analysis of Liquidity Ratio of United Bank Limited Table 4.21: Trend Analysis of Liquidity Ratio of United Bank Limited in Pre and Post Privatization Years/Ratios 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Current Ratios T* 0.74 1.27 1.37 1.27 1.13 2.17 2.14 0.80 0.90 0.93 Quick Ratios T* 0.18 0.34 0.30 0.37 0.42 0.44 0.47 0.16 0.19 0.16 Source: Annual Reports of United Bank Limited (1998-2007), T* Times Figure 4.5: Liquidity Ratios of United Bank Limited Current Ratio Quick Ratio LIQUIDITY RATIO 2.5 2 1.5 1 0.5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 YEARS The figure 4.5 shows liquidity ratios position of United Bank Limited, current ratio curve is improve in pre-privatization while in the initial stages of post-privatization reach to the highest point and then come down again and initial post-privatization result are positive because it is above than 1. Quick ratios improve from the start of the study and then decline in the last years of the postprivatization. Overall performances are not satisfactory. 4.5.2.2. Trend Analysis of Profitability Ratio of United Bank Limited Table 4.22: Trend Analysis of Profitability Ratio of United Bank Limited in Pre and Post Privatization Years/Ratios 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 ROE % 37.69 6.30 7.57 (604.74) 11.76 18.09 19.71 25.41 31.70 19.80