TESTING THE HEALTH OF STOCK MARKET

LISTED COMMERCIAL BANKS

PROF. DR. KHAWAJA AMJAD SAEED*
Email: kamjadsaeed@yahoo.com
Apr 20 - 26, 2009

PRELUDE

This piece will focus on the performance of commercial banks listed on Karachi Stock Exchange (KSE). The data relates to September 11, 2008 and have been taken from Daily Quotations Sheet of the Karachi Stock Exchange (Guarantee) Ltd.

EFFICIENCY TEST MODEL

The following nine points have been used to test the performance of listed Commercial Banks in Pakistan:

1. Market Share
2. Paid up Capital
3. Par Value
4. Historical Growth
5. Turnover
6. Market Capitalization
7. Share in GDP of Pakistan
8. Market Price Compared to Par Value
9. Distribution as Return

1. MARKET SHARE

Total number of companies listed on KSE was 657 against 25 number of commercial banks listed on KSE. This represents only 4%. If commercial banks are to be popularized as one of important Instrument of Finance, it is advisable to increase its share through strategic move by stakeholders.

2. PAID UP CAPITAL

Listed paid up capital of KSE was Rs. 719 billion. Out of this, a sum of Rs. 211 billion related to listed commercial banks. Based on this, its share in the KSE total paid up capital was 29%. Concerted efforts are needed to increase paid up capital by establishing more and more listed commercial banks in Pakistan.

3. PAR VALUE

Par value of each listed Commercial Bank was Rs. 10. This, in today's time, is too small. In future, par value may be raised to at least Rs. 100 per share.

4. HISTORICAL GROWTH

The following box captures the position relating to historical growth of listed commercial banks in Pakistan:

BOX NO. 1

HISTORICAL GROWTH OF LISTED COMMERCIAL BANKS ON KSE
YEAR NUMBER %
1991-1995 11 44
1996-2000 01 04
Total 12 48
2001-2008 13 52
Total 25 100

From the above box, it would appear that the development of listed commercial bank has been very slow-around 1.47% Commercial Bank per annum.

5. TURNOVER

During January-August, 2008 (8 months) KSE had a total turnover of Rs. 31 billion. Against this, share of listed commercial banks was only Rs. 7.8 billion. This represents 25.2%. This shows high level of activity.

6. MARKET CAPITALIZATION

KSE market capitalization was Rs. 2,894 billion. Against this, total market capitalization of commercial banks was Rs. 766 billion-representing a share of 27%. This represents a good number.

7. SHARE IN GDP

Total GDP of Pakistan was US $ 160 billion. Share of KSE listed companies was $ 38 billion and the share of listed commercial banks was 6.3% only.

8. MARKET PRICE COMPARED TO PAR VALUE

One of the Acid Test for checking the financial health of a company is to compare the par value with the ruling market price. Based on this, 93% listed commercial banks were above their par value. Accordingly, this represents healthy position which needs to be developed on sustainable basis in future also. Only 8% commercial banks were quoted below par.

9. DISTRIBUTION AS RETURN

Distribution to shareholders is another important indicator. Based on our analysis, Box No. 2 presents the position:

BOX NO. 2
ANALYSIS OF DISTRIBUTION AS RETURN
PARTICULARS 2008 %
No Distribution as Dividend 21 91
Distribution as Dividend 02 09
Total 23 100

Four listed commercial banks declared bonus shares. Five announced right shares to existing shareholders.

All commercial banks were not in a position for full distribution as 91% of these did not announce any dividend to the shareholders.

CONCLUSIONS & SUGGESTIONS

Based on foregoing analysis, the following conclusions emerge alongwith suggestions for consideration by stakeholders:

1. A Policy Statement is needed whether we wish to promote listed commercial banks as financial instrument or not. If the answer is in the positive, then, under the Bankers Association of Pakistan, a workshop is suggested to be held to help develop a strategy to introduce more listed commercial banks.

2. Sickness in 8% of existing listed commercial banks be diagnosed and corrective action be initiated to turn sick listed commercial banks into healthy ones.

3. Some suggestions have been offered during the review of the performance of listed commercial banks in this article. These may be considered by stakeholders.