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Financial Performance of Pakistani Banks after the Implementation of Reforms: A Post-Global-Crisis Study

Pakistani banking industry has been facing a series of successes and failures after the implementation of reforms. The financial institutions of the developing countries such as Pakistan have suffered after the onset of global financial crisis from 2009-2016. Whilst studies have been performed in many other countries to assess banking sector’s performance after the crisis, limited efforts exist in the context of Pakistani banking industry, particularly in relation to stock price changes and credit risk. This work is therefore, aimed to fill this gap by studying the effects of financial reforms implemented in early stages of recession on the efficiency of Pakistani banks in the past eight years. Measures of profitability, liquidity, capital and credit quality performance using five financial ratios; Return on Assets (ROA), Cost/Income ratio (C/I), Loan Loss Reserves/Gross Loans ratio (LLR/GL), Total Loans/Total Assets ratio (TL/TA) and Capital Adequacy Ratio (CAR), and their impact on stock price changes of the five banks are used to characterise the performance of the banks in the period of 2009-2016. The data is organized using panel data technique and multiple regression is adopted for the analysis. The results indicate a significant change in banks’ performance after the global financial crisis, having the highest impact in 2011 with declining profitability and poor credit performance. Later years have seen stabilized banking conditions with increased profitability and control on Non-Performing Loans by reducing provisions of risky loans. The stock price changes have revealed a positive relationship with ROA and least positive relationship with CAR, whereas a negative relationship has been found with LLR/GL and TL/TA. Moreover, it is observed that the market considers ROA and C/I in decision making as the results have shown a highly positive correlation of these ratios with stock prices. It also depicts that investors show no particular interest in credit risk and have focused on profitability of the banks instead. This suggests that the regulators in the country should revisit their priorities to come at par with investors and market interests by reducing their focus on decreasing the credit risk.