HBL: top line grows, bottom line doesn’t

BR Research July 25, 2019

Having had a decent first quarter, HBL underwent some pressure in the 2QCY1, as a drastic reduction in contribution form non mark-up income and a double digit rise in administrative expenses – dragged the pretax profits down by 30 percent year-on-year. That said, the country’s largest commercial bank still boasts of a massive balance sheet, which seems to be steadily growing, more importantly, in the right direction.

The total advances at HBL grew by over 5 percent to Rs1.1 trillion, as HBL continues to lend smartly to the private sector, despite a visible slowdown in the economy. The top line grew at the back of both, volumetric rise in asset size, and significant increase in earning yields on assets. The bank’s ADR has remained north of 50 percent. Investment details are not known yet, but the industry trend suggests that the asset mix is now shifting towards more advances, and HBL would be no exception.

Despite a considerable rise in interest rates, the cost of deposits was still kept in check, clearly visible by improvement in net interest margins, as the bank’s deposit mix continues to grow in the right direction. HBL’s CASA was close to 85 percent by the end of 1QCY19, and of the deposit size of over Rs2 trillion, more than half the growth has come from current accounts. An improved CASA holds significant value, especially in times as testing as the current ones, where the pressure on noncore expenses and income has increased.

The fee and commission income remained strong even in the second quarter, but the other arms of non mark-up income let the bank down. Adverse impact of currency depreciation resulted in substantial losses in terms of foreign exchange to the tune of Rs2.39 billion in 2QCY19 alone. The underperforming stock market also meant losses over Rs1.1 billion were booked on account of sale of securities.

The operating expenses have also increased significantly ever since the New York episode, as the control and compliance costs have considerably increases, especially for the international business. The impact of currency devaluation was also significant on the international business. Some of the cost escalation can also be attributed to business growth and higher marketing spend.

The interest rates are believed to be close to the peak, which should at least give a sense of direction to the businesses. HBL would not mind lending in these times, but with an open eye on the NPLs, which, at the moment, are not a huge problem, as the balance sheet sits largely clean. The efforts to extract better yields from the noncore operations could prove to be vital in such times, and HBL does have the inherent strength to do that.

Copyright Business Recorder, 2019

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