HBL needs to gear up advances

The notion that Pakistani commercial banks are not focusing on their core business is self evident from the performance of the biggest private lender in 2009.
Habib Bank Limited, owing to its strong presence across the country, managed to increase its deposits by 14.2 percent last year.
But its managers were unable to convert these deposits into lucrative assets, as the banks advances rose marginally by 1.4 percent. On top of it, HBLs gross infection ratio worsened by 123 basis points to 9.13 percent.
The bank was sailing smoothly in the first nine months by keeping the pace of its lending in tandem with its deposits growth. A massive fall in advances (Rs17 billion) in the last quarter, however, totally changed this picture - reducing its ADR to 70.9 percent, down 889 bps over last year.
Aggressive marketing campaign adopted during the period reaped fruits by reducing the ratio of time liabilities in total deposits by 26 bps to 29.2 percent.
Despite this, growth in mark-up expense (30%) outpaced that of mark-up earned (22%), on account of increased competition in fixed deposits and higher concentration of investments in government papers.
The banks cost of funds increased by 60 bps to 4.9 percent, which reduced the growth in net mark-up income to 17 percent in 2009.
Though, HBLs provisioning against non-performing loans jumped by almost a quarter, the 37 percent, year-on-year, reduction in impairment loss against investment to Rs 1.39 billion offset that impact. Core income net of provisions, consequently, improved by 22 percent in 2009.
The bank lost Rs 1.8 billion on its associate investment in the Nigerian lender, Platinum Habib Bank, based on its share price at the Nigerian bourse. Had it not been there, HBL might have actually booked a reversal of about Rs 500 million on its last years impairment.
In contrast, if PHBs stock price hits zero, HBL would have to provide another Rs800-900 million against it, keeping in mind that, HBL has already written down its PHB investment to zero in its consolidated accounts, with the impact recognized in 2007 and 2008.
Meanwhile, the banks non-core income eased by 4 percent due to a decline in trade activities amid banks failure to focus on investment banking and lower penetration in the consumer segment.
It is true that HBL ought to work on its ability to convert its deposits into lucrative assets and to create a niche in modern day banking for far more competitive days ahead.
But it is also true that its conventional styled banking along with its widespread presence helped the bank control its operating cost, as its non mark-up expenditure increased by just 8 percent last year.
This mitigated the impact of fall in other income; as a result, the lender posted a growth of 23 percent in net earnings. HBLs average return on equity improved by 75 bps to 17.1 percent last year.
In addition to the announcement of better-than-expected dividend of Rs6 per share, HBLs board has proposed a bonus issue of 10 percent, even though the bank is comfortably ahead of SBPs minimum capital requirement of Rs6 billion by 2009.
But then at HBL, it seems, prudence goes hand in hand with convention - as its capital adequacy ratio enhanced by 180 bps to 13.3 percent, which is much higher than the industrys average.
The bank perhaps wants to continue with its cautious strategy with no aggressive plans to capture consumer segment and it seems is in no mood to acquire any of those ailing small lenders.

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HBL PROFIT AND LOSS ACCOUNTS

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Rs (mn)                                2009      2008  Growth

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Mark-up earned                       74,751    61,158     22%

Mark-up expensed                    (33,089)  (25,524)    30%

Net mark-up Income                   41,663    35,634     17%

Provisioning                         (9,612)   (9,295)     3%

Net mark-up income after provisions  32,051    26,339     22%

Non-markup income                     9,943    10,337     -4%

Operating revenues                   51,605    45,971     12%

Non-markup expenses                 (22,508)  (20,820)     8%

Profit before taxation               19,486    15,855     23%

Profit after taxation                12,299    10,001     23%

EPS                                   13.50     10.98       -

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Source: Company Announcements

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