Bank: BANK AL-HABIB LIMITED - Analysis of Financial Statements Financial Year 2004 - 3Q Financial Year 2010
Bank Al-Habib Limited provides various financial products and services in Pakistan. It offers consumer, commercial and Islamic banking services.
Its commercial banking services include current and deposit accounts for corporate and individual clients; foreign currency accounts; finance through loans and other credit facilities to the corporate, private, and public sectors; short-term finance of foreign trade through letters of credit and negotiation of bills of exchange; and issuance of guarantees, bid bonds, and performance bonds. The company's commercial banking services also include acceptance and placement of funds in the interbank market; purchase and sale of foreign currencies; trade information and research; remittances and transfer of funds; purchase and sale of government securities; Sui gas bills collection; and MCB rupee traveller cheque services.
The bank's consumer banking products and services comprise agricultural, auto, home, home buying, home construction, and home improvement loans. The company's Islamic banking products and services include various deposit schemes, such as current accounts, savings accounts, and term deposits; and Islamic finance and leasing services for individual/traders/industries. In addition, it offers investment products and services such as PLS savings accounts and monthly profit plans, term deposit accounts, AL Habib growth certificates and super savings accounts. Further, the bank offers online banking, safe deposit boxes, ATM cards, debit cards, telebanking, electronic funds transfer, remittances, life insurance, and cash management services.
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COMPANY SNAPSHOT
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Name of company Bank Al - Habib Limited
Nature of Business Banking
Ticker BAHL
Market Capitalization 21598847086
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During the year, the bank opened 30 branches, bringing the network to 255 branches which include six Islamic banking branches and one overseas branch in the Kingdom of Bahrain. As before, the bank will continue to expand its branch network in various parts of the country.
RECENT RESULTS (3Q10)
The performance of BAH on the Karachi Stock Exchange is summarised in the chart below.
OVERVIEW OF ECONOMIC CONDITIONS
The current fiscal year began with concerns over the large budgetary deficit (6.3% of GDP in June 2010), servicing of the IMF loan ($11.3 billion), escalating inflation (15.7% in September 2010) and domestic political issues. Current trends and expected developments indicate risks of inflation pressures continuing in FY11. These include further upward adjustments in the electricity prices, increase in general sales tax (GST) and revision in government employees' wages in the wake of high inflation.
The recent super flood not only claimed 1600 lives, but also posed serious economic challenges besides incurring of losses around 50 billion dollars. This caused budget deficit to shoot from an estimated 4% to 5.2% of the GDP. To meet the deficit, government increased its reliance on the SBP and borrowed Rs 220 billion (1st July-24th Sept).
This not only aggravated the expectations of rising inflation but kept an upward pressure on interest rates. The result is a crowding out of private sector credit and increased stress on debt sustainability, while the tax collection was short of Rs 53 billion. This has further worsened the situation, causing increased reliance on foreign borrowings to meet the rising expenditures. Meanwhile, widening of the current account deficit has increased as growth in imports seems to surpass exports, especially after the floods. Considering the challenges to the economic stability, the State Bank of Pakistan raised the policy rate consecutively by 50bps points in its two Monetary Policy announcements in July 2010 and September 2010.
RECENT PERFORMANCE OF THE BANKING INDUSTRY
Spreads earned by the banking sector on fresh deposits and advances extended in August have increased by 38 basis points (bps) on a month-on-month (MoM) basis to 6.09 per cent. Divergent movements in lending and deposits rates helped improve outstanding spreads by 5bps MoM and 24bps year-on-year during August 2010 to 7.56 per cent. Net retirement of investment worth Rs 70 billion during August led to a sharp decline in yields on earning assets. Weak credit growth has kept credit demand under pressure, taking a bite out of returns earned by banks.
Banking deposit rates also declined by a significant 50 basis points in August 2010 as against July 2010. The six-month Karachi Inter-Bank Offering Rate (KIBOR) has increased by 8 basis points since September 15 to 12.97 percent. The State Bank in September had raised the policy rate by 50 basis points to 13.5 percent. A similar rate increase is expected in the upcoming policy as efforts to curb inflation have so far failed to have the desired effect. It posted a profit of Rs 50 billion in the third quarter of 2010, 11% higher as compared to Rs 45 billion in the corresponding period last year. Firstly, banks' increasing preference for risk-free investments yields good returns. Secondly, compared to the third quarter last year, banking taxes were significantly lower.
RECENT PERFORMANCE (3Q10)
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Income Statement 3Q'10 3Q'09 %change
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Interest Earned 19910972 16132006 18.98
Interest Expensed 12138334 9430840 22.31
Net-mark-up/Interest Income 7772638 6701166 13.79
Total Non-mark-up/Interest Income 1560452 1559952 0.03
Total Non-mark-up/Interest Expenses 12138334 9430840 28.71
PBT 3828259 3256116 14.95
PAT (Reported) 2269597 2010440 11.42
EPS (basic/diluted) 3.09 2.74 11.33
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Balance Sheet 3Q'10 3Q'09 %change
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Lending to Financial instituitions 2706831 0 -
Investments 124998652 92936019 34.5
Advances 111719563 95504480 16.98
Deposits 231802337 175697095 31.93
Shareholders' Equity 7321643 6101370 20.00
NPLs 1685004 1163124 44.87
Ratios 3Q'10 3Q'09 %change
Provision to NPLs 0.693 1.0046 -30.97
Advances to Deposits 0.482 0.544 -11.33
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Bank Al-Habib posted profit before tax of Rs 3.83 billion, almost 15% higher than in the corresponding period last year. It reported profit after tax of Rs 2.27 billion in 3Q10 (3Q09: Rs 2.01 billion) with EPS of Rs 3.09. There was a significant rise in Net Interest Income by 18.98% reaching a level of Rs 19.9 billion in 3Q10 primarily due to increased investments in available for sale securities by as much as 60.4% and also due to high volume of deposits kept with financial institutions. Similarly, Interest Expensed too rose by 22.3% and was recorded at Rs 12.14 billion mostly due to the enhancement of deposits mix.
Income from fee, commission, brokerage and dividend resulted in a 3% YoY increase non-interest income to Rs 1.56 billion. This increase was negligible as compared to a 28.7 YoY increase in non-interest expenses recorded at Rs 12.14 billion in 3Q10 (3Q09: 9.43 billion). Administrative expense had increased by almost Rs 1 billion during 3Q09-3Q10.
NPLs increased by as much as 44.9% resulting in Rs 1.69 billon in 3Q10 (3Q09: Rs 1.16 billion). While provision coverage ratio declined by almost 31% which shows the greater risk taken by banks resulting in greater increase in provision as compared to that of NPLs.
As on the assets side, the distribution of earning assets has changed. Majority of the share in earning assets was held by investments in 3Q09 which further changed when advances took a lead as the major chunk of the earning assets in 3Q10. While, lending to financial institutions, which was nil in 3Q09, reached Rs 2.7 billion in 3Q10. Gross advances were Rs 114.8 billion as at 30th September 2010 as compared to Rs 97.8 billion on 30th September 2009. As compared to the end of FY09, advances had declined by 3.7%.
On liabilities side, deposits had a YoY 31.9% increase resulting in Rs 231 billion in 3Q10 (3Q09: Rs 175 billion). ADR on the other hand declined from 0.544 in 3Q09 to 0.48 in 3Q10. Equity of the bank continues to rise with State Bank's Minimum Capital Requirement deadline approaching registering a strong growth of 16.3% over September 30, 2009.
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BAHL Industry Averages
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2008 2009 2008 2009
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Profits After Tax 7.45% 20.69% -4.37% 26.07%
Advances 26.47% 5.76% 22.89% 4.75%
Deposits 25.71% 31.13% 12.98% 10.03%
Investments 35.97% 131.45% -8.69% 33.53%
Net Interest Income 32.54% 45.04% 15.98% 19.69%
Non Interest Income 12.56% -24.01% 75.05% 21.12%
Return on Assets -13.57% -9.96% -13.72% 4.02%
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As seen from the table, the growth rates for almost all of the components have been higher than their industry averages for FY08. Same trend was followed for most of the components in FY09.
FINANCIAL PERFORMANCE (FY04-09)
The profitability of BAHL has slightly declined over the current year FY09. Profit after tax increased to Rs 2,856 million as against Rs 2,425 million of last year, showing an increase of 21%. Assets, deposits and equity rose by 40.87%, 31.13% and 20.78% respectively. In FY09, the interest income was the major contributor to the profits and showed an increase of 45.04% while non interest income decreased by 24%. Net markup interest income has increased by 37.35%. Bank Al-Habib's return on assets is below the industry averages reflecting lower profitability as compared to industry.
Similarly, company's ROE has been way above the industry averages showing its leveraged position. This is clearly reflected in a very high deposit to equity multiple of 15.57 as compared to industry's 8.75 in FY09. The bank's performing advances were higher at this time. Although the yield on the earning assets grew, this was offset by a higher cost of funding. In spite of that and the decline in banking sector spread, the bank's profitability picture remained positive, indicating that the bank has prudent policies in place for handling its deposits, advances and investments.
The earning assets of the bank have been growing all throughout. Higher deposits are being streamed into greater advances, lending, and investments especially. Bank's investments constituted about 51% of earning assets in the FY09 as compared to 38% in the FY08. This is mainly due to significant investment made in different government securities and term finance certificates in FY09. Composition of the earning assets shows greater investments than advances which shows that the trend from FY08 has continued. This trend was a result of the higher NPLs to advances ratio and the worsening state of country's economy. Moreover, increasing investments in low-risk assets mean lower credit risk and better quality of assets.
The liquidity profile of the bank shows comforting trend. The liquidity position of the bank has improved in general over the period under study. Bank's earning assets to total assets have grown at more than industry averages. Similarly, bank's Advance to deposits ratio has been declining marginally in the period under review.
The ADR of the bank has shown a decline over this period because of heavy growth in bank's deposits, outpacing the otherwise moderate advances growth rate resulting from a relatively prudent loans portfolio in 2009.
The debt management of the bank shows a highly leveraged position as compared to industry averages. In FY08, the bank's debt to equity and debt to total assets ratio have declined but are still above the industry averages. This indicates that the bank is a highly leveraged institution with only a small portion of its assets constituting equity. Though the bank has made efforts to increase its equity to meet the SBP's minimum capital requirements, a large proportion of its assets remain debt financed. Such high debt levels may expose the bank to excessive credit, interest and other risks. Moreover, maintaining such high levels of deposits against equity is also exposed to the danger of the bank experiencing a run on its deposits. Increasing the equity portion of the assets would provide a cushion against all such risks.
The solvency ratios of the bank show somewhat similar trend. This trend may be attributed to the efforts of the bank in increasing its equity and it's earning assets. The equity to assets and equity to deposits profiles have remained rather constant over the last four years. Earning assets to deposits profile showed a decline in FY08 and an increase in FY09. The bank needs to further increase its equity base and investments in government securities and other sectors of the economy.
The non-performing loans of the bank have sharply increased from Rs 862.55 million to Rs 2,067.66 million in FY09. NPLs to advances have shown a declining trend after FY04. It then increased in FY09 more than the level of FY04. Bank's NPLs/advances ratio has been lower than the industry averages. Provisions to NPLs declined from 0.64 to 0.57 in FY09.
The bank paid dividend of Rs 2.00 per share in FY09 (FY08: Rs 1.25). The dividend cover has declined to 2.34 and dividend yield has increased to 6.11%. Generally, the investor expectations have improved since FY05.
FUTURE OUTLOOK
After the global financial crisis of 2008 which affected the domestic markets as well, the prospects of returning to normalcy have improved in recent months. Nevertheless, market conditions remain vulnerable. As before, the bank will continue to strive for growth and progress.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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