Pakistan arguably had its toughest year in 2023 in terms of macroeconomic situation. The country’s largest commercial bank, HBL had its best year in terms of profits. Some would say HBL’s (and the banking sector’s generally) record profitability is ‘despite’ the challenging macroeconomic conditions. There are others who say the record profits are ‘because of’.
Be that as it may, HBL and the shareholders are not complaining, as HBL announced a final cash dividend of Rs4/share. The after-tax profits grew a handsome 68 percent year-on-year to an all-time high of Rs58 billion. The playbook for banks has been rather straightforward, more so for bigger banks, and there is no bigger than HBL.
The balance sheet grew 19 percent over December 2022, to a colossal Rs5.5 trillion. On the asset front, total advances grew marginally at 4 percent over December 2022 or Rs79 billion to Rs1.9 trillion. Recall that private sector advances have taken a big hit in the last 12 months – as high interest rates headlined much of the year.
The government’s unsatiated appetite for borrowing meant the investments, on the other hand, continued to grow appreciably –up 31 percent year-on-year to Rs2.6 trillion. The Investment-to-Deposit Ratio inched over 60 percent, whereas the ADR once again dipped to 45 percent. The net interest income was up 46 percent year-on-year, driven by both volumetric asset expansion and interest rate rise – leading to over 150 basis points increase in net interest margin.
On the liabilities front, the deposit base crossed Rs4 trillion – well over any other bank – having grown 19 percent over December 2022. Average deposit growth was Rs350 billion – mostly concentrated around low-cost deposits. Unlike many in the industry, HBL’s current account did not grow from last year – as the fastest growth was witnessed in saving deposits at 33 percent year-on-year. Fixed deposits also grew 32 percent year-on-year – which is a rare sight for most banks. The CASA ratio stood largely unchanged from a year ago from last year at around 80 percent.
Non markup income once again grew well into double digits led by an impressive 34 percent year-on-year growth in fee income. The card business was the largest contributor to fee and commission income, followed by trade commission and merchant discount fees. Administrative expenses soared 36 percent year-on-year, a little higher than average annual inflation. The biggest increase was recorded in legal and documentation expenses. The cost to income ratio reduced slightly to a little under 57 percent – though still higher than a number of peer banks. The infection ratio has stayed in single digits and adequately provided for, but there is a visible and expected increase in NPLs across the industry.
Going forward, the interest rate cycle is expected to start reversing by 2HCY24. If that spurs credit demand is too early to call – but a robust increase in private sector credit, where the economy is still not completely out of the woods, looks highly unlikely. What is almost a given at any point is the government’s appetite for more commercial borrowing – and banks – big or small – don’t mind that one bit.