It seems that the fortunes of the banking sector have a blip in an otherwise rising interest rate economy. And the market leader has borne the biggest brunt of the change in winds, as HBL’s profit after tax has declined by almost half during 1HCY18.

Net mark-up income showed overall stability as interest earned on advances grew by 4.5 percent; however, mark-up expensed shot by 14 percent during the same period, leading to a slight but consequential decline in NII of 2.7 percent on year-on-year basis. The times ahead are good; rising interest rates will boost mark-up income while the expense is largely sticky.

However, it is the non-fund-based income where the story takes a twist with a 35 percent decline. According to market analysts, NFI nosedived on the back of losses in foreign currency dealings worth Rs385 million during the second quarter because of Pak rupee depreciation. Note that as per the statement of financial position disclosed by the bank, investments declined by a mere 1.4 percent, which translates into Rs19.6 billion due to bank’s huge balance sheet.

Industry insiders note that currency depreciation also negatively impacted the foreign loan on bank’s books, which was taken last year for settlement payments to Federal Reserve. At the same time, non-interest expense increased by 27 percent on year-on-year basis, which further dented profitability. The currency is likely to remain stable in coming months; the volatility may stabilize latest by fourth quarter.

However, it’s not all bad news from Pakistan’s largest bank: closer analysis of notes to financial statements reveal that the bank continues to maintain a high share of low cost deposits thanks to its 1,500+ branch network of which major chunk continues to be of current account holders. While other domestic banks continue to aggressively expand their branch networks, HBL maintained its growth trajectory with an 8 percent increase in domestic deposits since December 2017. On the advances front, domestic advances also recorded a 13 percent up tick, reflected in higher mark-up earned as discussed above.

HBL’s fundamentals continue to remain strong due to a stable NPL portfolio and a high asset-to-deposit ratio. Furthermore, despite a challenging environment faced last year vis US Fed, the bank has held its head high by ensuring that capital ratio remains above minimum requirements.

In a fast-evolving industry dynamic, HBL continues to remain at the forefront of innovation. Insiders reveal that HBL’s digital platforms continue to receive high customer acceptability, with the quantum of digital transactions increasing three times since last year. As monetary policy continues to be tightened in upcoming periods, expect HBL to maximize income from non-traditional sources, such as initiatives for financial inclusion launched under the banner of HBL Konnect this year.