Bank: Habib Bank Ltd - Analysis of Financial Statements Financial Year 2005 - FY 2009

Tuesday, 24 August 2010 10:54

OVERVIEW : HBL was the first commercial bank established in Pakistan in 1947. Over the
years, the bank has expanded its branch network and has become the largest private retail
bank in terms of branches and deposits. Its customer base currently exceeds five million.

{loadposition content_adsense300}HBL also has a presence in 25 countries with subsidiaries in

Hong Kong and the UK and affiliates in Nepal and Nigeria. HBL s major areas of operations
encompass product offerings and services in retail banking and, recently, consumer banking as
well. HBL has the largest corporate banking portfolio in the country with a dynamic investment
banking side. SME and agriculture lending programmes and banking services are offered in
both urban and rural centers.

HBL is expanding its presence in international markets such as the UK, UAE, South Asia and
the Gulf where a huge South Asian Diaspora is present. HBL has also reached in
Africa
and
Central Asia
through its shareholdings in regional banks such as Diamond Trust Bank,
Kenya
and Kyrgyz Investment and Credit Bank in
Kyrgyz
Republic
.

Habib Bank also received three Global Finance Awards in Istanbul at the World Bank Annual
Meetings 2009, namely Best Bank -
Pakistan
, Best Trade Finance Provider -
Pakistan
and Best Foreign Exchange Provider -
Pakistan
. Along with these international recognitions HBL was also rated as the Top Banking Brand in
Pakistan
by The Banker, the world s premier banking and finance magazine.

BANKING INDUSTRY IN FY09

The banking industry was faced with a rather challenging year in 2009. With the repercussions
of the financial global crisis still clutching world economies, Pakistan was fighting domestic
economic hurdles, which included but not limited to the slowdown of exports, rising security
concerns, inflation and energy crisis gripping the country and a GDP achieved of only 2.5%.

The domestic remained largely immune to the financial stress faced by developed nations; this
was mostly attributed to the fact that our markets don t have significant international exposure.
Our financial markets also don t have innovative and complex derivative products, which

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Bank: Habib Bank Ltd - Analysis of Financial Statements Financial Year 2005 - FY 2009
Tuesday, 24 August 2010 10:54

inadvertently have become one of the many reasons why our situation is a lot better than theirs.

However, the financial markets in Pakistan faced various episodes of liquidity stress during FY
09 as the year kicked started with the build-up of liquidity pressure in the money market that
peaked during October-November 2009. The overall liquidity profile of the banking system was
strained due to high public sector demand for bank credit and pick up in credit to private sector.
The SBP continuously tried to offset the situation by injecting funds into the market through
discounting and open-market-operations OMOs to keep the market liquid. In comparison, OMO
average outstanding balance was Rs 76.2 billion in FY09 as opposed to Rs 23.6 billion in the
last quarter.

Due to inflationary pressure spinning off from rising international commodities, SBP continued
with its monetary tightening stance during the first two quarters of FY09. With the subsequent
decline in prices, inflationary pressures eased off which lead to a decline in CPI post March FY
09 to which SBP acted by lowering its discount rate by 100 BPS in April FY09. CRR and SLR
requirements, which were increased in May FY08, were reduced during the first half of FY09 to
alleviate temporary liquidity strains, which the financial market was facing come
October-November 2009.

INVESTMENTS

Overall banking investments for December 2009 were Rs 1,753 billion, a 62% jump from CY08
where net investments of the banking system were Rs 1,080 billion. The total asset mix of the
banks continued to invest heavily in government papers and bonds in public sector enterprise.
The increase has accounted for more than one third of the overall growth in the banking
systems asset base. Major increase upon break up of government papers was seen in
short-term market treasury bills and long-term Pakistan Investment Bonds. DEPOSITSDeposits
showed some robust growth, CY08 registered deposits of the banking industry at Rs 4,217
billion whereas in December 2009 deposits were at Rs 4,787 billion. The deposit base of the
system posted a 6.8% growth for the quarter but a 13.5% Y-o-Y increase.

ADVANCES Advances, being the key component in the asset mix have shown considerable
change in the past year. The private sectors low demand for bank credit has only concretized
banks risk aversion due to heightened credit risk prevailing in the market over the years. With
this in mind, the public sector has emerged as a leading consumer of bank credit, most of which
is tunneled in the form of government papers for budgetary support and public sector enterprise
which are facing increasing financial constraints due to inter-corporate receivable and
commodity operations.

On a larger scale, the asset base is now shifting to investments from advances, while the
internal composition of advances is moving from private sector to public and from small and
medium enterprises to corporate segment. The end-use analysis of advances has shown
increase in all end uses such as; fixed investments, trade finance, working capital and staff
loans except the consumer finance segment, which has actually lost 19% from being Rs 332.2
billion in December 2008 to Rs 268.6 billion in December 2009.

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Bank: Habib Bank Ltd - Analysis of Financial Statements Financial Year 2005 - FY 2009
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Table 2.4: End-use of Advances (domestic operations)

======================================================================

            (amount in billion Rupees, share n in percent)

======================================================================

               Dec-08     Sep-09      Dec-09

----------------------------------------------------------------------

            Amount Share  Amount Share  Amount  Share

======================================================================

Fixed Investment     738.1  23.1  828.2  26.0  836.0  25.0

Corporate Sector     694.2  21.7  788.5  24.8  795.2  23.8

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SMEs           43.9  1.4   39.7  1.2   49.7   1.2

Trade Finance      480.6  15.1  474.9  14.9  517.0  15.5

Corporate Sector     438.3  13.7  436.5  13.7  473,0  14.2

SMEs           42.3  1.3   38.4  1.2   44.0   1.3

Working Capital    1,562.9  49.0 1,523.0  47.8 1,635.4  49.0

Corporate Sector     883.3  27.7  729.0  22.9  797.3   239

SMEs           288.8  9.0  240.8  7.6  263.0   7.9

Agriculture       165.5  4.9  154.3  4.8  156.5   4.7

Commodity Financing   235.4  7.4  398.8  12.5  418.5  12.5

Consumer Finance     332.2  10.4  280.1  8.8  268.6   8.0

Credit Cards       40.7  1.3   34.2  1.1   31.2   0.9

Auto Loans        95.3  3.0   72.5  2.3   66.3   2.0

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Bank: Habib Bank Ltd - Analysis of Financial Statements Financial Year 2005 - FY 2009
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Consumer Durable      0.3  0.0   0.2  0.01    02  0.00

Mortgage Loan       66.9  2.1   62.2  2.0   61.5   1.8

Other personal Loans   128.8  4.0  111.0  3.5  109.5   3.3

Staff Loans        64.5  2.0   71.9  2.3   73.9   2.2

Housing Finance      46.7  1.5   53.2  1.7   55.0   1.6

Others          17.8  0.6   18.6  0.5   18.9   0.6

Others          13.5  0.4   7.6  0.2   8.2   0.2

Total         3,191.8  100  3,186  100  3,339   100

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* Agriculture and commodity finance are added in the category for

 analysis in this section only.

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Bank: Habib Bank Ltd - Analysis of Financial Statements Financial Year 2005 - FY 2009
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Source: SBP review

PROFITABILITY

Compared to last year, the profitability of the banking system improved especially due to high
net interest and non-interest income. Albeit due to ever increasing administrative costs and high
provisioning, growth was compromised. As compared to CY08 where profits after taxes were Rs
43.3 billion, December 2009 profits after tax for the system were at Rs 54.2 billion, a 25%
increase. Upon further breakdown, the system saw the share in income from investments in
total interest income growing by 170 bps. This shows that banks are increasing their inclination
towards lending to the government, as it bodes favourable with the current situation in hand.
Investments in December 2008 were at Rs 92.7 billion whereas in December 2009 they are at
Rs 148.4 billion.

RECENT PERFORMANCE

For 2009, Habib Bank Limited posted profit after tax of Rs 13.4 billion, a 23% increase from
2008 PAT which was Rs 10.86 billion. Although before tax profit witness a 26.3% increase over
the preceding year which was achieved via aggressively controlling cost of funds and
implementing effective operating cost management. The group s net worth also grew by 27.2%
to Rs 84 billion, which was Rs 66 billion in 2008. Overall deposits showed an increase of 14%
from being Rs 597 billion in 2008 to Rs 683 billion in 2009.

Although much acute measures were taken to alleviate losses and costs, the result of all the
efficiency yielded a market share of 13.44% as opposed to 13.35% in 2008.

HBL s interest earned for 2009 was 20% greater than that of 2008 and interest expensed was
26% greater. However, the net interest income for the year ended being Rs 42. 6 billion, a 16%
increase from Rs 36 billion in 2008.

HBL s interest income after provision was Rs 33.5 billion, 22% higher than 2008. What was
interesting to note was that total provision for the year 2009 was actually 1% less than 2008.
Only provision against non-performing loans and advances saw a 22% increase whereas
provision against diminution in the value of investments exponentially dropped 87 percent,
helping interest income grow substantially. Non-interest income did not see any skyrocketing
changes, a mere 1% decrease was witnessed resulting in total interest/non-interest income
growth of 15%, Rs 44.7 billion (2009). Interest expense on the other hand grew by 6% to Rs
23.3 billion leaving Profit before Tax at Rs 21.3 billion, a 26.3% increase from 2008.

ANALYSIS OF FINANCIAL PERFORMANCE

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Bank: Habib Bank Ltd - Analysis of Financial Statements Financial Year 2005 - FY 2009
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The earnings profile vis-à-vis ROA, ROD and ROE give us historical insight into HBL s
profitability. ROE has been declining since 2005 and has shown little improvement from 2008
onwards. Nevertheless, in FY09 the interest earnings of the bank have been increasing
throughout the years and so have been its mark-up interest expenses. Interestingly, the
mark-up interest expenses of the bank have been quite less as compared to its interest
earnings, thus accentuating its net interest earnings.

The main contribution to the profit of the bank comes from its net interest earnings although the
non-interest earnings are also quite a significant contributor. Of these, the fee, commission and
brokerage income takes the highest share with 47% and other income, which constitutes to
30% of total non-markup/interest income.

The NPLs of the bank have been declining till FY07; a significant surge was seen in mid FY08.
The bank has been stringent in its policies indicating that it s protecting itself from exposures to
poor customer. 2009 has been the year with highest NPLs for the bank. However, HBL is not
alone in this matter, as the whole banking system is trying to oust NPLs as an industry; players
are heavily investing out of consumer finance and are diverting their attention to government
bonds, public sector enterprises and corporate finance to move forward.

The above graphs compare two types of advances in 2008 and 2009. The composition of
short-term advances has decreased whereas that of the long-term advances has increased. A
decrease in short term advances indicates the bank s aversion from quick money recovery and
on-the-spot lending as the operating environment does not bode favorable with NPLs rising and
instability peaking. Taking a more long-term approach for the time being is indicating that the
bank foresees visible benefit in locking their money with solid and stable clientele as opposed to
deteriorating and cash dry companies. The conservative approach the bank is taking might
benefit them in the long-run when matters in the country at hand seem very dim and lackluster
for spiraling economic activity.

The liquidity profile of the company shows good signs as most of the ratios have been
increasing. The earning assets (advances, lendings to financial institutions and investments) of
the bank have been within a safe range over the years. In FY09 the lendings to financial
institutions of the bank have been decreasing whereas the investments have witnessed a major
increase that has led to an overall increase in the earning assets of the bank. Moreover, the
investments have been made mostly in the government securities. Keeping in mind the current
downward trend of the stock market, investment in the government securities would protect the
bank from the fluctuations being experienced by the stocks.

As can be seen, the cost of funding the earning assets is much below that of the yield on the
earning assets, leaving a large net interest margin for the bank. However, as evident, the cost of
fund is rising and must be checked before net interest margin begins to slim down in times
where liquidity is of great concern. The advances to deposits have also dropped from 0.76 to
0.67 in 2009 as the bank tries to take a strong hold on whom and where they are disbursing the
money.

The Earning Assets Composition further highlights the fact the HBL has significantly cut down

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Bank: Habib Bank Ltd - Analysis of Financial Statements Financial Year 2005 - FY 2009
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on their advances and have allocated more towards investments. As mentioned earlier, the
industry and HBL on the whole are heavily investing in government bonds and Public Sector
Enterprises where cash stripped companies are in dire need of money to settle inter-corporate
debt.

This year the bank gave 20% bonus issue (20 shares for every 100 shares owned) thus
increasing the total number of issued shares to 9,108,000. The debt management of the bank
indicates a shift to equity. Therefore we see a constant decline in debt to assets ratio over the
years. Hence, a shift to equity from debt is evident. A systematic trend can be seen as HBL
continues to alleviate their debt to equity ratio. In 2005, the bank had Debt-Equity of 11.84%
whereas now it stands at 9.24%. Debt to assets ratio has also declined since 2006 and been
maintained at 0.90% showing a continuous effort to release leverage and strengthen the system
with equity.

========================================================================
========

Customers                2008     2009   Growth % of total

                               since 2008 deposits

                                      (2009)

========================================================================
=========

Fixed deposits            186,206,978 208,459,070   12%     31%

Savings               271,240,066 314,040,743   16%     46%

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Current Account Remunerative      2,739,417  1,811,833  -34%    0.3%

Current Account Non-Remunerative   130,326,871 149,221,644   14%     22%

Fin.Inst - Remunerative deposits    2,368,970  1,616,443  -32%    0.2%

Fin Inst - Non-Remunerative deposits  4,208,243  7,600,346   81%     1%

                   597,090,545 682,750,079   14%

The deposits form an important form of funds for the banks which later pass on to other
consumers in the form of advances and investments. The deposit policies used to be
monopolized for last few years where depositors were never protected against increases in
inflation or any given any other benefit accruing from competition.

It was due to State Bank of Pakistan s stance that confirmed a minimum of 5% of returns on all
types of deposits. This move was important as competing forms of deposits like National
Savings Schemes were offering better rates and they did drain huge chunks from banks. In
FY09 the deposits of HBL grew by 14%. This year it s apparent that fixed deposits (12% growth)
were on the lead after savings growth of 16% over previous year.

The solvency profile of the bank shows a historical understanding once again, although the
ratios were all at a steady rise until 2007, mid 2008 has not been favorable. The earning assets
to deposits ratio is has taken a slight plunge from being 1.01% in 2008 to being 0.99% in 2009
which means that the earning potential and revenue generation of the bank have thinned.
Equity to assets have maintained their levels at 0.10 and equity to deposits too has dipped from
0.13% to 0.12% in 2009.

FUTURE OUTLOOK

The global financial crisis has its effects trickling down to our banking systems. The financial
sector is facing its lows but still on a comparative basis its better than other neighbouring
countries owing to regulations and the role of SBP to take timely corrective measures.
Measures include relaxation of CRR and SLR in phases. The profits show that long-term
investment in Pakistani banking system will be lucrative as the assets quality is quite
satisfactory.

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Bank: Habib Bank Ltd - Analysis of Financial Statements Financial Year 2005 - FY 2009
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As against the worldwide trend of low interest rates even zero-rated, Pakistan continued to
follow stance of tightening of the monetary policy using the high interest rate as a tool to contain
inflationary pressures at the cost of stalled economic activities. It can be noted that SBP already
charging lower mark-up rate from exporters against export refinance facility under EFS in order
to enable them to become competitive in the international market. The trade and industry
however feels in order to ignite a spark in the dull and dreary economic conditions and to come
out of the persisting recession the incentive of low interest should have been given to all
stakeholders across the board to achieve the desired results.

Challenges faced by the economy, in general, and banking sector, in specific, include
restrained liquidity, slow down of economic activity, and high inflation. Despite of these issues
HBL has been able to maintain its profitability and its only concern as of now is the high NPLs
growth, which has to be checked as it has surpassed to alarming levels. Besides this, the bank
is equipped to face challenges with its dynamic management and trained workforce.

COURTESY: Economics and Finance Department, Institute of Business Administration, Karac

hi ,
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].

Courtesy: Business Recorder

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