Bank: HABIB METROPOLITAN BANK LIMITED - Analysis of Financial Statements Financial Year 2003 - H 2001 2008
Metropolitan Bank Limited (now Habib Metropolitan Bank) was incorporated on August 3, 1992. From October 1992 to September 2006, it remained a high rated bank and with its nationwide 51-branch on-line network, established as a distinguished provider of trade finance services.
On October 26, 2006 Habib Bank AG Zurich's Pakistan operations merged into Metropolitan Bank Limited and the merged entity was named Habib Metropolitan Bank Limited (HMB). Demonstrating a strong commitment to Pakistan economy, HBZ is the principal shareholder of HMB.
The HBZ Group is heir to a rich tradition of banking and commerce dating back to more than 160 years. The group's flagship and HMB's principal shareholder, HBZ (incorporated in 1967) enjoys international ranking of 687 in terms of capital. With headquartered in Switzerland, the HBZ Group also operates in Hong Kong, Singapore, United Arab Emirates, Kenya, South Africa, United Kingdom and North America.
For the seventh consecutive year, the Pakistan Credit Rating Agency Limited (PACRA) has assigned AA+ (Double A Plus) for long-term and A1+ (A One Plus) for short term to the bank. The bank has a network of 100 branches, with 4 Islamic banking branches.
BANKING SECTOR'S PERFORMANCE
A slowdown witnessed in Pakistan's economy, which is affecting the financial markets, including the banking sector. Over the last couple of weeks, the banking sector has been facing severe liquidity crisis. A crisis of confidence has clouded the entire banking sector as banks have begun to ask their corporate clients not to avail their credit limits. Also, some cases were witnessed, in which some corporate clients doing arbitrage deals were being checked out by banks, wherein their clients have availed advances against the sanctioned limits and deposited the same at higher rates in liquidity squeezed banks willing to pay 16.5 to 17 percent or more for one month term.
The SBP initially injected more than Rs 31 billion through reduction of 100 basis points in Cash Reserve Requirement (CRR) in the system against a drop of Rs 179 billion in deposits since July. The sudden panic withdrawal by the customers had contributed to the crisis of confidence and it is estimated that the liquidity gap has widened to Rs 225 billion or even more. It is also witnessed that the response from the authorities was less than required and if not unattended, it will worsen further.
RECENT PERFORMANCE (H1'08)
The bank's performance has been good considering the tough macroeconomic conditions being faced by the country and banking sector in particular. Within these six months, the tight monetary policy was followed by the central bank to curtail the inflationary pressures facing the economy. Similarly, profit payment on savings accounts was floored at 5 percent on all balances thus increasing the cost of funding.
HMB recorded a growth of 42.9 percent in profit after tax in the first half of FY08 as compared to the same period last year (SPLY). This growth was actually supported by a 34.6 percent growth in interest income and 86.5 percent growth in non-interest income. PAT during the first half of FY08 stood at Rs 1,565 million as compared to Rs 1,170 million in the SPLY. As a result, earning per share rose to Rs 2.6 as against Rs 2.33 in the SPLY. Moreover, the income from dealing in foreign currencies recorded a growth rate of 103.6 percent in the H1FY08. Also, provision against non-performing loans and advances registered a growth of 111.6 percent in the period under review.
FINANCIAL PERFORMANCE (FY03-FY07)
In 2008, 16.3 percent growth in total assets was witnessed. The increase in the assets has been brought about mostly by an increase of 56.1 percent in investments, while the advances have grown at 7.8 percent. The increase in investments has been in the market Treasury Bills. The marginal increase in advances is the consequence of a deceleration in consumer as well as corporate credit, a trend exhibited by the whole sector. Elimination of Forced Sale Value (FSV) benefit has resulted in a higher provisioning against the NPLs and thus lowering of net advances figure. An industry-wise rise in NPLs has prompted the banks to be cautious in their lending and has made SBP more vigilant and stringent with its rules.
The deposits have shown an increase; interestingly the increase is broad-based. Fixed deposits, savings as well as current non-remunerative accounts have all shown considerable amounts of increase. On one hand, the non-remunerative deposits will help in depressing the cost of funds, while the increase in the fixed deposits will help the bank have more of loanable funds (CRR on more than 1 year deposits is zero). The bank is undergoing a consolidation process after its merger in 2006. The benefits from the merger are expected to accrue over the next couple of years or so. In line with the industry trend, the bank has been retaining its profits in the form of bonus share issue. Such measures will help the bank strengthen its position and maintain its MCR.
ROA of HMBL rose drastically in 2005 to 1.99 from 1.28 in 2004, after which it has been falling. In 2007, ROA fell to 1.74 as compared to 1.83 in FY06. This was due to the growth in profits of the bank (34%) lagged behind that of average assets (40%). As previously mentioned the asset growth in FY07 has been supported by significant growth rates witnessed in investments, operating fixed assets and advances.
Higher profits growth of 33.5 percent in FY07 can be attributed to a 29.6 percent growth in interest income. Though mark-up interest grew at 64.4 percent, an 87% expenses growth was seen, which is a concerning sign for the bank. Also, the NPLs provisionings of the bank have almost tripled in 2007 causing a decline in profits. The bank was acquired by the Habib Group at the end of 2006, which caused the assets to jump up as well as the costs.
ROD has had a similar growth trend. Deposits shot up in the year 2005 and continued to rise through 2007. There has been a significant rise in fixed and savings deposits of the bank. In the year 2006 alone, fixed deposits rose from Rs 20.5 billion to Rs 48.5 billion while savings deposits rose from Rs 13.5 billion to Rs 21.7 billion because of the merger. On the contrary, in 2007, fixed deposits increased to Rs 54.8 billion while savings deposits rose to Rs 28.3 billion. ROE had a sharp rise in 2005 because the bank's profitability rose substantially compared to the equity, but declined in 2006 and 2007. This was primarily because bank's equity grew at a greater pace that the profitability mainly because of bonus issue and increase in reserve money.
In particular NPLs shot up to from 0.443 million to 0.804 million, an increase of almost 100% in 2007. Consequently provisions (kept as a reserve account to cover unexpected defaults) also almost tripled. Among all the sectors, textile sector had the largest number of NPLs.
As indicated by increasing provisions to NPLs ratio the bank needs to curtail the amount of NPLs and also to increase provisions as to provide greater guard against defaults since interest rates would remain high because of the tight monetary policy stance of the SBP.
The debt as a proportion of assets of the bank has been consistent for the bank over the past 5 years. It has remained around the 92-93% mark. Debt to equity has had a slight declining trend mainly after the year 2005. This is fundamentally because of the reserves rise and also due to the issue of share capital and bonus shares issued by the bank in the last two years.
HMBL's advances have seen a rise of 91.7% only in the year 2006, which is an indicative of an aggressive lending policy of the bank. However, in the year 2007, advances grew at 7.8 percent and most of the asset growth was mainly supported by growth in investment. On the other hand deposits of the bank have also risen by 18.1% in the year 2007 which depicts successful schemes in attracting depositors. This has resulted in the slight improvement of the advance to deposits ratio. This is encouraging for the bank as it means increased capacity for the bank to lend more as well as keep provisions as to safeguard against loan defaults.
Equity to total assets is a common measure used to analyze capital adequacy of a bank. There was a dip in this ratio in the year 2004 but has risen since then. This dip was primarily because of the cash dividend given by the bank causing lesser profits retention and thus a lower equity. With share capital and bonus shares issue the bank's equity has risen over the years.
Because of an increase in the bank's equity, the ratio equity to deposits have had an increasing trend in the last few years, rising from 9.42 in 2004 to 10.91 in 2007. The bank's earning assets have been on the rise primarily because of increasing advances that form 56.4 percent of the total earning assets. This has particularly declined from 61.9% in 2006.
But alongside there has also been a growth in bank deposits resulting in a declining trend for EA to deposits. But from year 2006 has seen the ratio start to increase again as the bank's EA increase again indicating HMBL's strength to meet its debt obligations. In the year 2007, the earning assets were more than the deposits, with the bank making up for the shortfall by borrowing from the financial institutions. On one hand this depicts aggressive investment strategy of the bank, and on the other it highlights the need for the bank to raise more deposits.
Earning assets rose by 18% in 2006 to Rs 159.24 billion, but EA have formed a stable 90% part of the total assets of the bank. Since 2004 to 2007, there has been an increase from Rs 2.78 billion to Rs 11.98 billion in earnings from mark-up, returns and interest. The net interest margin of the bank has declined from 38% to 32% in line with the industry trend of slightly depressed margins. However, this decline has been more than made up by an increase in the non-interest income.
Both the market value/book value and price to earnings show positive trends over the last couple of years. Price to earning ratio in the year 2007 stood at 20.12 as compared to 17.37 in the year 2006. Similarly, market value to book value has grown positively from 1.89 in 2005 to 4.26 in 2007.
FUTURE OUTLOOK
Pakistan's banking sector has been facing liquidity crunch over the last couple of weeks. The liquidity gap has widened to Rs 225 billion or even more. If the corrective measures are not taken, the situation will worsen further and the liquidity gap is expected to cross Rs 300 billion mark.
Apart from this, budgetary borrowing of GoP from the banking system has already shown 98 percent growth in the first quarter of the FY09. Less revenue collection, pause in privatisation and slow foreign inflows are compelling the government to resort to more borrowing for budgetary support. However, as per SBP demands, the government will have to come up with a definite policy for retirement of the SBP's huge borrowing, as central bank has already asked the federal government to minimise borrowing from SBP.
SBP recently slashed CRR by 200 basis points and exempted the time deposits of one year tenor and above from SLR. The effect will release an aggregate liquidity of Rs 180 billion immediately into the system and will contribute significantly to alleviate the liquidity crunch being faced by the banking sector. Similarly, advances to deposit ratio, which has reached 80-95 percent, has been directed by the SBP to be maintained below 70 percent. This requirement has been given a deadline of March 31, 2009.
However, one thing to be realised is that, this is not a change in the monetary policy but, in fact, some temporary measures to avoid the liquidity problems being faced by the country. Also, there would be further 100 basis points decline in CRR by November 15 and it would be brought down to 5 percent. SBP has also involved in other similar measures like OMOs, allowing of HTM securities for discounting purposes, and an increase in the SLR eligibility limit of the PIBs from existing 5 percent to 10 percent of the TDL wef 18th October, 2008, to improve the liquidity position. It is, therefore, predicted that these steps would positively affect the sector's performance besides the tested fact that Pakistan's banking sector is resilient to many domestic and external shocks like recent financial crisis.
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HABIB METROPOLITAN BANK FINANCIALS
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BALANCE SHEET (PKR '000) 2003 2004 2005 2006 2007
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ASSETS
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Cash and balances with treasury banks 3,294,581 4,648,318 5,145,677 11,348,162 10,201,545
Balances with other banks 607,302 2,359,259 1,118,240 6,296,564 3,691,183
Lending to financial institutions 3,896,284 4,132,234 5,462,582 5,447,110 3,989,249
Investments 17,958,901 15,559,826 22,809,126 39,555,569 61,735,796
Advances 32,229,583 40,121,548 43,463,256 83,324,059 89,826,806
Other assets 652,327 699,665 1,248,095 2,047,809 2,127,936
Operating fixed assets 342,898 369,675 418,922 649,122 1,294,486
Total assets 58,981,876 67,890,525 79,665,898 148,668,395 172,867,001
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LIABILITIES
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Bills payable 939,780 1,203,214 1,046,050 1,619,796 3,210,041
Borrrowing from financial institutions 13,155,136 12,327,265 14,429,178 29,518,458 29,991,633
Deposits and other accounts 39,338,050 48,595,565 56,712,820 102,492,712 121,066,469
subject to finance lease
Other liabilities 983,666 965,049 1,333,691 3,992,514 5,019,792
Deferred Tax liabilities 757,883 535,636 484,994 176,803 60,874
55,174,515 63,626,729 74,006,733 137,800,283 159,348,809
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NET ASSETS 3,807,361 4,263,796 5,659,165 10,868,112 13,518,192
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REPRESENTED BY
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Share capital 1,000,000 1,200,000 1,560,000 3,005,000 5,018,350
Reserves 1,698,951 2,321,951 3,374,951 5,824,936 6,383,936
Unappropriated profit/accumulated loss 53,722 46,261 98,569 1,835,302 2,059,958
2,752,673 3,568,212 5,033,520 10,665,238 13,462,244
Surplus on revaluation of assets 1,054,688 695,584 625,645 202,874 55,948
3,807,361 4,263,796 5,659,165 10,868,112 13,518,192
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PROFIT AND LOSS (PKR '000) 2003 2004 2005 2006 2007
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MARKUP/INTEREST INCOME
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Markup/return/ interest earned 2,684,887 2,783,812 4,358,556 7,289,123 11,983,551
Markup/return/ interest expensed 1,312,054 1,260,702 2,224,648 4,416,477 8,259,184
Net markup/ interest income 1,372,833 1,523,110 2,133,908 2,872,646 3,724,367
Reversal/Provision against 134,687 84,192 51,088 108,092 434,740
non-performing loans & advances-net
off-balance sheet obligations
Provision for the diminution - - - - 7,344
in the value of investments
Bad debts written off 71 432 753 289 76
134,758 84,624 51,841 108,381 (442,160)
Net markup/interest income after provision 1,238,075 1,438,486 2,082,067 2,764,265 3,282,207
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NON MARKUP/NON INTEREST INCOME
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Fee commision and brokerage income 323,335 372,048 423,428 580,825 996,771
Income earned as trustee to various funds
Dividend income/Gain/Loss 29,003 5,490 33,231 41,524 33,211
Gain on sale/redemption of securities 198,083 822,388
Income from dealing with foreign currencies 144,723 279,363 330,604 673,263 1,153,820
Other income 153,811 97,765 139,503 234,936 169,516
Total non markup/non interest income 650,872 754,666 926,766 1,728,631 3,175,706
Revenue 3,335,759 3,538,478 5,285,322 9,017,754 15,159,257
1,888,947 2,193,152 3,008,833 4,492,896 6,457,913
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NON MARKUP/ INTEREST EXPENSE
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Administrative expenses 661,960 814,337 970,599 1,348,921 2,253,559
Other provisions -
Other Charges-net 3,068 894 6,505 1,177 456
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Total Non markup interest expense 665,028 815,231 977,104 1,350,098 2,254,015
665,028 815,231 977,104 1,350,098 2,254,015
PROFIT BEFORE TAXATION 1,223,919 1,377,921 2,031,729 3,142,798 4,203,898
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Taxation
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Current 548,000 478,000 621,000 1,040,000 1,279,000
Prior 1,552 (140,700) 33,448 174,000
Deferred (4,112) 84,382 86,121 (26,539) (46,108)
545,440 562,382 566,421 1,046,909 1,406,892
PROFIT AFTER TAXATION 678,479 815,539 1,465,308 2,095,889 2,797,006
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Ratios 2003 2004 2005 2006 2007
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Cost of Funds 2.98 2.22 3.37 4.35 5.84
Intermediation Cost 1.50 1.44 1.47 1.33 1.59
Net Profit Margin 1.54 1.44 2.22 2.06 1.98
Interest Margin 51.13 54.71 48.96 39.41 31.08
Net Interest margin 41.16 43.04 40.37 31.86 24.57
Non Interest Income Ratio 19.51 21.33 17.53 19.17 20.95
Capital Ratio 6.89 6.36 6.72 7.24 7.58
Capital to risk Asset Ratio 13.38 11.16 11.87 13.04 14.08
Interest Spread 0.03 0.03 0.03 0.03 0.02
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Liquidity Ratio
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Advances to Deposit 76.2% 82.3% 79.4% 79.6% 77.5%
Earning Assets to Assets 92.0% 92.1% 91.5% 90.9% 91.4%
Cost of funding Earning Assets 0.028 0.022 0.033 0.043 0.056
Yield on earning assets 0.058 0.048 0.065 0.070 0.082
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Solvency Ratio
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Equity to Assets 6.89 6.36 6.72 7.24 7.58
Equity to Deposits 10.19 9.18 9.42 10.38 10.91
Earning assets to Deposits 136.09 132.90 128.22 130.32 131.45
Equity to Liabilities 7.40 6.79 7.21 7.80 8.21
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Debt Management Ratio
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Debt to Equity (times) 13.52 14.72 13.87 12.82 12.19
Deposit time capital (times) 9.81 10.89 10.61 9.63 9.17
Debt to Assets(times) 0.93 0.94 0.93 0.93 0.92
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Cost to Income Ratio 19.84 23.01 18.36 14.96 14.87
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Earning Ratio
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Return on Assets 1.35 1.29 1.99 1.84 1.74
Return on Deposits 2.00 1.85 2.78 2.63 2.50
Return on Equity 19.63 20.21 29.53 25.36 22.94
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Asset Quality Ratios
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Non performing loans to advances 0.45 0.25 0.21 0.17 0.12
Provisions to non performing loans 1.16 0.94 0.58 1.00 4.28
Non performing loans 115,833 89,690 88,724 108,092 434,740
Provisions to average advanves 0.52 0.23 0.12 0.17 0.50
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Market Value Ratios
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Price to Earnings 5.32 9.31 7.29 17.37 20.12
MV/BV 0.95 1.78 1.89 3.88 4.26
EPS 5.65 5.23 9.39 4.03 4.03
Weighted no. of shares ('000) 120,085 155,935 156,050 520,072 694,046
Average market price* 30.04 48.70 68.41 70.00 74.65
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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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