Low non-core revenues amid thin penetration in the lucrative consumer segment are key impediments to HBL's bright future. Being the largest bank, its earnings are withered by higher mix of current (22%) and saving (45%) deposit accounts amidst declining ADR and rising bad loans.
However, unlike peers, it managed to convert its incremental deposits (up 8%) into advances (10% growth in the second quarter) - pushing its bottom-line 3 percent higher in the first six months ending June.
The bank strengthened its market leadership in attracting deposits with market share rising by 29 basis points (bps) in the last three months to 15.6 percent by June. More to the bank's advantage, it even expanded its loan pie by 89 bps to 15.5 percent - increasing its ADR by 95 bps to 77 percent; contrary to the industry trend that slowed by 212 bps to 77 percent during the period. This trend will likely continue in future, as rehabilitation in northern areas, once smoothly complete, would give more impetus to its dominance given its strong presence in the region.
Broadly managed by the Agha Khan Trust, the management has been prudent; with 28 percent share in most infectious segments, textile and energy, HBL managed to lower its bad loans to gross loans ratio by 30 bps to 8.9 percent in the second quarter 2009. It also improved its coverage ratio by 3 percent to 74 percent which makes its NPLs/Gross advances ratio stagnant at 6.6 percent. Prudence is good, but at the end of day shareholders are interested in return on equity. HBL's ROE on annualised basis is a mere 16 percent on six-month numbers, whereas, rivals MCB and UBL yielded 24 and 18 percent returns for their shareholders respectively.
HBL has to catch up on the lucrative consumer segment and ought to concentrate more on non-traditional earning avenues. At present, HBL earns 18 percent of its operating revenue from non-mark up income, trailing second behind segment leader UBL, which makes 30 percent from non-core business.
The management, apparently, had this on their mind when they opted to acquire RBS operations before the deal closed in the favour of MCB. With RBS deal finalised, it's even more challenging for HBL executives to compete in a neighbourhood of high towered inhabitants.
Summarising January-June 09 results, HBL's top line earnings grew 26 percent to Rs15 billion. But extremely high provisioning against non-performing loans (NPLs) eroded most of the gains resulting in a 9 percent increase in net-mark-up income after provisioning.
Meanwhile, the lender's non-mark up income also stayed put - growing just 4 percent - owing to a decline in fees, commissions and securities market gains, as investment and trading activities remained thin during the period in tandem with slowdown in the economy.
Nonetheless, bank's operating revenues managed to exhibit nominal GDP growth - rising 21 percent in 1HCY09. And to the like of UBL, the lender's attention to rescue the bottom-line was focused on cost cutting that nearly halted its administrative expenses in the last quarter (up just 6%, YoY). HBL's admin expense increased just 15 percent during the six months period.
The bank is currently trading at a price-to-book multiple of 1.24 on the book value published in Jun'09 end; and by adjusting for all of its unprovided bad advances, it is trading at a P/B multiple 1.44x.
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HBL Profit and toss accounts
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Rs (mn) 2Q-09 2Q 08 Growth 1H 09 1H 08 Growth
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Mark-up earned 18,467 14,057 31% 36,705 27,566 33%
Mark-up expensed (8,046) (5,898) 36% (15,864) (11,044) 44%
Net mark-up Income 10,421 8,159 28% 20,841 16,522 26%
Provisioning (2,902) (871) 233% (4,174) (1,233) 239%
Net mark-up income
after provisions 7,519 7,288 3% 16,667 1 5,290 9%
Non-mark-up income 2,746 2,203 25% 4,695 4,525 4%
Operating revenues 13,168 10,362 27% 25,536 21,047 21%
Non-mark-up expenses (5,303) (4,989) 6% (10,943) (9,508) 15%
Profit before taxation 4,963 4,502 10% 10,420 10,306 1%
Profit after taxation 3,073 2,593 19% 6,554 6,357 3%
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EPS 3.37 2.72 7.20 6.98
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