Bank Al-Habib Limited

Brief Introduction: Bank Al Habib operates under the umbrella of Dawood Habib Group, one of the renowned and trusted names in the banking industry. The rich history of the group dates back to 1920. Besides BAHL, the group has Habib Insurance Company, Habib Sugar mills, Habib Asset Management Limited and Al Habib Capital Markets Limited to its credit.
BAHL was incorporated as a Public Limited Company in October 1991 and began banking operations in 1992. In a short span of time, the bank is able to grow its assets to Rs 350 billion, with an extensive network of over 388 branches and sub-branches, across the country. Besides, the bank also has a wholesale branch in the Kingdom of Bahrain, and representative offices in Dubai and Istanbul. Having its roots in corporate banking, SME banking, Islamic banking, trade services, cash management services, the bank has a wide array of customers.
INDUSTRY REVIEW Undoubtedly, Pakistan's banking industry has shown a great degree of resilience over the period. It surprised the world by remaining largely intact when the rest of the world was badly hit by the financial meltdown in 2008. However, amid interest rates riding a downward journey for over 20 months, minting money is no longer an easier task for the Pakistan banking sector.
Declining interest rates are clearly mirrored by a sharp industry-wise drop in the top line revenues. This coupled with an increase of 100 bps in the minimum rate on saving deposits in 2012 further tightened the noose around banks' bottom lines by squeezing their spreads.
Another shock came to the banking sector in the form of recent SBP instruction to pay at least the minimum rate on average monthly balance instead of minimum balance of saving deposits. Owing to low credit appetite from the private sector and also to dispose of its toxic assets, banks are increasingly parking their funds in the government securities instead of performing their inherent duty of mobilising funds in the private sector.
However, in the wake of dropping interest rates and shrinking spreads, it is quite difficult for the banks to sustain their bottom lines. Cost cutting seems to be a strategy of time. Thus, banks are increasingly focusing on garnering low-cost deposits, streamline their administrative costs and diversify their earning avenues.
FINANCIAL PERFORMANCE, 1QCY13 In tandem with its peers, BAHL too, couldn't win laurels in the first quarter of the ongoing year. With an increased exposure in low yielding government securities amid down ticking discount rates, top line couldn't help but sustained a slide of eight percent year-on-year.
However, the bank's ability to garner low cost deposits provided it a much needed respite. During the period, low cost deposits witnessed a massive jump (see CASA ratio). Resultantly, the bank could cut its mark-up expenses and keep its gross spread ratio intact.
Besides, non-mark-up income specially fee, commission and brokerage income and gain on sales of securities lent its hand in supporting the bottom line. Conversely, high non-mark-up expense owing to the opening of new branches during the period pushed the bottom line into negative zone. Despite growth in non-performing loans, fresh advances could keep a check on the infection ratio. Besides, amid bank's sufficient provisioning, NPLs uptick doesn't seem alarming
RECAPPING PAST PERFORMANCE A review of BAHL's past performance shows a growing contrast in its earning assets. Unsurprisingly, over the years, investments have witnessed new heights, evidenced by the bulging investment-to-deposit ratio (IDR) while advances-to-deposit ratio (ADR) has shrunk notably.
The top line is growing, however with a decelerating pace. The top line boasted a staggering growth of 33 percent year-on-year in CY11 which slumped to 14 percent in CY12 largely owing to difficult industry dynamics coupled with bulging exposure in low yielding government papers instead of risky private sector lending.
The bank is efficiently mustering deposits and more interestingly, the deposit growth is coming on the heels of low-cost deposits (see CASA ratio). However, amid low interest rates and shrinking spreads, the low-cost deposits couldn't provide much sustainability to the net interest margin (NIM). The weak NIM position is well evident by spread ratio dropping over the years.
Besides low interest rates and fragile spreads, another prime reason for the contraction in NIM is the growing mark-up expense. While mark-up expense on deposits is in check owing to sufficient share of low-cost deposits, expense on borrowings (SBP borrowing, REPO borrowings) is fanning the flames of the overall mark-up expense.
With non mark-up expense mounting over the years due to growing branch network, non-mark-up income has remained a lifeline for BAHL's bottom line. BAHL's cautious lending stance enabled it to cap its NPLs. Besides, the bank is in a comfortable provisioning position to cover the entire spectrum of the expected credit losses (see coverage ratio).
OUTLOOK With possible reversal in the policy rate during 2HFY13, banks' declining spreads will take a breather which will be a good omen for the banks' margins. However, SBP instruction to pay at least six percent rate on the average balance of saving deposits might act counter to it.
Industry insiders are of the opinion that the victory of PML-N which holds a pro-investment image, will bode well for the private sector businesses. This would in turn create numerous opportunities for the banking sector to lend to the private sector and shape their top line growth, hence shielding their bottom line from spread shrinkage.
Moreover, it is said that with the beginning of the new round of IMF programme, the prevalent opportunity of excessively lending to fill up government revenue gaps might fade, necessitating banks to expand its roots in private sector. How banks venture the risky avenue without affecting their NPLs would be the real challenge.

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BAHL - Key ratios

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Indicators        CY10    CY11    CY12   1QCY13

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Infection Ratio     2%      3%      3%       3%

Coverage Ratio    174%    160%    151%     152%

Spread Ratio       39%     38%     37%      36%

Capital Ratio       5%      5%      5%       5%

IDR                55%     74%     73%      74%

ADR                50%     38%     43%      41%

CASA               59%     58%     70%      73%

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Source: Company Accounts

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Bank Al Habib Limited

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Rs (mn)                              CY10     CY11     CY12   1QCY13

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Mark-up Earned                      27,481   36,529   41,474    9,684

Mark-up Expenses                    16,666   22,500   26,105    6,156

Net Mark-up Income                  10,814   14,029   15,369    3,528

Provisioning / (Reveral)              946    1,821      466     -162

Net Mark-up Income after provision   9,868   12,209   14,903    3,366

Non Mark-up / Interest Income       2,188    2,735    3,059      815

Operating Revenues                 12,055   14,943   17,962    4,180

Non Mark-up / Interest Expenses     6,331    7,784    9,033    2,417

Profit Before Taxation              5,724    7,159    8,929    1,763

Taxation                            2,056    2,622    3,419      604

Profit After Taxation               3,668    4,537    5,511    1,159

EPS (Rs)                             4.17     4.49     5.46     1.15

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