Risk should be resided at branch level - Sirajuddin Aziz, CEO - Habib Metropolitan Bank

In this interview with BR Research, the seasoned banker talks about how HMB plans to strengthen its core operations of being a trade finance bank, yet tap its corporate clients for consumer banking. The bank is also eyeing to increase its footprint in Islamic banking market. Below are edited transcripts of that sit-down.
BR Research: How was CY14 for banks in Pakistan and for HMB in particular?
Sirajuddin Aziz: Despite its ups and downs, 2014 was a reasonably good year for us in particular. Habib Metro did well during the year. We have to consider the dynamics of the market place. For the past couple of years, there is a perception being created in the mindsets of people; some of it rightfully, some of it without much understanding of banking sector dynamics.
The perception is that banks have become fat cows and they are making a lot of money at the cost of depositors. This is not true in its entirety because each bank has got its own resources, so the spreads which people generally talk - of about 6 percent or 7 percent - is incorrect. The spreads are fairly low for mid-tier and smaller banks. The State Bank has rightly intervened, and set a minimum benchmark for paying profit on every deposit you have. This, I believe, was a fair deal.
Now what does the banking industry do? They are supposed to act as a financial intermediary by collecting deposits and giving it to those who use it for entrepreneurial purposes. Now entrepreneurs are not available for a host of reasons: the law and order is not very sound, there are concerns about availability of energy, of availability of opportunities. If entrepreneurs are not going to put their bit of money into anything, then obviously you will find bankers reluctant to put their deposits into such projects. So obviously if the government is the major borrower, who would not like to get a good borrower like the Government of Pakistan.
BRR: How is HMB dealing with the changing realities?
SA: I think right now what has happened is that we have made some strategic moves within the institution, while being a trade finance bank. We have enjoyed a lot of trade business, but with a very little concentration on balance sheet. So we moved away from that in a very significant way that we branched out from being a Karachi-centric bank.
What was happening that we always had one leg of a transaction in Karachi, be it exports or imports, and the second leg was in the North of Pakistan which was being ignored, and some other banks were taking that opportunity. So now having a presence there, we have added value for strategy of trade finance bank and then linking up with the collection of resources from smaller cities.
In 19 years, this bank had coverage of 21 cities. Today, we are operating in 70 cities, so we have really spread out.
BRR: Is it impacting your business?
SA: Yes it is, for better! We did substantial trade business last year, much ahead of any of the previous years. We are still in the process of re-profiling our own balance sheet, moving away from just time deposits. We have a good cluster of current account, savings accounts, and term accounts and our lending is at the finest of rates.
BRR: Will oil prices coming decline affect your trade finance business?
SA: Certainly, the quantum will definitely get affected. It will not have the same numbers as we had in 2014. Although, I don't see a reduction in the number of transactions but I certainly see a reduction in the value of transactions.
BRR: With the commodity business eating a bit of the chunk of your core business, what alternate avenues are you looking for?
SA: We have launched several other products like we are concentrating very heavily on our alternative delivery channels. We have significantly made some headway in web banking, telephonic banking, these developments were already implemented in 2014, and we are seeing some very quick results out there. This will only supplement but I would not say that we want to move away from our core strength, which is financing of foreign trade; it will only be in conjunction with it.
You will be amazed to see how creating awareness for simple products like bancassurance is something that opens up a lot of investors' understanding. This market needs to be tutored, be made aware and taught.
BRR: Trade finance is how much of the component?
SA: We have 90 percent of the trade assets in loan book, where size of the loan book is Rs 150 billion as of December 31, 2014
BRR: Is HMB focusing on lending and what will be the lending strategy going forward?
SA: If economic circumstances move in the right direction in the current scenario of low interest rates, that's where I think we, as an institution, are in a better position than others. We haven't lost the spirit of lending money and we did not move significantly in government securities. ADR is fairly low but still higher than a lot of banks.
The point is we have been lending continuously and in fact our loan book has gone up. We weren't relying only on the spread between government securities and the cost of deposits. We were also lending money on trade products. We did this while others moved away from the core business totally and concentrated only on collecting deposits while giving money to the government with no growth in their loan books.
And even in 2015 and 2016, I am not in any doubt about our lending objectives. We do consumer products only for our corporate clients and we will be very easily lending to them. I have the liquidity; I have the ADR and the capital adequacy to lend more on my existing loan book.
BRR: Why HMB focuses on corporate clients only when it comes to consumer products?
SA: As you would have seen, many banks have burnt their fingers in consumer finance and personally I have the experience of having run a very major book on car finance.
So documentation is very weak in the economy. However, things have improved now with NADRA and requirements of NIC and linkages available on system based mechanisms, things are better than one could think to move into consumer financing. But I don't think 2015-2016 is really the time when would venture out in this area.
But what we would like to venture out in a more pronounced manner will be the Islamic banking.
BRR: How would you like to venture out in Islamic banking?
SA: Well until a few years ago, we had just 2 branches doing Islamic banking. Today, we have about 10 dedicated Islamic branches all over Pakistan. We want to take that figure to 25 by the end of 2016.
We have seen some good results. It contributes nicely to the bottom line and also in terms of deposit growth. Shariah compliance, I think, is an area that needs attention. We have a Shariah advisor who is extremely stringent so it's not easy getting transactions or products passed. Some Islamic banks are following the Malaysian model of flexibility and interpretations so they are doing better. We are more conservative.
From an economic standpoint, it's a growing industry. We have only a 3 percent share in the Islamic banking industry and Islamic industry assets are 10 percent or 11 percent so we have ample room to grow. I see it as a market and product/service that the market demands.
There are several levels of doing Islamic banking provided by the State Bank of Pakistan; windows, branches, subsidiaries, and then full-fledged Islamic banking. We currently offer a product called Islamic banking through conventional branches; then we have got dedicated Islamic banking branches.
There was a time when Islamic banking used to pay higher deposit rates. When I joined this banking, the return was over 9 percent, which was very high. That has now tanked to below 6 percent.
BRR: Will you come up with any e-product or mobile product in collaboration with any telecommunication company or microfinance banks?
SA: Not with microfinance banks, but we might line up with some telecommunication company to come up with something. But one needs to look at some aspects like who are you dealing with, what kind of customers they are.
We will be focusing on cost management on the deposit side but actually wanting to go full steam on the deposit growth.
BRR: HMB's deposits are rising but on the lending side things haven't improved as such. So would we see ADRs eroding further, and how will deposit growth be utilised?
SA: First and foremost, my whole idea would be to generate more foreign trade business. The second strategy would be to rationalise cost of deposits in the event that the loan book is not growing while the investments are increasing. Hence, I need to watch my investment book vis-à-vis my cost of resources.
BRR: Will declining interest rates compel banks to pursue lending?
SA: I am being averse to any consumer banking product because the credit scoring model doesn't work in this country; this is the experience I have gained. And I shall never put anything on credit scoring model. I want to see the person, discuss it with him and then lend the money. It's highly subjective; numbers should not be my guiding principle.
My experience has been good when I knew I resided my risk at the branch level rather than on a centralised level and then the branch manager is responsible for that client. Credit must originate at the branch level and get approved at the head office. It must never originate from the head office, when this starts happening, we will have bad creditors. Easy money is a great temptation.
Again the lesson of life is that if you are bad at hiring, the right resources then your business will turn to be bad. Make correct choices. While lending one has to be very sure who you are shaking hands with, what will be the end use of the funds and why you are lending!