With an average increase of Rs1.9 billion in toxic assets in the previous four quarters, a marginal decline of Rs0.4 billion in non-performing loans for the quarter ending June 30, 2010 is a good omen for the countrys biggest private lender - Habib Bank - as well as for the industry.
Net advances, which declined by four percent during the first quarter 2010, are back on northward journey but at a snail pace as they fell by 2 percent during the first half.
A similar picture is visible in the movements in deposits mobilization. Nonetheless, the pace is a bit faster that enabled deposits mobilization to grow by 3 percent during Jan-June 2010.
This resulted in lower advances-to-deposits ratio which fell by 341 basis points during the first half to stand at 69.32 by June end. For better comparison, the ADR calculation is based on adding back Rs43 billion of TFCs advanced to finance power sector circular debt, which are reluctantly being classified as investment by HBL on the instructions of State Bank of Pakistan.
Despite falling ADR and declining lending rates, HBL managed to maintain its spread by deliberate and continued efforts to focus more on mobilizing low cost deposits.
The proportion of high cost fixed deposits eased by 520 bps to just 24.2 percent in the last six months. This facilitated HBL to show a growth of five percent in net mark-up income as its cost of funds reduced by 31 bps in a years time to 4.60 percent by June end.
Although provisioning against bad debts is down by two-fifth (YoY) for the period under review - mark-up income (net off provisioning) increased by 20 percent during 1H2010.
Albeit, provisioning increased by a third during the second quarter versus the first quarter which is plausible since more non-performing loans are falling in the category of loss from doubtful and substandard categories with passage of time, and the former requires full provisioning cover.
Given the trend of falling NPLs continues, a similar pattern can be observed in provisioning against bad debts within a quarter or two.
A better play on volatility of exchange rate, lower impairment on investment in equity market and capital gains on stock market investment helped the bank to post 27 percent, YoY, growth in non-core income. This helped operating revenues grow by a tenth for the period under review.
Big size, far reached presence and conscious efforts to cut costs curtailed the hike in operating expenses to just 13 percent despite Rs250 billion contribution to HBL foundation from the banks earnings.
Habib Banks net earnings improved by 29 percent during the first half of 2010. These profits increased the return on average equity by 95 bps in a years time to 19.37 percent by June.
Higher reserves and low growth in advances improved the risk matrix of the bank as its capital adequacy ratio rose by 53 bps to stand at 13.78 percent. The bank is trading at price to book multiple of 1.23 as of yesterdays closing price.
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HBL P&L
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Rs (mn) 1H2010 1H2009 % chg 2Q2010 2Q2009 % chg
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Mark-up earned 39,675 37,474 6% 20,244 18,810 8%
Mark-up expensed (17,136) (16,061) 7% (8,519) (8,110) 5%
Net mark-up income 22,539 21,413 5% 11,725 10,700 10%
Provisioning (3,217) (5,118) -37% (1,765) (2,742) -36%
Net mark-up income after provisions 19,322 16,295 19% 9,960 7,958 25%
Non-markup income 6,306 4,972 27% 3,237 2,856 13%
Operating revenues 28,845 26,385 9% 14,962 13,556 10%
Non-markup expenses (12,864) (11,395) 13% (6,687) (5,564) 20%
Profit after taxation 7,865 6,100 29% 4,050 3,246 25%
EPS (Rs) 7.77 6.16 4.03 3.19
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Source: KSE Announcement
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