Bank: HABIB METROPOLITAN BANK LIMITED - Analysis of Financial Statements Financial Year 2005 - 3 Q 2010

Habib Metropolitan Bank was incorporated in Pakistan as a Public Listed Company in 1992 under the name, Metropolitan Bank Limited. The bank commenced, duly licensed, full scheduled commercial banking operations in October 1992.
Metropolitan Bank, from October 1992 to September 2006, remained a highly rated bank and, vide its nationwide 51-branch online 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.
HMB operates in all major cities of the country. The bank ranks within Top 10 in Pakistan with a strong vision to be the most respected Financial Institution. HMB has its primary focus on retail banking and trade finance and also offers highly innovative E-Banking solutions and Consumer Banking to its customers. The group's flagship and HMB's principal, HBZ (incorporated 1967) enjoys International ranking of 687 in terms of capital. With Headquarters in Switzerland, the HBZ Group also operates in Hong Kong, Singapore, United Arab Emirates, Kenya, South Africa, United Kingdom and North America.
The Pakistan Credit Rating Agency (PACRA) has allotted both long-term and short-term ratings of Habib Metropolitan Bank Limited at "AA+" (Double A plus) and "A1+" (A one plus), respectively. These ratings, being the highest amongst the local sector private banks, denote a very low expectation of credit risk emanating from a very strong capacity for timely payment of financial commitments.
The directors are pleased to propose a final dividend of 16% bonus shares (16 shares for every 100 shares held) and 10% cash dividend.
RECENT RESULTS 3Q10
Despite high discount rates and a flood hit economy, the banking sector has managed to raise profits by 11% by the end of 3Q10, compared to the same period last year. According to the financial results of the banking sector by the end of the third quarter, the local and foreign banks profits increased to Rs 50.2 billion as against Rs 45 billion during the same period last year. The improved profitability is attributed to the growth in net interest income earned, with a 7.5% increase in income earned. Combined with a 23% decline in provision against advances, the position of the banking sector is seen to have improved considerably under the given circumstances.
Net markup income for Habib Metropolitan Bank stood at Rs 5.25 billion, a marginal rise of 1.7% over 3Q09. Provisioning almost doubled, standing at Rs 2.26 billion as compared to Rs 1.15 billion during 3Q09; resulting in net mark-up after provisioning to fall by 25%, standing at Rs 2.99 billion (3Q09: Rs 4.00 billion).
Non-mark-up income rose by 26%, due to the combined effect of increases in fee, commission and brokerage income, dividend income, and income from dealing in foreign currencies. Non-mark-up expenses similarly rose, thus dampening the effect of increased income. Profit before taxation stood at Rs 3.02 billion, a decline of 21% YoY (3Q09: Rs 3.83 billion) as a result of rising expenses in every area. Profit after tax for the period stood at Rs 2.14 billion, with an EPS of Rs 2.45.
Deposits for the period stood at Rs 157 billion, a rise of 16.7% over 3Q09 (3Q09: Rs 135 billion). The greatest proportional change was seen within fixed deposits, which rose by 29%, followed by current accounts and then savings deposits. Borrowings fell by 40%, causing the overall increase in total liabilities to stand at 4%.
On the assets side, earning assets, which contribute 89% to total assets, declined by 3.7%, as a result of which total assets fell by 2.2%. While lendings to financial institutions rose by 47%, the 16% decline in net investments caused the overall figure to fall. The structure of the company's earning assets changed over the period, with the share of advances rising from 47% to 52%, and the share of investments falling from 51% to 44%. Total Assets stood at Rs 229 billion at the end of the period. (3Q09: Rs 234 billion).
NPLs for Habib Metropolitan Bank saw a staggering rise of almost 200%, standing at Rs 9.37 billion (3Q09: Rs 3.2 billion). The NPLs to advances ratio thus deteriorated, standing at 8.8%, as compared to 3.2% over 3Q09. Despite steps being taken by the banking sector to restructure debt and reduce NPLs, they are on a continuous rise. This trend could severely impact liquidity and profitability of the sector if not managed properly.
Advances of the bank rose by almost 8%, amid an industry where banks are sharply reducing their lending capacity. The advance to deposit ratio fell to 68%, still remaining higher than that of most banks despite the decline.
According to the latest monetary policy review, as of November 30th, SBP has announced further tightening of the monetary policy, setting the policy rate at 14.0%; a rise of 0.5% from the previous review at the end of September. Lending rates will as a result go up, further dampening private sector investment and thus reducing advances for banks. While banks are currently profiting as a result of the wide interest spread, this is a negative sign for the economy as a whole and will eventually cause trouble for the banking sector as well.
OVERVIEW
HMB deposits crossed the Rs 142 billion mark at the year-end and total assets exceeded Rs 237 billion. HMB's profit before provisions and taxation reflect a healthy increase from Rs 6.0 billion last year to Rs 6.8 billion during 2009, a 13% increase which demonstrates the bank's strong earnings' capacity. However, due to the economic environment, the bank recognised an additional Rs 4.6 billion of non-performing loans during 2009 and accordingly made additional provisions of Rs 2.5 billion for the year. The bank's post-tax profit for the year amounted to Rs 2.7 billion as against Rs 3.3 billion last year. This performance translates into an EPS of Rs 3.64 per share.
At year-end, HMB's equity stands at Rs 18.9 billion, at a comfortable 11.9% capital adequacy level against the required 10%.
ECONOMIC AND BANKING REVIEW
During the year 2009, country's trade balance reflects healthy improvement mainly on account of reduced cost of imports. With the International Monetary Fund support programme and a commitment expressed by the global community to extend monetary aid to Democratic Pakistan, the country's foreign exchange reserves have increased significantly, although rupee continues to depreciate against the US dollar. Weakening domestic demand, reduced commodity prices and lower government borrowing from SBP has also led to reduction in core inflation. The country's stock exchanges have managed to regain investor confidence after dismal look in 2008 and the market index reflects a positive sentiment.
Further, remittance inflows from overseas Pakistanis have remained strong which provided positive support to the economy. These factors along with several ongoing policy and structural reforms resulted in improvement in Pakistan's international ratings by Moody's from Negative to Stable outlook. Although the potential Economic crisis has been averted and the economy has stabilized, the country's manufacturing and export activity continues to remain under pressure. Power shortage remains a fundamental detriment to economic growth for which various short and long term measures are being taken by the Government. This is a matter of utmost priority as the rising costs of input needs to be kept under control for us to compete in international markets. The economy is also facing severe pressure due to the ongoing war against terror in the North and the remaining rehabilitation of Internally Displaced Persons (IDPs).
Despite liquidity shortages, the interbank money markets were stabilized due to very active intervention by the State Bank of Pakistan. During the year, market rates depicted a downward curve which was translated in a 250 bps gradual reduction by SBP in discount rates during the year. Market conditions resulted in an industry wide halt in consumer financing while credit off-take by the private sector continued to remain under pressure. However, the rate reductions during the year are expected to have positive impact on the country's gross domestic product and going forward, we expect some improvement in private sector credit demand. The SBP now reviews the monetary policy on bi-monthly basis which also ensures a closer market rates management.
During the period, the rates offered by the National Savings Schemes have also been reduced along with some fundamental changes with respect to institutional deposits. We expect the banking sector to increase its share of deposits with these changes. With global as well as local economic slowdown, maintaining asset quality remains a fundamental challenge to the banking sector and the industry is likely to show a higher ratio of non-performing advances.
RECENT PERFORMANCE
Habib Metropolitan Bank's gross revenues increased by 19% to Rs 25.1 billion, 85% of which was contributed by profit/mark-up earned on loans and investments. The Bank has maintained concerted efforts to increase margins as well as keeping its establishment costs at acceptable levels. Resultantly, it continues to enjoy a healthy cost to revenue ratio.
HMB's profit before provisions and taxation reflect a healthy increase from Rs 6.0 billion last year to Rs 6.8 billion during 2009, a 13% increase which is a strong reflection of the bank's current operations. However, due to prevailing market conditions especially with regard export markets, the Bank recognized an additional Rs 4.6 billion of non-performing loans during 2009 and made additional provisions of Rs 2.5 billion during the year. The Bank's pre-tax profit for the year amounted to Rupees 4.2 billion as against Rs 4.8 billion last year reflecting an 11.5% decline. This translates into an (post-tax) EPS of Rs 3.64 per share.
Bank's total non-performing loans portfolio stands at Rs 6.4 billion at year end, representing an infection ratio of less than 6%, which is one of the lowest levels in the industry. The portfolio also includes certain loans which have been classified by the Bank keeping in view weakened financials and diminished capacity to repay obligations by a few borrowing relationships. However, due to bank's strong customer selection with adequate collateral coverage, we expect to make significant recoveries from these loans in the future. At the year-end, HMB's equity stands at Rupees 18.9 billion with a comfortable 11.9% capital adequacy level (Basel II) against the required 10%.
CREDIT RATING
The credit rating of the Bank has been maintained at AA+ (double AA plus) for long term and A1+ (A one plus) for short term by the Pakistan Credit Rating Agency Limited. These ratings denote a very high credit quality, a very low expectation of credit risk and a very strong capacity for timely payment of financial commitments.
CUSTOMER DEPOSIT BREAK-UP
On breaking deposits and other accounts further, 97.1% of the deposits belong to customers with 2.9% belonging to financial institutions. The major portion of customer deposits once again remains in fixed deposits, where as current account deposits as percentage of total deposits in 2009 decreased. Although current account deposit and saving deposits which account for 24% and 29% of total deposits increased with respect to FY08, but it is found that saving deposits increased at faster rate than current account increase Habib Metropolitan Bank Liability.
GROSS ADVANCE BREAK-UP
Gross advances for HMB decreased 3% in FY09 to Rs 106923 million. After subtracting provision against non performing advances, total advances in FY09 Rs 102,293 million. On breaking gross advances, it is found that majority of gross advances were less than one year - short-term - 87% whereas remaining 13% were long-term. If gross advances were classified in terms of currency, then only 11% were in foreign currency and remaining 89% were in local currency.
ANALYSIS
FY09 showed dismal outlook in Habib Metropolitan Bank profit after taxation which decreased from Rs 3293 million to Rs 2739.5 million showing a 17% decline. However, with unappropriated profit brought forward, profit available for appropriation increased from Rs 5353 million to Rs 5827 million showing a 9% increase.
REVENUE ANALYSIS
Gross Revenue percentage increased from Rs 21,086 million in FY08 to Rs 25,078 million in FY09 showing a 19% increase. On classifying revenue further, it is found that net Interest Income increased from Rs 5319 million in FY08 to Rs 6711 million in FY09 showing a 26% increase whereas non-interest income declined from Rs 3928.5 million to Rs 3702 million showing a 6% decrease during the same period. Net interest income accounted for 64% of total revenue whereas non-interest income accounted for 34% of total revenue. Breaking non-interest income further, 34% composed of non-mark-up interest income, 12% composed of dividend income, 41% composed of income from foreign currency, 6% from gain on sale redemption securities, and 7% from other income.
ASSET QUALITY
Non-performing loans increased by 264% to Rs 6364 million in FY09 from Rs 1748 million causing non-performing loans to advance ratio increased from 1.61% to 6.22% in FY09. Although much of the banking industry faced an increase in non-performing loans in 2009, HMB was not any different. Owing to increase in non performing loans, the quality of asset deteriorated in FY09. Provision to Gross Advances increased from 2% to 4% in 2009 in the meanwhile provisions to non-performing loans decreased to 73% in FY09 as compared to 122% in FY08.
DEBT MANAGEMENT
Total debt of Habib Metropolitan increased from Rs 167,706 million to Rs 218,671 million in 2009. In percentage terms, it increased by 30%. Major increase in debt was due to increase in borrowing from Rs 30372 million in FY08 to Rs 68187 million showing 125% increase as compared to 1% increase a year earlier. The equity of the bank increased from Rs 15,005 million in 2008 to Rs 18,741 million in 2009. In percentage it increased by 25%. So debt to equity ratio increased from 11.2 to 11.7 in 2009.
Total assets have increased from Rs 182,710 million to Rs 237,412 million. In percentage terms, it increased by 30%. Operating fixed assets of HMB increased by 54% in FY09. Investments increased by 108% in FY09 which accounted for 47% of total assets. Advances accounted for 43% of total asset. Because Debt and asset both increased by 30% therefore Debt to asset ratio almost remained same at 92%.
Deposits which accounted for 65% of total liabilities in FY09 have increased from Rs 128,432 million to 142,457 million. In percentage terms, it has increased by 11%. Deposits time capital has declined from 8.56xs to 7.60xs.
OTHER RATIOS
CASA ratio is the ratio of the deposits in the form of Current Account and Savings Account to the total deposits. It should be higher for a bank because interest paid on savings account is very low and no interest is paid on current account deposits. In this way, the banks get money at low cost.
CASA ratio for the HMB increased from 47% in 2008 to 51% in 2009. It is a sign of improvement for the bank, as the current and saving accounts have increased.
Capital Adequacy Ratio has increased from 10.36% to 11.87% in 2009, which is a healthy sign for bank's financial. The minimum level for the bank in 2009 was 10%. This increase showed that the bank was meeting its liabilities and protecting its depositors.
LIABILITIES
Borrowing increased at a very high, 125% growth, jumping from Rs 30,372 million to Rs 68,186 million. Deposits and other accounts, on the other hand, showed a steady growth, increasing from 6% to 11%, rising from to Rs 142,457 million. Overall liabilities of bank increased to Rs 218,671 million in 2009 showing a 30% increase. Borrowing and deposits combined made 96% of bank liability in FY09.
ASSETS
Cash and balances with treasury banks decreased by 2% in 2009. Balances with other banks increased by 63%. Lending to financial institutions increased by 53% in 2009 and Investments increased by 108%. Advances decreased by 6%. Advances which were Rs 102,293 million in 2009 accounted for 43% of total assets and investments which were Rs 111,679 million in 2009 accounted for 47% of total assets. Overall assets which were Rs 237,412 million in FY09 increased 30% from FY08.
EARNING
With net income decreasing in FY09, return on assets, return on deposit and return on equity decreased. Overall earning showed a negative trend with earning per share declining to Rs 3.64 in FY09 from Rs 5.47 a year earlier and return on deposits decreased to 1.9%. Return on assets decreased to 1.2% in 2009 from 1.8%. Similarly, return on equity declined to 1.9% from 2.9%.
SOLVENCY RATIOS
The company has seen a growth in assets in 2009 that has surpassed the growth in equity for the same period. As shown by the equity to asset ratio, the ratio fell from 8.2% to 7.9% during FY09. This relates that the growth in assets has been more phenomenal than the growth in equity. But at the same time, deposits also grew, but not at the rate of growth of equity, as the equity to deposits ratio increased from 11.7% to 13.2%.
On the other hand, due to the massive growth in investments in FY09 of about 108%, the ratio of earning assets to deposits rose massively from 126.1% to 150.3%. This showed that the major increase in assets have been led by the rise in investments, while deposits and equity rose slightly. Thus, the solvency ratios that show company position to meet its obligations strengthened in FY09.
LIQUIDITY
Advance to deposits of the HMB decreased in the year 2009 where advances decreased and deposits and other liabilities increased. Thus, the ratio came down to 71.8% from 84.3% year earlier. Earning assets to assets which includes sum of lending assets to financial institutions, advances and investments divided by Total Assets increased by 1.5% from 88.9% in FY08. Once again, the increase can be attributed to large increase in investment.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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