HABIB BANK LIMITED-Analysis of Financial Statements Financial Year 2005-1Q Financial Year 2011

HBL was the first commercial bank to be established in Pakistan in 1947. Over the years, HBL has expanded its branch network and become the largest private sector bank with over 1,450 branches across the country and a customer base exceeding five million relationships.
With respect to recent developments, HBL closed 14 branches in 2009 and opened seven in 2010. The bank has an international presence in over 25 countries including Hong Kong, UK, Iran, China, Nepal, Nigeria, Kenya and Kyrgyzstan. HBL is expanding its presence in principal international markets including the UK, UAE, South and Central Asia, Africa and the Far East.

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COMPANY SNAPSHOT

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Name of company                                 Habib Bank Limited

Nature of Business                              Banking

Ticker                                          HBL

Profit After Taxation FY '10                     Rs 17,034,380,000

Profit After Taxation FY'09                      Rs 13,400,749,000

Share price (avg. over Jan'10-Dec'10)          Rs 108.16 per share

Market Capitalization as at 31st March 2011     Rs 108,363,340,800

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The government privatised HBL in 2004 through which AKFED acquired 51% of the bank's shareholding and management control. HBL is majority owned (51%) by the Aga Khan Fund for Economic Development, 42.5% of the shareholding is retained by the government of Pakistan, whilst 7.5% is owned by the general public ie over 170,000 shareholders following the public listing that took place in July 2007.
HBL is the second largest bank in the country with a market share of Rs 460 billion in advances and Rs 747 billion in deposits, after NBP, which has a market share of Rs 508 billion in advances and Rs 832 billion in deposits. It is followed, in the given order, by the remaining three of the five big banks in Pakistan: UBL (Rs 342 billion in advances and Rs 5687 billion in deposits), MCB (Rs 255 billion in advances and Rs 431 billion in deposits) and ABL (Rs 253 billion in advances and Rs 371 billion percent in deposits).
RECENT RESULTS (1Q11)
Net Interest Income (NII) rose by 23 percent YoY to Rs 13.0 billion, as KIBOR remained high by 140bps on a YoY basis. Non Interest Income too rose by 17 percent. However, total provisioning was higher by 65 percent at Rs 2.3 billion. HBL posted a PAT of Rs 5 billion translating into an EPS of Rs 4.54 as against PAT of Rs 3.82 billion [EPS of Rs 3.46] in the same period last year. The growth in bottom line in 1QCY11 was mainly driven by increase in net interest income and non-interest income which rose by 23 percent and 13 percent respectively. However, a 64% rise in provisions to Rs 2.3 billion tarnished somewhat the rise in the NII and non-interest income.
10% growth in deposits was witnesses, which translated into 31% increase in investments along with 6% increase in advances only. NIM increased on back of lower CASA and a generally higher interest rate environment.

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Rupees in 000s                            2009        2010  % Change

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Net mark-up/ interest income

Mark-up/return/ interest earned     76,076,347  81,325,028      6.90

Mark-up/return/ interest expensed   33,405,813  34,330,255      2.77

Net mark-up/ interest income        42,670,534  46,994,773     10.13

Provision against NPLs

and advances                         8,794,560   7,602,440    -13.56

Net mark-up/ interest

income after provisions             33,580,875  39,409,109     17.36

Non mark-up/ interest income

Fee, commission and

brokerage income                     5,316,479   5,432,706      2.19

Income from dealing in

foreign currencies                   1,913,115   3,189,333     66.71

Gain on investments                    597,018   1,380,162    131.18

Other income                         3,333,000   2,760,230    -17.18

Total non-markup/

interest income                     11,159,612  12,762,431     14.36

Non mark-up/ interest expenses

Administrative expenses             22,745,955  24,252,960      6.63

Other provisions and write-offs        210,190     178,148    -15.24

Total non-markup/

interest expenses                   22,956,145  25,131,510      9.48

Profit before taxation              21,381,636  27,040,030     26.46

Taxation                             7,980,887  10,005,650     25.37

Profit after taxation               13,400,749  17,034,380     27.12

Basic earnings per share-(Rupees)        14.70       16.78     14.15

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Mark-up earned increased by 6.90% from Rs 76.08 billion in FY09 to Rs 81.33 billion in FY10 due to 17.76% increase in investments from Rs 216 billion in FY09 to Rs 255 billion in FY10, and 467% increase in lendings to financial institutions from Rs 5 billion in FY09 to Rs 30 billion in FY10. The increasing trend in KIBOR towards the end of FY10 also contributed to this increase in mark-up earned, as depicted by the following graph. Industry average markup earned of the 5 major banks (NBP, HBL, MCB, UBL, and ABL) over FY10 was 6.67%. This shows that HBL outperformed the industry average by 0.23%.
Mark-up expensed increased by a smaller 2.77% from Rs 33.41 billion in FY09 to Rs 34.33 billion in FY10 due to 8.61% increase in savings accounts from Rs 314 billion in FY09 to Rs 341 billion in FY10. Thus net mark-up increased by 10.13% and coupled with the decrease of 13.56% in provisions against NPLs, due to improvement in FSV benefit from 30% to 40%, this led to an overall 17.36% in net markup after provisions, from Rs 33.58 billion in FY09 to Rs 39.41 billion in FY10. The industry average for mark-up expensed over FY10 was 3.57%. This shows that HBL also outperformed the market at the mark-up expensed frontier by 0.8%.

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Rupees in 000s                            2009          2010   % Change

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Customers-Fixed deposits           208,459,070   203,018,996      -2.61

Customers-Savings Account          314,040,743   341,086,487       8.61

Customers-Current

Account Remunerative                 1,811,833     1,725,974      -4.74

Customers-Current Account

Non-Remunerative                   149,221,644   186,234,235      24.80

Fin. Inst-Remunerative deposits      1,616,443     9,302,286     475.48

Fin Inst-Non-Remunerative deposits   7,600,346     6,006,821     -20.97

Net deposits                       682,750,079   747,374,799       9.47

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The proportion of short-term advances to long-term advances in FY10 remained almost the same as that in FY09, reflecting a tendency to avoid advancing long-term loans, compared to the scenario in FY08, when long-term loans constituted 76% of the portfolio.
Non-mark-up income registered a 14.36% increase from Rs 11.16 billion in FY09 to Rs 12.76 billion in FY10. This was mainly driven by 66.71% increase in income from dealing in foreign securities and 131.18% increase in gain on sale of investments. Non-mark-up expenses increased by a smaller 9.48% and taxation increased by 25.37%, leading to an overall 27.12% increase in profit after taxation, from Rs 13.4 billion in FY09 to Rs 17.0 billion in FY10. This growth was reflected in the earning per share, which increased from Rs 14.70 per share in FY09 to Rs 16.78 per share in FY10.
MARKET COMPARISON
(Figures in this section of the analysis are courtesy SBP's Quarterly Performance Review of the Banking System, September 2010)

Banking sector performance in FY10 improved over compared to FY09. It was mainly characterized by increasing trend in NPLs as slowdown in economic growth took a toll on the performance of enterprises. However, some respite was offered by the FSV benefit on the provisions against NPLs, which was increased by the SBP from 30% to 40% in October 2009. NPLs growth registered a downward trend, falling from 23.43% to 8.43% in HBL, and 19.04% to 10.76% in the industry, defined by the 5 major banks (NBP, HBL, MCB, UBL, and ABL).

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                                            HBL               Industry

                                      2009     2010     2009      2010

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Net Interest Income (growth %)      15.80%   10.00%   19.32%     8.20%

Deposits (growth %)                 14.00%    9.50%   10.78%    13.08%

Advances (growth %)                 -0.40%    1.10%    3.72%     0.90%

% of Deposits in CASA               68.00%   71.00%   67.19%    69.49%

NPLs (growth %)                     23.43%    8.43%   19.04%    10.76%

Investments (growth %)              57.00%   17.80%   38.42%    35.12%

Profit After Taxation (growth %)   -14.00%   27.00%   17.56%    14.93%

Earning Asset Ratio                 78.00%   81.00%   80.25%    81.25%

Return on Deposits                   1.17%    2.28%    3.09%     3.26%

Return On Equity                     9.46%   17.70%   22.06%    23.90%

Price/Earnings Multiple               8.40     6.45     7.71      7.54

Capital Adequacy Ratio              13.25%   14.61%   14.75%    16.39%

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The industry generally experienced a decline in growth of net interest income from 19.32% in FY09 to 8.20% in FY10. HBL's net interest income growth similarly fell from 15.80% to 10.00%, but stayed above the industry average of 8.20%, thus showing HBL's ability to beat the market despite downward market trend. According to the SBP review, the declining spread between the return on advances and the return on deposits (as shown in the graph), coupled with the overall decline in advances growth as well as the tendency of banks to invest in low-return, risk-averse assets, resulted in a negative impact on net interest income and profitability of the banking system.
HBL's profit after tax growth improved significantly from -14.00% to 27.00%, whereas the trend observed in the industry was a decline in growth from 17.56% to 14.93%. HBL's earning asset ratio also increased from 78.00% to 81.00%, showing better returns generating capability at HBL. The earning asset ratio in FY10 was almost the same as the industry average.
Return on deposits showed an increasing trend both in HBL, from 1.17% to 2.28%, and the industry from 3.09% to 3.26%; however HBL's return on deposits was lower than industry average, indicating possible improvements in generation of returns, given HBL's deposit base. HBL's return on equity also improved significantly from 9.46% to 17.70%, whereas the industry showed a general positive trend from 22.06% to 23.90%.
HBL's growth in deposits fell from 14.00% to 9.50%, although the industry witnessed a growth in deposits from 10.78% to 13.08% over FY09-10. These additional deposits mainly occurred in the category of savings deposits and current non-remunerative deposits, as shown. There was a positive trend in the growth of CASA accounts in both HBL, from 68.00% to 71.00%, and the industry, from 67.19% to 69.49%. This shows that the banking sector is moving towards cheaper sources of financing.
HBL's advances also improved from a negative growth in advances of -0.40% in FY09 to 1.10% in FY10. Industry wide, there was a decline in advances growth from 3.72% to 0.90%. According to the SBP banking review, the unfavourable macro environment characterized by floods, power shortages, security concerns and higher inflation resulted in decreasing payback capacity of the private sector enterprises, especially SMEs, resulting in shift of banks' asset mix towards credit to the public sector, eg government paper and bonds of PSEs, and commodity operations financing. In the private sector financing, top rated corporate borrowers were granted most loans, as they are more resilient to economic slowdown and a fragile business environment.
Industry wide, investment growth declined slightly from 38.42% to 35.12% due to rejection of all the bids for PIBs auctions during the third quarter of FY10. However, HBL witnessed a significant fall in investment growth from 57.00% to 17.80%, due to fall in held-for-trading securities from Rs 643 million in FY09 to Rs 208 million in FY10, and decrease in available-for-sale securities from Rs 203 million in FY09 to Rs 242 million in FY10.
HBL's average share price fell from Rs 123.44 per share to Rs 108.16 per share, and this compounded with the increase in EPS, caused the price earnings multiple to fall from 8.40 to 6.45. Industry wide, the price earnings multiple witnessed a slight decline from 7.71 to 7.54. The industry average EPS for FY'10 was Rs 13.75 per share, mainly driven by MCB's EPS of Rs 22.20 per share, as compared to HBL's EPS of Rs 16.78 per share in FY10.
HBL's capital adequacy ratio improved slightly from 13.25% to 14.61%, whereas the industry experienced a greater increase in the capital adequacy ratio from 14.75% to 16.39%. CAR improved due to declining RWA to total assets, as shown in the graph below, which shows decreasing risk appetite of the banks.
STOCK PERFORMANCE
Stock returns volatility of weekly continuously-compounded returns shows that the standard deviation of these stock returns is 4.13%. The future stock returns are expected to vary with a standard deviation of 4.13%, showing the consistency and steadiness of stock returns.
Beta analysis generates the beta of HBL stock to be 1.10 against a (KSE-100) market beta of 1.00, as given by the slope of the trend line. This shows that HBL stock is about as risky as the market, and price fluctuations in HBL stock generally represent overall market sentiments. A great extent of consistency was observed in the scatter plot, showing that HBL enjoys steady investor confidence.
RATIO ANALYSIS
The return on assets declined from 1.55% in FY09 to 1.08% in FY10, due to 7.05% increase in total assets (driven by 18% increase in investments and 467% increase in lendings to financial institutions), which overcame the 27% increase in net income. This can be compared to an industry average ROA of 1.82%. Return on deposits increased significantly from 1.17% in FY09 to 2.28% in FY10, caused by the 27.12% increase in profit after taxation, while deposits only increased by 9.47%. Return on equity also improved appreciably from 9.46% in FY09 to 17.70% in FY10, indicating a positive trend in the company's bottom line.
The NPLs to advances ratio increased from 10.87% in FY09 to 11.66% in FY10, showing a slight decline in the credit quality of the loan portfolio. The ratio of provisions against NPLs to NPLs declined from 17.79% in FY09 to 14.19% in FY10, reflecting the fact that HBL has availed the benefit of FSV as promulgated by SBP, which was increased from 30% in FY09 to 40% in FY10. The non-performing loans registered a 8.43% increase from Rs 49.44 billion in FY09 to Rs 53.61 billion in FY10. The industry average NPLs growth over FY09-10 was 10.76%, and coupled with the fact that HBL's advances growth of 1.10% in FY10 was greater than the industry average of 0.90%, it shows that HBL better managed its NPLs growth over this period. HBL's NPLs growth was driven mainly increase in textile sector NPLs from Rs 15.3 billion in FY09 to Rs 18.5 billion in FY10.
Deposits times' capital declined from 8.09 in FY09 to 7.77 in FY10 due to the 9.47% increase in deposits, compared to 14.08% increase in capital. The debt to asset ratio remained the same at 0.90. The industry average growth in deposits was 13.08%, indicating potential disadvantage in HBL's deposit growth over FY10.
The earnings assets to assets ratio increased from 0.78 in FY09 to 0.81 in FY10, indicating a positive bottom line for the company, as it increases the likelihood of greater returns on investment. The industry average earnings assets ratio was also 0.81 in FY10, showing that HBL is keeping up with the industry in its earning assets holdings. The advance to deposit ratio fell from 0.67 in FY09 to 0.62 in FY10, caused by the 1.12% increase in advances, as compared to 9.47% increase in deposits. Advances increased mainly due to 1.32% increase in loans, cash credits and running finances, and 19.5% increase in bills discounted and purchased, offset by 1.12% increase in provisions against NPLs. However, HBL's advances growth of 1.12% was better compared to the industry average of 0.90%. Cost of funding of earning assets remained the same at 0.05, indicating efficient management of funding costs at HBL.
The yield on earning assets fell slightly from 11.25% in FY09 to 10.89% in FY10, because of the significant increase in the level of earning assets, especially the lending to financial institutions which increased by 466%. Among the other components of earning assets, investments increased by 17.76% and advances increased by 1.12%, as shown in the graph below. HBL exhibited a better trend in growth of earning assets from 78% to 81% of total assets over FY09-10, compared to industry average growth from 80.25% to 81.25% of total assets over FY09-10.
The equity to assets ratio improved from 0.0977 in FY09 to 0.1041 in FY10, caused by a 14.08% increase in equity, compared to a 7.05% increase in total assets. Equity to deposits ratio also increased slightly from 0.1236 in FY09 to 0.1288 in FY10, caused by 14.08% increase in equity relative to 9.47% increase in deposits. As explained in the earlier part of the analysis, earnings assets to deposits ratio also increased slightly from 99.08% in FY09 to 99.69% in FY10.
The price earnings ratio declined from 8.40 in FY09 to 6.45 in FY10. This was caused by an increase in EPS from Rs 14.70 per share in FY09 to Rs 16.78 per share in FY09, with a simultaneous decrease in average market price of HBL stock, from Rs 123.44 per share in FY09 to Rs 108.16 per share in FY10. Although the EPS increased due to improvement in the company's bottom-line, this improvement was not reflected in the market's valuation of HBL stock, which was proved by a decline in stock value. Compared to the industry, HBL's price earnings ratio showed an unfavorable trend, declining by 1.95 from 8.40 in FY09 to 6.45 in FY10, compared to an industry average decline of 0.17 from 7.71 in FY09 to 7.54 in FY10. The industry average EPS for FY10 was Rs 13.75 per share, mainly driven by MCB's EPS of Rs 22.20 per share, as compared to HBL's EPS of Rs 16.78 per share in FY10.
FUTURE OUTLOOK
In addition to focus on retail banking and upgradation of its network, HBL is considering developing Islamic Banking services and SME related and microfinance initiatives. HBL is also reflecting on developing alternate delivery channels for its banking services to increase public outreach to those individuals who do not have access to financial services. The presence in South Asia, UAE, the Gulf and the UK is planned to be expanded, to tap into the large South Asian Diaspora in these regions. HBL's outreach in Africa and Central Asia, through shareholdings in regional banks, is expected to focus on the trade finance business.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].