Habib Metropolitan Bank

Habib Metropolitan Bank (PSX: HMB) was incorporated in Pakistan as a public limited company in 1992. The bank is the subsidiary of Habib Bank AG Zurich – Switzerland which is the holding company of the bank. Through is wide network of over 500 branches, HMB is offering a suite of conventional banking services. The bank also offers Islamic banking services through its 115 dedicated Islamic banking branches and 217 Islamic windows. HMB has its presence in ten countries across four continents.

Pattern of Shareholding

As of December 31, 2022, HMB has a total of 1047.83 million shares outstanding which are held by 2826 shareholders. Habib Bank AG Zurich, the parent company of HMB holds 51 percent of its shares followed by local general public holding 18.55 percent of its outstanding shares. Foreign companies have a stake of 9.4 percent in the bank. NIT accounts for 3.55 percent shares of HMB. Directors, CEO, their spouse and minor children have 2.24 percent of the bank’s shares. Banks, DFIs and NBFIs have a stake of 1.5 percent in HMB while Insurance companies hold 1.75 percent shares. Around 1.33 percent shares of HMB are held by Modarabas and Mutual Funds. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

HMB’s asset base has been showing steady growth in all the years under consideration which came on the bank of both advances and investment. However, in all the years, the bank’s ID ratio conveniently stays above its AD Ratio. HMB’s AD ratio which stood at 41.7 percent in 2018 grew to 49.22 percent in 2022 while its ID ratio grew from 63.77 percent in 2018 to 82.16 percent in 2022. The asset composition of HMB speaks volume of the risk-averse stance the bank is undertaking while deploying its assets. The non-performing loans of the bank have inched up in 2020 and 2022 – both were the times when businesses were grappling against the macroeconomic headwinds. In 2020, the outbreak of COVID-19 and the related lockdown impeded many businesses from meeting their loan commitments while in 2022, unprecedented level of inflation, high energy prices and import restrictions forced many businesses to shutdown their operations. The bank’s infection ratio had followed a downward trajectory from 7.8 percent in 2018 to 4.24 percent in 2021; however, it ticked up to 5 percent in 2022 due to 28 percent year-on-year surge in its NPLs while advances grew by only 9 percent in 2022. It is pertinent to note that majority of HMB’s non-performing loans belong to the loss category which is quite worrisome. As of December 2022, 42 percent of the bank’s gross advances pertain to textile sector, followed by power, gas, water and sanitary (9 percent) and edibles (8.8 percent) and these sectors have the same ranking in HMB’s NPLs too. The bank has maintained adequate provisioning against its NPLs with its coverage ratio escalating from 93.67 percent in 2018 to 101 percent in 2022.

HMB’s deposits have also been posting reasonable growth since 2018, rising from Rs.543,578 million in 2018 to Rs.880,697 million in 2022. The encouraging factor about deposit growth is that it came on account of CASA deposits which grew from 57 percent of the total deposits in 2018 to 64 percent in 2022. With the excessive monetary tightening and the imposition of MDR on saving deposits, the bank has increasingly inclined its focus towards non-remunerative current deposits. The share of current deposits in HMB’s total deposits grew from 27 percent in 2018 to 35 percent in 2022 while the share of saving deposits declined from 30.2 percent in 2018 to 29 percent in 2022.

A sneak into the financial performance of HMB shows that except for a 4 percent year-on-year drop, its mark-up income has grown in all the years under consideration. The topline drop in 2021 might be on account of monetary easing as both advances and investments grew reasonably during the year. In 2020 and 2021, HMB’s markup expense also dropped by 14 percent and 7 percent respectively. However, its NIM increased from 24 percent in 2019 to 38 percent in 2020 and 40 percent in 2021. HMB’s NIM tumbled to 30.5 percent in 2022 despite tremendous 81 percent year-on-year growth in its topline. This was on the heels of a 16 percent year-on-year growth in its saving deposits amidst higher discount rate and MDR.

The non-markup income of HMB has also shown considerable growth in all the years under consideration, despite the fact that the bank incurred loss on securities in most of the years. HMB booked the highest loss on securities worth Rs.1164.92 million in 2019 which largely includes the loss on investment in Pakistan Investment Bonds which dropped in value as discount rate increased in 2019. The same happened in 2022 when discount rate rose multiple times. The main contributors of non-markup income have been fee and commission income foreign exchange income which have inclined in all the years since 2018 except for a 9 percent year-on-year drop in foreign exchange income in 2019. Fee and commission income is mainly driven by commission on trade. Non-markup income to total income has declined from 27.24 percent in 2018 to 24.55 percent in 2022.

Due to consistent growth in the branch network, operating expense have also significantly grown from Rs.11,840 million in 2018 to Rs.22,677 million in 2022, however, the bank has been quite successful in optimizing its cost to income ratio from 53 percent in 2018 to 42 percent in 2022.

Net profit also posted an ascending trajectory in all the years under consideration despite high provisioning booked by the bank in all the years and higher taxation imposed on the banking sector. HMB’s profit after taxation clocked in at Rs.14,260.72 million in 2022 with an EPS of Rs.13.61 which grew from the net profit of Rs.6160.58 million and an EPS of Rs.5.88 in 2018.

Recent Performance (1QCY23)

The asset base of HMB grew by 2 percent when compared to the year-end, 2022. While advances grew by a marginal 1 percent over the 1QCY23, investments posted a considerable 9 percent growth. This squeezed the AD ratio from 49.2 percent in 2022 to 47 percent as of March 2023. Conversely, ID ratio grew from 82.16 to 84.36 percent during the same period. NPLs also posted an 8 percent growth in the first quarter of 2023 over the year-end figure. This drove the infection ratio up from 5 percent as of December 2022 to 5.31 percent as of March 2023. While HMB also increased it’s provisioning against NPLs in 1QCY23, its coverage ratio inched down from 101 percent as of December 2022 to 98.21 percent as of March 2023 as advances didn’t post any commendable growth over the quarter. As of March 2023, only 23.5 percent of HMB’s total advances pertain to Islamic banking.

Deposits grew by 6 percent in 1QCY23 which mainly came on the back of CASA deposits which grew from 64 percent of the total deposits as of December 2022 to 68 percent as of March 2023. The bank seems keen in mobilizing non-remunerative deposits to improve its NIM. This is evident by a 14.7 percent growth in current deposits in 1QCY23. The share of Current deposits in total deposits has grown from 34.8 percent as of December 2022 to 37.6 percent as of March 2023. Saving deposits also posted a 10 percent growth in 1QCY23 and have also grown from 29 percent of the total deposits to 30 percent during the same period, however, this needs to be checked as saving deposits no longer classify as low-cost deposits.

HMB’s topline grew by a massive 89 percent year-on-year in 1QCY23 on the back of high discount rate and considerable growth in earning assets, however, its NIM dropped from 33 percent in 1QCY22 to 31 percent in 1QCY23 due to sizeable share of saving deposits in its overall deposit portfolio. HMB’s non-markup income rose by 18 percent year-on-year in 1QCY23 primarily on account of high fee and commission income and foreign exchange income. The bank booked loss on securities worth Rs.142.4 million in 1QCY23 as against the gain on securities of Rs.49.71 million during 1QCY22. Non-markup income to total income ratio dropped from 30.2 percent in 1QCY22 to 22.35 percent in 1QCY23. Operating expense grew by 38 percent year-on-year in 1QCY23, however, cost-to-income ratio improved from 43 percent in 1QCY22 to 37 percent in 1QCY23.

Despite 170 percent higher provisioning booked in 1QCY23 and higher effective tax rate, HMB was able to improve its profit after taxation by 60 percent year-on-year in 1QCY23. Net profit stood at Rs.5724.81 million in 1QCY23 with an EPS of Rs.5.46 versus an EPS of Rs.3.42 in 1QCY22.

Future Outlook

With its NPLs ticking up, the bank is rightly focusing more towards investments. However, to shore up its NIM, the bank needs to taper off its markup expense for which it needs to cut down on its saving deposits which currently have a share of 30 percent in its overall deposit mix. Furthermore, the bank needs to boost its non-funded income. Perhaps the bank should invest more in short-term government securities amidst monetary tightening scenario, so that any future rake hike produces an instantaneous effect on its topline and guard the bank from incurring incessant loss on securities.