The Habib Bank Ltd has recently released its annual report ( printed edition) for the calendar year 2003.
According to the report, the bank has earned the pre-tax profit of Rs 5.469 billion which reflects increase of 33.78 per cent over the pre-tax profit of Rs 4.088 billion earned during the calendar year 2002.
The after-tax profit for 2003 works out to Rs 4.018 billion which depicts an increase of 97.54 percent over the after tax profit of Rs 2.034 billion of the calendar year 2002.
ANALYSIS OF THE PROFIT COMPONENTS: Let us now take stock of the bank's income/expenditure under various heads falling under the " banking functions".
For this purpose, we append a Table containing the detailed information:
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Income under different heads Figures in billion Rs
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S. No Head of income/expenditure 2002 2003 Year over
No year change
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1. Interest income on advances 14.337 10.016
2. Interest income under other heads 9.619 9.256
3. Total interest income [1+2] 23.956 19.272 - 19.55 %
4. Interest expenses on deposits 9.513 4.602
5. Interest expenses under other heads 2.067 1.066
6. Total interest expenses [4 + 5] 11.580 5.668 51.05 %
7. Net interest income [3-6] 12.376 13.604 + 9.92 %
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Non-interest income
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8 Fee, commission and brokerage 2.097 1.977
9. Income on dealings in foreign currencies 1.144 1.069
10. Other income 1.152 1.200
11. Total non-interest income [8+9+10] 4.393 4.246 - 3.35 %
12. Total income from banking functions:
interest/non-interest income [7+11] 16.769 17.850 + 6.45 %
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It will be seen from the table that the interest income from advances in 2003 has reduced by Rs 4.321 billion to Rs 10.016 billion from Rs 14.337 billion [2002] This is because the lending rates have gone down from 8.6 percent p.a. in 2002 to 5.7 percent p.a. in 2003- a decline of 33.7 percent.
This interest income decline gap was more than offset by curtailing interest payments to the depositors to the extent Rs 4.911 billion from Rs 9.513 billion [2002] to Rs 4.602 billion [2003] as the depositors were more squeezed by reducing the deposit rates from 3 percent p.a. in 2002 to 1.3 percent p.a. in 2003- a squeeze of 56.7 percent.
The change in the interest income under other heads remained marginal because the bulk of the income Rs 8.191 billion out of Rs 9.256 billion was generated from "available for sale securities".
The combined effect of the items discussed in the preceding two paragraphs was that the net interest income increased by 9.92 per cent from Rs 12.376 billion in 2002 to Rs 13.604 billion in 2003.
The income from non-interest sources showed a decline of 3.35 percent from Rs 4.393 billion in 2002 to Rs 4.246 billion in 2003.
The aggregate interest/non-interest earnings showed an increase of 6.45 percent from Rs 16.769 billion in 2002 to Rs 17.850 billion in 2003.
As against this, the amount of non-interest expenditure coupled with the provisions on different accounts including provisions for non-performing loans totalled to Rs 15.607 billion which leaves the profit margin of Rs 2.243 billion only.
This profit margin also owes its origin to the reduction of the like amount of Rs 2.025 billion in the administrative expenses [2002 Rs 11.807 billion-2003 Rs 9.782 billion].
The question is: Has the bank really been able to cut the administrative expenditure to the extent of over Rs 2 billion? Certainly, the response is "NO".
This reduction has occurred because of the write back of Rs 2.230 billion in 2003 on account of "defined benefit plan and other benefits" [please see Notes Nos. 25/32.3.2/32.4.1 and 32.5]. The President's review [page 8 of the annual report] admits this as "one-off adjustment of provisions/reversals".
Besides the write back of Rs 2.230 billion mentioned in the preceding paragraph, the second major component of the pre-tax profit of Rs 5.469 billion during 2003 is the gain of Rs 2.658 billion on the sale of investments [Note No 23].
It is not known which investments were sold thereby earning a huge sum of Rs 2.658 billion. There are reports that the banks are replacing the high yield Government securities [Market Treasury Bills/Pakistan Investment Bonds etc with the low yield ones] thereby inflating current profits by premature using up future earnings source.
Apart from the above, the banks have earned a lot in the year 2003 on stock trading as there was no limit on the banks' investment in the stocks.
National Bank of Pakistan and United bank Ltd have earned Rs 2 billion each during 2003 from this source. But stock trading is not the safe and sustainable source of income and carries heavy risks.
The collapse of the National Investment Trust on account of fall in the indice is not the story of too distant past.
State Bank of Pakistan (SBP) has, therefore, taken cognisance of the banks' heavy involvement in the stock trading and has placed a limit of 20 percent of the capital and reserves of the concerned bank for investment in the stocks.
The banks are required to bring the investment in the stocks within the prescribed limit by the end of October, 2004.
PROSPECTS OF FUTURE PROFITS: In view of the position discussed in the preceding paragraphs, the profit of the bank is likely to be affected quite substantially in 2004 because:
(a) in case the gain of Rs 2.658 billion [Note No 23] has accrued through stock trading and replacement of high yield Government securities with the low yield ones, similar chance shall either not be available or will be available to a lesser extent;
(b) the facility of write back of Rs 2.230 billion [Notes Nos 25/32.3.2/32.4.1/32.5] was a one-time adjustment and will no more be available.
The situation may, however, become promising in case the interest rates of the Market Treasury Bills and Pakistan Investment Bonds are raised by the SBP during the second half of 2004.
The signal given by the SBP recently by rejecting all the bids for Treasury Bills demanding higher interest rates does not provide a room for reasonable optimism at least for the time being.
NON-PERFORMING LOANS: The position of non-performing loans as at the end of 2002 and 2003 is appended:
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(Rs billion)
2002 2003
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Domestic 38.620 33.606
Overseas 14.392 14.120
Total 53.012 47.726
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It will be seen from the above details that there has not been any progress in the recovery of overseas non-performing loans (NPLs).
The domestic NPLs have reduced by slightly over Rs 5 billion. It has been mentioned in the President's review (page 7 of the annual report) that: " Cash payment of Rs 5.0 b Non-performing and restructured loans were realised".
This is a vague version and does not depict the clear picture. If NPLs have reduced by Rs 5.286 billion, reduction of Rs 2.128 billion has come through write-offs [Rs 816.631 million- write-off principal Note No 9.6 + Rs 905.035 million & Rs 406.056 million-write-off of interest/other financial relief provided - Annexure II to the annual report = total Rs 2.128 billion].
Thus cash recovery may have been of the order of slightly over Rs 3 billion unless the restructuring of NPLs was also taken by the bank as cash recovery and in that event the real figure of cash recovery will be known to the bank alone.
The President's review (page 7 of the annual report) contains some comments about increase in the country's foreign exchange reserves. It stipulates: "The rise has been marked by an increase in the economic activity that is reflected in the expected GDP growth of over 5.5% for the current financial year - for the year 2004 as compared to 5.1% for the year 2003".
That the GDP growth has been instrumental in the build-up of foreign exchange reserves is difficult to assimilate. Had the GDP growth led to "trade surplus" in the external sector, the said version could be justified but the country had never seen surplus in the trade except one/two years in 1950s during the Korean war.
In fact, build-up of reserves owes its origin to the two major factors: current account surplus during the last two years or so because of huge amounts remitted by the overseas Pakistanis in the aftermath of September 11/2001 and purchases of dollars made by the SBP from the open market. [purchases from the kerb market during fiscal years 1998-99 to 2001-02 aggregate US $5.7 billion as per the data published in SBP annual reports].
INTERMEDIATION COST: In its annual report for 2002, Habib Bank Ltd had claimed to have reduced the intermediation cost to 3.3 per cent which was incorrect.
The intermediation cost during 2003 works out to 4.4 per cent [lending rate 5.7 percent - deposit rate 1.3 percent c.f. page 8 of annual report for 2003]. Let us hope that the private management will be successful in reducing the cost to 3 percent or less.