An article by Mr Asif Said was published in the Business Recorder of June 20, 2005. The article attempts to analyse the performance of the four large banks of the country. In his analysis the author has made some very basic mistakes, which are either deliberate with some ulterior motive (discussed later) or innocent showing a complete lack of analytical skill.
The full focus of his analysis appears to be on percentage growth numbers. From this he even concludes that UBL may overtake HBL as the largest bank. The dichotomy between analysis based on percentages and absolute amounts is one of the most basic analytical puzzles.
This is encompassed in the efficiency vs effectiveness debate and is well documented in all basic business studies books. The Economic Value Added (EVA) principle, which has been adopted by some of the largest global organisations, including HSBC and Lloyds bank, is the most obvious manifestation of this conflict, which concludes that organisation should maximise the absolute returns, which exceed the cost of capital and not set itself % ROE targets.
HBL has the largest branch network because its management considers this to be the most optimal branch network size. Similarly other banks believe their network size to be the most optimal and have closed branches in the past five years. Hence each bank should now be able to capture the largest share of new business.
It is clear that in both areas of new deposits and advances, HBL's performance has been the best and well above the average of the other three large banks, both in the past year and over the three years period 2002-2004. The author fails to realise that the gap between HBL and the other banks has actually widened over this period in HBL's favour and hence there is no way the author's scenario of doom can be justified.

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Loan and Deposit Growth in Rsbn (Widening Gap)
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             Loan Increase    Deposit Increase
            1-Yr    3-year      1-Yr    3-year
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HBL           78       104        44       121
Best amongst
Other 3       65        69        70       116
Average of
Other 3       52        66        41        90
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A simple year on year % change analysis also has the drawback that it incorrectly penalises the early mover and favours the latecomer. Let me explain this by a simple analysis

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        Opening    Year1    Year2    Growth yr1    Growth yr2
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Bank A    100       110      135        10%               20%
Bank B    100       125      135        25%                9%
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It appears that bank B is worse than bank A in Year 2 whereas it is Bank B that has been the early mover. This is because the early mover's performance has been built into its base. In practical terms, it will also be more difficult for bank B to lend further or take additional deposits from the target market in year 2.
He compounds the errors by making multiple performance criterion from a few (which were dubious in the first place). For example, he has used % growth in NII and NFI as individual criterion and then the total income as another criteria. He then uses expenses as another criterion followed by operating profit as other. So from three plausible criteria he concocts five! His 'marksheet' appears to have 16 criteria whereas the listed criteria are only 13 and he throws in marks on 3 unexplained criteria, in which of course HBL is awarded minimum points.
The author completely ignores facts from the financial statements that may have helped him to properly analyse the competitive situation.
A proper analysis of Non-Performing Loan (NPL) situation also shows that HBL has made progress in addressing its NPL problem and has been very successful at it.

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                    2001    2004 *    Mar05 *
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Net NPL (Rs BN)     24.1    11.2         10.0
Net NPL % assets     7.2%    2.3%        2.0%
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-- Net of cash provision but covered by Forced Sale Value of collateral.
Apart from the costs of workout of NPLs mentioned above, HBL's income is affected by the non-accrual on assets amounting to Rs13bn, which have been settled in 2003 and are expected to become earning assets by July 05.
The interest rate mismatch shows the riskiness of the banks earning to interest rate movements. The amount of fixed rate lending plus investment over one year for HBL was lowest, showing the seriousness of risk management at HBL.
If Asif Said were aware of the banking sector dynamics, he would be aware that HBL handles the highest number of Haj applications and it receives 40% of all utility Bill payments although it has less than 23% of countrywide branches. HBL provides these services to the public to fulfil responsibilities as a nation-wide bank.
We readily admit the point on the level of administrative costs. HBL's costs at Rs 13.7 bn are indeed the highest in the banking industry and nearly Rs 5 bn higher than any other bank. This is a legacy of the early to mid 90's when staffing levels became the highest in the banking sector. The bank has been tackling this very complex situation since its restructuring began in 1997 and considerable progress has been made.
However, there is still need to reduce the intermediation cost even further to bring it in line with that of other large banks and HBL is working on several initiatives to further rationalise its cost structure.
However, this high administrative cost has not deterred the management from undertaking expenditures that are key to long-term success. HBL is implementing a state-of-the-art core banking system that is of the highest international standard and is further advanced in this task than any of the other banks.
The author further attempts to use his inept analysis to compute valuations for the various banks. He must be aware that in most mergers/acquisitions globally it is quite the norm that market values move significantly and usually double and can even triple compared to the pre-bid price.
In summary, the author's analysis is predisposed and does not reflect reality.
We at HBL fail to understand the author's motive but he has been consistently against the public interest undervaluing the assets that are being privatised. He wrote to the potential bidders on October 1, 2003, (just before the final bidding date for HBL) as follows:
1. If an investor believes that the bank's future profitability will mirror what is reflected in its 2002 balance sheet, PC could receive an all in price of D 182 million (D 307 less D 125 million discount for excess NPL) or PKR 5.3 billion for a 51% controlling interest.
2. But, if a potential investor believes that its own management team can really shake up the bank, one could anticipate a high bid 80% to 100% over the amount mentioned above...perhaps around PKR 9.5 to 10.5 billion for 51% of the bank.
3. And, ultimately, if GOP picks up the tab for excess NPL overhang on the books of HBL, as it did last year for UBL, the final bid for HBL could go as high as D 480 to D 500 million (PKR 28 to 29 billion), making the bank's controlling interest worth D 240 to D 250 million, or PKR 14 to 14.5 billion. Anything more would be wildly optimistic not only because of the foregoing rationale but also because our country is not exactly the haven for Foreign Direct Investments (FDI) that MOF's spin doctors would have us believe.
(The writer is SEVP and CFO of Habib Bank Limited)