The calendar year 2004 was the first complete year of Habib Bank Ltd under private management. During this year, the Bank earned pre-tax profit of Rs 7.164 billion which represents an increase of 31 percent over the pre-tax profit of Rs 5.469 billion earned during 2003.
The after tax profit for the year 2004 is Rs 5.680 billion representing an increase of 41.36 percent over the after tax profit of Rs 4.018 billion of the year 2003.
The Bank's intermediation cost [the difference between the weighted average lending and deposit rates] shows a reduction of 0.75 percent from 4.12 percent in 2003 to 3.37 percent in 2004. The detailed calculations are given in Table I appended:
TABLE I:

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          Intermediation cost.                  [Figures in Rs billion]
S.No      Advances/Deposits/Interest    2003     2004         Year over
                                                            Year change
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1   Advances                          183.654    258.306     (+) 40.65%
2   Interest earned                    10.016     11.187    (+) 11.69 %
3   Weighted average lending rate       5.45%      4.33%       (-)1.12%
4   Deposits                          360.648    404.629      (+)12.19%
5   Interest paid                       4.815      3.906      (-)18.88%
6   Weighted average deposit rate       1.33%      0.96%       (-)0.37%
7   Bank's intermediation cost (3-6)    4.12%     3.37 %       (-)0.75%
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However, this reduction has not taken place at the expense of the Bank's profit [or the borrowers as the lending rate in 2004 has gone down as compared to 2003] but by squeezing the depositors. As will be seen from Table I that though the deposits increased by 12.19 percent in 2004, the amount of interest paid to the depositors decreased by 18.88 percent from Rs 4.815 billion in 2003 to Rs 3.906 billion in 2004.
All banks including HBL have been paying the negative rate of interest to the depositors In 2004, the deposit rate was made still worse by reducing the weighted average rate from 1.33 percent p.a. in 2003 to merely 0.96 percent in 2004.
On the earning side, the interest earnings on the advances grew by 11.69 percent from Rs 10.016 billion in 2003 to Rs 11.187 billion in 2004 even though the quantum of advances grew by 40.65 percent in 2004. As the interest rates had started picking up during the second half of 2004, the interest earnings should have grown at a rate faster than the growth rate of the advances or if at all the escalating interest rate did not affect the Bank's advances during the year, the growth in the interest income should have at least been equal to the growth rate of advances. Why did the interest income on advances not keep pace with the growth in advances is an enigma?
Is it also not strange that in the ascending interest rates scenario, the Bank's weighted average lending rate went down from 5.45 percent p.a. in 2003 to 4.33 percent p.a. in 2004
The beneficiaries of squeezing the depositors are thus both- the high profile borrowers and the Bank itself - as there are reports that all banks are charging considerably higher interest rates on consumer loans including loans obtained on the credit/debit cards.
Let us now come to important components of the Bank's income/expenditure during the calendar years 2003 and 2004 are summarised in the Table II appended:
TABLE II:
INCOME FROM BANKING SOURCES DURING 2004

[Figures in Rs billion]

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S.No  Income/expenditure head           2003     2004         Year over
                                                            Year change
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1.  Interest income on advances        10.016     11.187      (+)11.69%
2.  Interest income under other heads   9.033      6.960      (-)22.95%
3.  Total interest income(2+3)         19.049     18.147       (-)4.74%
4.  Interest expenses on deposits       4.815      3.906      (-)18.88%
5.  Interest expenses under other heads 0.631      0.561      (-)11.09%
6.  Total interest expenses (4+5)       5.446      4.467      (-)17.98%
7.  Net interest income (3-6)          13.603     13.680       (+)0.57%
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Non-interest income.
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8.  Commission/fee and brokerage        2.045      2.510      (+)22.73%
9.  Income on dealing in F.C*           1.069      1.096       (+)2.53%
10. Income/gain on investments          3.514      4.206      (+)19.69%
11. Other income.                       1.132      2.020      (+)78.45%
12. Total non-interest income           7.760      9.832      (+)26.70%
    (8+9+10+11)
13. Total income from banking          21.363     23.512      (+)10.05%
    sources (7+12)
*F.C = Foreign currencies.
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It will be seen from Table II that though the interest income on advances grew by 11.69 percent in 2004, interest under other heads declined by 22.94 percent although the another important interest-earner ie "Investments" reduced by merely 15.31 percent from Rs 158.871 billion in 2003 to Rs 134.541 billion in 2004 while bulk of the "Investment" comprised government bonds and the Treasury Bills (T.B.s) while the interest rates on the T.B.s remained on the ascending side in 2004.
On other components of interest income viz-a-viz deposits with/ lending to the financial institutions, 2003/2004 income was almost at par.
After accounting for the total interest expenses against total interest income, the net increase in this head is merely 0.57 percent from Rs 13.603 billion in 2003 to Rs 13.680 billion in 2004 despite substantial expansion in the deposits/ advances base.
Among the non-interest income items, the prominent are: (a) commission/fee and brokerage- increase 22.73 percent, (b) income /gain on investment 19.69 percent but the bulk Rs 3.361 billion out of Rs 4.206 billion [please see note No 22 was generated by the sale of "investment", and (c) other income -increase 78.45 percent. Out of other income amounting to Rs 2.020 billion, half ie Rs 1.010 billion is on account of "incidental charges".
What are these incidental charges has not been elucidated in the Bank's annual report. As the income is quite substantial -14 percent of the Bank's pre-tax profit (Note 23), the report must have contained some explanation about this major head of income.
The comparative position of the outstanding Non-performing Loans (NPLs) as at end-2003 / end-2004 is appended:
[Figures in Rs billion.]

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              2003        2004
------------------------------
Domestic     33.606     30.034
Overseas     14.120     14.473
TOTAL        47.726     44.507
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It will be seen from the above data that there has been an overall reduction of Rs 3.219 billion in the NPLs during 2004 out of which reduction of Rs 2.124 billion has occurred on account of write-offs. Thus at best a sum of Rs one billion may have been recovered in cash. It will also be interesting to note that during 2004, the quantum of overseas NPLs has increased by 2.5 percent instead of being reduced.
Another feature of the NPLs is that the ratio of domestic/ overseas NPLs is 67.48: 32.52 ie almost 2/3rd and 1/3rd respectively. Keeping in view the size of business being handled by the Bank domestically and through its overseas branches, one third of the NPLs pertaining to the overseas branches is abnormally high. The new private sector management should find out the causes and take measures to address the issue.
It may be added here for public information that HBL was handed over to the "professional management" in early 1997. The quantum of NPLs inherited by the professional managers was Rs 35.459 billion as at the end of calendar year 1996 which abruptly grew to Rs 46.485 billion at the close of the calendar 1997. One of the objectives of putting professional management in 1997 was to accelerate the process of recovery of the NPLs. After eight years of the professional handling of the Bank's affairs, the NPLs have decreased from Rs 46.485 billion (31-12-1997) to Rs 44.507 billion (31-12-2004).
During 2004, the Bank wrote off all the accumulated losses against the capital and consequently, the amount of the capital reduced to Rs 6.9 billion only. After the complete clean-up of the balance sheet, the Bank holds reserves of Rs 16.191 billion [capital reserve Rs 2.644 billion + Rs 13.547 billion un-appropriated profit and other reserves].
Against this huge built-up of the accumulated profit/reserves, the Bank has declared a paltry dividend of Re.0.5 per share and the total dividend pay out amounts to Rs 345 million only which is merely 6.07 percent of the after tax profit of Rs 5.680 billion and 2.13 percent of the accumulated profit and reserves aggregating Rs 16.191 billion.
The current financial status of the Bank allowed the Bank to conveniently declare dividend at 50 percent amounting to Rs 3.45 billion which would have entailed extra appropriation to the extent of Rs 3.105 billion but even in that scenario, the Bank would have been left with the accumulated profit/reserves of the order of over Rs 13 billion.
The single biggest victim of the misery of the Bank in declaring the paltry dividend is State Bank of Pakistan which, as mentioned on page 41 of the Bank's annual report for 2004, is holding 73 percent shares while Aga Khan Fund for Development [AKD}is holding 26 percent shares.