Pakistan’s largest commercial bank, HBL delivered another strong quarter, registering record 9M profits. Pretax profits grew 3 percent year-on-year to Rs85.8 billion, and the result was accompanied by another Rs4/share dividend, bringing the year-to-date payout to Rs12/share. The path to profitability has largely remained the same – with the asset mix tilted toward sovereign investments leading the way, ably supported by strong growth in non-core income.
The balance sheet footprint grew 12 percent over December 2023 to a mammoth Rs6.2 trillion. Needless to say, the lion’s share of this expansion came from investments in government securities. The investment portfolio reached Rs3.18 trillion – an increase of 34 percent or Rs624 billion over December 2023. In stark contrast, the advances portfolio remained largely stagnant at Rs1.84 trillion – erringly similar to December 2023.
The investment-to-deposit ratio of 66 percent for 9MCY24 is higher by over 4 percentage points over December 2023. Islamic banking segment continues to be the fastest growing, and contributed over 30 percent to pre-tax profits, with a circa 10 percent share in both advances and deposits. Advances in the corporate, commercial, and investment banking segments remained unchanged from December 2023, with the share in profits going considerably down. Consumer, SME, and agriculture lending witnessed a decline in gross advances from December 2023 – despite having been one of the key growth areas on the lending side prior to the period under discussion.
The advances to deposits ratio (ADR) at a little over 38 percent hardly inspires confidence – given it is down 6 percentage points from December 2023 and of the lowest in a long time. With the macroeconomic indicators showing signs of a slow resurgence, one should expect some positive movement in advance growth across the industry. A considerable reduction in interest rates should also help, but industrial growth still seems to be stuck in a low-growth spiral and there is not much confidence to draw from the consumer side either, given the sharp dent in purchasing power over the past 24 months. Consumer confidence surveys say as much – with decisions to purchase durable items not on the list for the next six months.
On the liabilities front, deposits at Rs4.8 trillion were up 16 percent from December 2023– led by low-cost and no-cost savings and current accounts. The CASA ratio has been continuously improving and recorded 87.3 percent, with low-cost deposits having a two-thirds share in deposit growth. Non-markup income lent the biggest hand, nearly trebling year-on-year, with fee and commission income registering an impressive 20 percent year-on-year growth. The card business was the largest contributor to fee and commission income, followed by trade commission and merchant discount fees. Realization of gain on government securities and shares led to a positive difference of nearly Rs6.8 billion to the bottom line. The administrative expenses were largely in line with inflation growth. The cost-to-income ratio stayed unchanged at 57 percent.
With the interest rate cycle finally having started to reverse, having stayed at record high levels for a long time, it may not lead to an immediate change in advances portfolio, as the large-scale sector is still struggling to post meaningful growth. With the prospect of significantly higher taxation in case of ADRs being lower than a certain threshold by the end of CY24 – a visible change in the asset mix is very much on the cards for 4QCY24.