BANK AL-HABIB: Analysis of Financial Statements CY'03-9MCY'09
OVERVIEW (December 01 2009): Bank Al-Habib was incorporated in 1991 and is headquartered in Multan. It provides various financial products and services in Pakistan. It offers consumer, commercial and Islamic banking services.
Its commercial banking services include current and deposit accounts for corporate and individual clients; foreign currency accounts; finance through loans and other credit facilities to the corporate, private, and public sectors; short-term finance of foreign trade through letters of credit and negotiation of bills of exchange; and issuance of guarantees, bid bonds, and performance bonds. The bank's consumer banking products and services comprise agricultural, auto, home, home buying, home construction, and home improvement loans.
Name of company Bank Al - Habib Limited
Nature of Business Banking
Net Premium CY '07 Rs 6,247,739,000
Net Premium CY '08 Rs 7,851,991,000
Share price (avg.) Rs 26.48
Market Capitalization 12671712720
Its Islamic banking products and services include various deposit schemes, such as current accounts, savings accounts, and term deposits; and Islamic finance and leasing services for individual/traders/industries. In addition, it offers investment products and services, which consist of PLS savings accounts and monthly profit plans, term deposit accounts, AL Habib growth certificates, and super savings accounts. Further, the bank offers online banking, safe deposit boxes, ATM cards, debit cards, tele-banking, electronic funds transfer, remittances, life insurance, and cash management services.
The bank has opened its 200th branch in Lahore on 25th June 2008. Currently, the bank has a network of 203 branches consisting of 202 branches in the major cities and towns of Pakistan and a wholesale branch in the Kingdom of Bahrain. The bank also intends to open more new branches as per its branch expansion policy. Pakistan Credit Rating Agency Limited (PACRA) has maintained the bank's long-term and short-term entity rating at AA (Double A) and A1+ (A One plus) respectively.
Recent results 3Q09: Net interest income increased by 50%, on back of rapid increase in the interest income. The pre-tax profit of the bank for the nine months period ended September 30, 2009 was Rs 3,244.4 million as compared to Rs 2,690.6 million during the corresponding period last year. PAT was recorded at Rs 611 million as compared to Rs 573 million. As against the industry trends, the provisions against NPLs, declined by 40.7%. Non-interest income however did not complement the above achievements and declined by -27.3%. The decline in the non-interest income was due to decline in dividend income and decline in income from dealing in foreign currencies.
The deposits increased by 21.5% to Rs 175.9 billion as compared to Rs 144.4 billion on December 31, 2008. The major increase was in the fixed deposits, while the remunerative savings accounts also increased. This trend is dangerous in times of sluggish credit demand, and lowering of lending rates due to decline in KIBOR. In the same period advances decreased to Rs 95.5 billion from Rs 100.2 billion, while investments increased to Rs 93.1 billion from Rs 48.2 billion. The accelerated increase in investments is in line with the whole industry, which has responded eagerly to SBP's issue of government paper. Subordinated debt has increased by 71.4%.
Banking sector update:
Our banking sector is quite resilient and has been able to withstand different types of market shocks and adverse macro economic conditions. This capability has been achieved through continuous financial reform process distinctively pursued during the past few years. Therefore, there should not be any cause of concern about the stability of the banking system in the near future. The banking sector has strong capital adequacy ratio, which is well above the minimum requirement.
CAR stood at 12.1 percent as of Jun 08, which is well above the international benchmark. Similarly, NPLs ratio and NPLs to capital ratio is also quite low and within acceptable ranges. This is mainly because banks in Pakistan focus largely on conventional lending and not into sub-prime credit lending. SBP prudential regulations prohibit banks from clean lending and investment in low quality assets.
Liquidity package worth Rs 270 billion was made public fortnight ago. Amendment in the Advances to Deposit Ratio (ADR) has enhanced the banks' existing lending capacity to Rs 550 billion as the average of advance-to-deposit ratio has dropped from 75 to 57 percent. Banks were facing huge liquidity shortage for the last two months due to tremendous withdrawals of cash from banks in the wake of default remorse, as a result of which the overnight rate reached new peak of 40-48 percent in the domestic market.
To meet the banks' liquidity requirements, the SBP has reduced the CRR up to 5 percent besides exempting the time deposits of 1 year tenor and above from Statutory Liquidity Requirements (SLR). The current mover of central bank would inject a liquidity of Rs 30 billion in the banking system easing them to meet their customers' demand, while cumulatively with SBP's current and previous moves will have released liquidity of Rs 270 billion in the banking system.
Analysis of financial performance:
The profitability of BAHL has declined over the current year CY08. The profit after tax rose by 15.90% while assets, deposits and equity rose by 25.46%, 25.71% and 38.81% respectively. In CY08, the interest income was the major contributor to the profits and showed an increase of 32.54% while non-interest income grew by 12.56%. Net mark-up interest income has increased by 57.88%. Bank Al-Habib's return on assets is below the industry averages reflecting lower profitability as compared to industry. Similarly, company's ROE has been way above the industry averages showing its leveraged position. This is clearly reflected in a very high deposit to equity multiple of 12.36 percent as compared to industry's 8.21 percent in the CY08.
The bank's performing advances were higher this time. Though the yield on the earning assets grew, this was offset by a higher cost of funding. In spite of that and the decline in banking sector spread, the bank's profitability picture remained positive, indicating that the bank has prudent policies in place for handling its deposits, advances and investments.
Bank's EPS has slightly increased from Rs 4.59 in CY07 to Rs 4.95 in CY08. The earning assets of the bank have been growing all throughout. Higher deposits are being streamed into greater advances, lending, and investments especially. Bank's investments constituted about 32 percent of earning assets in the CY08 as compared to 30 percent in the FY07. This is mainly due to significant investment made in different government securities and term finance certificates in FY08.
Composition of the earning assets shows greater investments than advances, which shows that the trend from CY07 has continued. We expect this trend to increase further considering the higher NPLs to advances ratio and the worsening state of country's economy. Moreover, increasing investments in low-risky assets mean lower credit risk and better quality of assets. The interest rate spread of the banking industry showed a declining trend in the CY08. Despite this trend, the performance of the bank showed more than satisfactory results.
The liquidity profile of the bank shows comforting trend. The liquidity position of the bank has improved in general over the period under study. Bank's earning assets to total assets have grown at more than industry averages. Similarly, bank's advance to deposits ratio has been declining marginally in the period under study.
The ADR of the bank has shown a decline over this period because of heavy growth in bank's deposits, outpacing the otherwise moderate advances growth rate resulting from a relatively prudent loans portfolio in 2008. The deposit base rose in CY08 due to SBP's regulation to offer higher return on deposits with the intention to reduce banking sector spreads and provide investors with a fair rate of return.
The debt management of the bank shows a highly leveraged position as compared to industry averages. In CY08, the bank's debt to equity and debt to total assets ratio have declined but are still above the industry averages in the period understudy. This indicates that the bank is a highly leveraged institution with only a small portion of its assets constituting equity.
Though the bank has made efforts to increase its equity to meet the SBP's minimum capital requirements, a large proportion of its assets remain debt financed. Such high debt levels may expose the bank to excessive credit, interest and other risks. Moreover, maintaining such high levels of deposits against equity is also exposed to the danger of the bank experiencing a run on its deposits. Increasing the equity portion of the assets would provide a cushion against all such risks.
The solvency ratios of the bank show somewhat similar trend. This trend may be attributed to the efforts of the bank in increasing its equity and its earning assets. The equity to assets and equity to deposits profiles have remained rather constant over the last four years. Earning assets to deposits profile has shown a decline in CY08. The bank needs to increase its equity base and investments in government securities and other sectors of the economy.
The non-performing loans of the bank have somewhat remained constant for the last four years. However, NPLs to advances have shown a declining trend especially after 2006. This is mainly due to greater advances as compared to NPLs, which is a welcoming trend as higher return may be generated from greater advances.
Bank's NPLs/advances ratio and provision for NPLs have been lower than the industry averages. Lower provision on one hand may leave the bank with greater amount of assets for more productive uses but the bank should increase its provisions until the declining trend in the NPLs becomes more visible. The NPL provisioning in CY'08 was Rs 1.17 billion, which is much higher than Rs 93 million in CY07.
The company paid out dividend of Rs 1.14 per share in CY08 (CY07: Rs 0.81). The dividend cover has declined to 4.36 and dividend yield has increased to 4.30%. This shows that the investor expectations have improved since CY05.
SBP further loosened its monetary policy as it slashed the discount rate by 50 bps to 12.5%. The policy rate cut has been lower than expected. However, a lower discount rate is expected to reduce the banking spread and affect the interest income earned by banks. Easing monetary policy and favourable liquidity position has reduced KIBOR and six months repo rate since April 2009. The demand for private sector credit has been declining sharply and a decline in the policy rate of 100 bps to 13% earlier in CY09 could not boost this dwindling demand.
This was because slow economic activity country hampered credit off-take and the banks also took a stance of risk aversion in the face of increasing NPLs (which rose by Rs 19 billion during 2Q09 and has reached Rs 398 billion by the end of June 2009. Banks were more attracted towards government paper. The demand that was emanating was from the PSE mostly.
FSV benefit up to 40% has been allowed by SBP. This would give benefit to the banks in terms of lowering the provisioning requirements and thus bolstering the bottom line.
SBP has also introduced a reverse repo rate at 9.5 percent to manage liquidity and stabilise the interest rate in the overnight money market. The SBP policy rate will act as a 'ceiling' while the repo rate on the new overnight deposit facility (300 bps below the SBP policy rate) will provide a binding 'floor'. This new framework will improve liquidity management and make money market operations more transparent. Liquidity position in the market has been favourable and thus the total deposits with the banks expanded by Rs 295.3 billion during the 2Q09. The Budget 2009-10 is expected to have a neutral impact on the banking sector.
COURTESY: Economics and Finance Department, Institute of Business Administration