Research and Analysis Project New Updated

Syed Tanveer Ali

An Analysis and Evaluation of the business and financial performance of HABIB BANK LIMITED’Between1 st January 2010 to 31 st December 2012

Habib Bank Limited Research and Analysis Report Page 1Oxford Brookes University Research and Analysis Project

Syed Tanveer Ali

TABLE OF CONTENTS

Section I

(2.0) Information Gathering And Accounting / Business Technique

(2.1)Data Collection Sources(2.2)Details of Sources of Information Gathering(2.3)Limitations of Information Gathering(2.4)Discussion on Ethical Issues(2.5)Explanation of Accounting & Business Technique used and their Limitations

Section II

(3.0) Analysis, Results, Conclusions And Recommendations

(3.1) Company’s Introduction (HABIB BANK LIMITED)(3.2) List of Competitors (3.3) Graphical Comparison (HBL vs. PEERS’)(3.4) Business Analysis SWOT Analysis PEST Analysis(3.5) Financial Analysis Profitability Ratios Asset Quality and Liquidity Ratios Risk Adequacy and Liquidity Ratios Investment/Market Ratios Horizontal Analysis(3.6) Conclusions and Recommendations


Syed Tanveer Ali

SECTION II (2.0) INFORMATION GATHERING AND ACCOUNTING / BUSINESS TECHNIQUE

(2.1) DATA COLLECTION SOURCES

I have used just used secondary source of information in my research project as primary sources

were difficult to obtain as I was unable to arrange interviews within the Bank due to time constraints.

SOURCES OF INFORMATION

PRIMARY SOURCE

Primary sources are original materials. They are from the time period involved and have not been filtered through interpretation or evaluation. Primary sources are original materials on which other research is based. They are usually the first formal appearance of results in physical, print or electronic format. They present original thinking, report a discovery, or share new information.

Examples include

a) Interviews (e.g., oral histories, telephone, e-mail)b) Journal articles published c) Survey Researchd) Web site. Etc.

SECONDARY SOURCE

Secondary sources are less easily defined than primary sources. Generally, they are accounts written after the fact with the benefit of hindsight. They are interpretations and evaluations of primary sources. Secondary sources are not evidence, but rather commentary on and discussion of evidence. However, what some define as a secondary source, others define as a tertiary source. Context is everything.

Examples include

a) Bibliographies (also considered tertiary)b) Commentaries, criticismsc) Textbooks (also considered tertiary);d) Dictionaries, Encyclopedias. Etc.

[Lib.umd.edu, (2013)]

(2.2) DETAILS OF SOURCES OF INFORMATION GATHERING


Syed Tanveer Ali

The key task to progress through the research is to gather the relevant information related to topic to

achieve the desired outcome because this may subsequently affect on the quality of the research

work. Therefore extensive research was required along with the filtration and assessment of relevant

information through relevant business and accounting tools. As suggested in the BSC INFO PACK I

have used secondary sources of information as part of research report as all the information was

available through secondary sources.

SECONDARY SOURCES

Textbooks

I used ACCA’s official publishers’ textbooks of BPP and Kaplan and Institute of Banker Pakistan

(IBP), in particular texts for F7, P2 and P3 and stage I & II books of IBP were used comprehensively

during the project. These books proved to be invaluable and provided help in analyzing and

computing the financial ratios and understanding the company’s business strategy and tactics.

Audited Annual Reports

The authentic source of information about company’s financial and key non-financial performances is

its printed annual reports and it also include other valuable pieces of information leads to insight of

company’s affairs. This is the major source of information in the analysis part of this report. The

audited annual reports of HBL and MCB were obtained from Head office and official website of both

banks.

Articles

ACCA technical articles, Local newspapers and other sources were referred during the research

process. Following are the sources which were used:

Students Accountant Magazine

1. Grade ‘ A ‘ Rap [Shane Johnson, 2009]

2. Working with the best mentor [Alastair Neilson, 2009]

3. Performance Appraisal [Bobie Retallack , 2010]

4. How to approach performance appraisal questions [Steve Scott, 2006]

Newspapers


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1. Business Recorder

2. Daily Times

3. The News

Research Articles ( Accessible/Published Online)

INTERNET

Internet was a great tool to help me complete my research. Since I often spend hours on researching

different things on internet, it was easiest source to gather information. I gathered most of the

information from different websites using different search engines such as Google and Yahoo.

Official websites of HBL and MCB were of great importance in terms of respective company profiles

and news updates. The time to extract relevant information from loads of information was quite time

consuming.

(2.3) LIMITATION ON INFORMATION GATHERING

Firstly the data used for the research report is mainly secondary and was collected from many

different sources mentioned above. Relying too much on secondary sources may not provide

accurate and complete information as information from internet may not be reliable and authentic.

Therefore extreme care was taken to ensure that no conflict arises between the facts and figures as

mentioned in financial statements and those in the publications.

Secondly, there was a time constraint too because as I mentioned above that HBL is one of the

largest domestic private bank so loads of information was available and the time to extract relevant

information was a bit difficult exercise which consumed hours. There was a threat that some

important piece of information may have been ignored.

Thirdly, due to limitations of words of this project I had to be more specific to just depict the important

matters and information.

(2.4) DISCUSSION ON ETHICAL ISSUES


Syed Tanveer Ali

I faced few ethical issues which came up during information gathering and the ways I tackled them.

I had easy access to the some extent to inside information and there was a threat relating to

confidentiality. Before proceeding on the project I had to inform the management of HBL about

the research and took the written permission.

Temptation to buy existing reports or paying someone to write the report for you.

(2.5) ACCOUNTING & BUSINESS TECHNIQUE USED AND THEIR LIMITATIONS

We can use several accounting and business techniques to evaluate a company’s performance. I

have used three accounting and business technique in my research report and applied on the

gathered information. Following are the techniques and their limitations:

1) Ratio Analysis

A tool used by individuals to conduct a quantitative analysis of information in a company's financial

statements. Ratios are calculated from current year numbers and are then compared to previous

years, other companies, the industry, or even the economy to judge the performance of the

company. Ratio analysis is predominately used by proponents of fundamental analysis.

(http://www.investopedia.com/terms/r/ratioanalysis.asp, 2013)

Limitations:

1) Ratios, calculated using past data, don't provide complete information for future forecasting.

2) Management's choice of accounting policies--the specific principles and methods of preparing

and presenting financial statements may have a significant effect on key ratios.

[Limitations of Financial Ratios | eHow (Damoah, 2002)]

3) Incorrect or inaccurate data may give false results and interpretation of ratios.

Vertical Analysis

A method of financial statement analysis in which each entry for each of the three major categories

of accounts (assets, liabilities and equities) in a balance sheet is represented as a proportion of the

total account. The main advantages of vertical analysis are that the balance sheets of businesses of

all sizes can easily be compared. It also makes it easy to see relative annual changes within one

business.


http://www.investopedia.com/terms/r/ratioanalysis.asp

Syed Tanveer Ali

Limitations:

1) The company may engage in a unique activity in one year that skews the results of the

analysis.

2) If the companies operate in different industries, they may report different asset percentages,

making the comparison lack meaning.

[Base Amount of a Vertical Analysis | eHow.com, (McIntosh, 2001)]

Horizontal Analysis

A procedure in fundamental analysis in which an analyst compare ratios or line items in a company's

financial statements over a certain period of time. The analyst will use his or her discretion when

choosing a particular timeline; however, the decision is often based on the investing time horizon

under consideration.

(Investopedia.com, 2013)

Limitations

1) Being highly dependent on the selection of base year and the period under examination in the

financial model

2) Horizontal analysis provides little insight into why the trend occurred in a financial model.

Reference: [Financial Modeling Guide, (n.d)]

2) Swot Analysis

SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. By definition, Strengths

(S) and Weaknesses (W) are considered to be internal factors over which you have some measure


Syed Tanveer Ali

of control. Also, by definition, Opportunities (O) and Threats (T) are considered to be external factors

over which you have essentially no control.

SWOT ANALYSIS FRAMEWORK

(http://www.managementstudyguide.com/swot-analysis.htm, 2008)

Limitations of SWOT Analysis

The SWOT framework emphasizes the elements of strengths, weaknesses, opportunities

and threats, but provides no real guidance on how individual organizations can identify these

elements for themselves.

Organizations also may have difficulty determining whether something in their external

environment presents an opportunity or a threat, and the SWOT framework does not offer a

way to distinguish them.

[Hall, (n.d).]

3) PEST Analysis


http://www.managementstudyguide.com/swot-analysis.htm

Syed Tanveer Ali

The PEST analysis is used in the process of environmental scanning. It gives an overview of the

different macro environmental factors that the company has to take into consideration. It is a helpful

strategic tool for perceptive market growth or decline, potential, business position and direction for

operations. The Factors are:

Political factors

Economical factors

Social factors

Technological factors

[(http://www.ukessays.com/essays/marketing/marketing-planning-is-a-logical-sequence-of-events-marketing-

essay.php, (2008)]

Limitations:

The external factors considered during PEST analysis are dynamic and they change at a

very fast pace.

Collecting enormous amounts of relevant data from the right sources becomes a bit of a

problem, especially since most of the pertinent data must be collected from external

agencies.

[Limitations of a PEST Analysis (Sidharth Thakur and Ginny Edwards, 2010)]

(Brighthubpm.com, n.d.)

SECTION III


http://www.ukessays.com/essays/marketing/marketing-planning-is-a-logical-sequence-of-events-marketing-essay.php

http://www.ukessays.com/essays/marketing/marketing-planning-is-a-logical-sequence-of-events-marketing-essay.php

Syed Tanveer Ali

(3.0) ANALYSIS AND RESULTS

(3.1) COMPANY’S INTRODUCTIONS:

(3.2) List of Competitors


Introduction of Habib Bank of Pakistan:

HBL was the first commercial bank to be established in Pakistan in 1947. Over the years, HBL has grown its branch network and become the largest private sector bank with over 1,500 branches and 830 ATMs across the country and a customer base exceeding five million relationships. The Government of Pakistan privatized HBL in 2004 through which AKFED acquired 51% of the Bank's shareholding and management control. HBL is majority owned (51%) by the Aga Khan Fund for Economic Development, 42.5% of the shareholding is retained by the Government of Pakistan (GOP), whilst 7.5% is owned by the general public i.e. over 170,000 shareholders following the public listing that took place in July 2007. With a presence in 25 countries, subsidiaries in Hong Kong and the UK, affiliates in Nepal, Nigeria, Kenya and Kyrgyzstan and rep offices in Iran and China, HBL is also the largest domestic multinational. The Bank is expanding its presence in principal international markets including the UK, UAE, South and Central Asia, Africa and the Far East. [REF http://www.hbl.com/about-us.php]

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The competitors Analysis has made by gathering data of Top 5 banks from their respective Annual

Reports of 2012.

Major Head HBL NBP MCB UBL ABL

Assets 1,610,309 1,316,160 770,283 960,210 632,302 Deposits 1,214,964 1,038,095 544,988 755,264 514,702 Advances 499,818 661,345 239,789 385,834 271,116 Investments 797,095 342,965 405,601 381,246 267,683 Net Markup Income 57,760 44,573 4,090 39,643 18,331 Non- markup income 15,960 24,805 9,541 17,195 14,245 Income from dealing in foreign currencies 2,568 3,795 824 1,926 598 Fee, commission and brokerage income 6,786 11,146 6,385 9,450 2,942 Provision against advances 7,244 7,155 481 3,321 1,274 Operating expenses 32,062 37,295 17,823 26,578 14,686 Profit before tax 34,891 24,063 32,476 28,410 16,146 Profit after tax 22,356 16,887 21,235 19,280 11,882 Total Equity 133,038 156,178 105,755 100,854 51,264 Earnings per share (Rs.) 18.36 9.13 23.00 15.71 12.56

HBL vs. PEERS' ANALYSIS 2012 Million

(3.3) Graphical Representation of HBL vs. PEERS’ Analysis


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HBL 30%

NBP 25%

MCB 15%

UBL 18%

ABL 12%

Assets

HBL 24%

NBP 18%

MCB 23%

UBL 21%

ABL 13%

Deposits

HBL 24%

NBP 18%

MCB 23%

UBL 21%

ABL 13%

Investments

HBL 24%

NBP 18%MCB

12%

UBL 21%

ABL 13%

Advance

HBL 25%

NBP 18%MCB

24%

UBL 21%

ABL 12%

Profit before Tax

HBL 24%

NBP 19%

MCB 23%

UBL 21%

ABL 13%

Profit after tax


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(3.4) BUSINESS ANALYSIS

Business Performance of HBL can be evaluated through application of business models that would

help in evaluating the company’s core activities, internal and external appraisal

SWOT ANALYSIS

Positive NegativeStrengths Weaknesses

I

N

T

E

R

N

A

L

F

A

C

T

O

R

S

HBL has good reputation and prestigious

background since 1947. HBL has won two

Global Finance Awards 2010.

HBL has wide branch network of 1540

branches reaching out to every corner of the

country.

Payment services (Includes cash

management, branchless banking and

alternate delivery channels) growing faster.

Cash management showed growth by 42%.

HBL has over 1400 branches making best

use of technology and increasing customer

based by providing extensive online

services.

HBL has created an excellent brand image

through advertisement and capturing market

share.

Proper training to employee makes

employees more capable of dealing complex

issues.

Majority of the customers are unaware of

products of HBL. That requires heavy

media campaign of those products.

Retention of Bank employees is

becoming a problem for HBL due to less

salary giving to employees, as new

Banks and foreign Banks recruiting

experience staff of big Banks.

Customer dissatisfaction can be seen in

branches in peak hours, where the staff

does not facilitate the customer in quick

manner.

Other Islamic bank showing extensive

growth, HBL also need to expand its

Islamic banking operation.

Internet Banking, Mobile banking should

be offered at cheaper prices as other

Banks such as Foreign Banks offering

the same at cheaper price.


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Positive Negative

Opportunities Threats

E

X

T

E

R

N

A

L

F

A

C

T

O

R

S

Large Deposits can be used to expand its

lending portfolio to private sector.

Being the largest bank HBL can help SME’s

and Agri financing by providing loans on less

strict covenant.

New government has been formed which can

provide boost to economy in coming years,

HBL has all potential to best use of the future

opportunities.

Talent development and potential employee

retention would be beneficial for HBL.

HBL can add value into its services by

training and skill enhancement program.

HBL acquired CITI Bank’s consumer portfolio

which shows that HBL is committed towards

increasing customer based and finding

opportunities.

High competition in the market by other

banks offering innovative products on

regular intervals.

Lack of credit demand from private

sector, shrinking banking spread which is

impeding Banking sector growth.

Banks may be restrained from heavily

investing in Government papers in the

future. (High tax would be charging on

returns).

New policies such as revision of minimum

interest on PLS saving from 2% to 6%

can cause troublesome for Banks’

profitability if such policies continue to be

issued in the future.

PEST ANALYSIS


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Political Environment

Political environment of a country plays an important role for business sectors to have consistent

policies and implementation that increases resilience to accommodate shocks that affects

macroeconomics such as inflation. Unfortunately in Pakistan, there has been no consistency in

political environment for decades which lead to weak policies and implementation and result in

erratic economic growth. Government is responsible for making the fiscal policies which directly

affects financial sector. In recent years Government of Pakistan had borrowed extensively from SBP

and commercial Banks to keep the government spending in flow, which ultimately effected the

economical environment.

[Monetary Policy Decision (SBP, 2012)]

Due to lack of political instability which leads to weaken legal framework, the decline in investment to

GDP ratio to historically low can be noticed. Financial sector focus remains on upcoming election

rather macro-economic reforms, hoping economic reforms policies which enhance opportunities for

banking sector to grow further in coming years.

Economical Environment

The economic situation of country had become worse in 2008; since economic condition started

recovery witnessed a modest recovery in 2012. In 2012, the real GDP grew by 3.7% as compared to

3% in FY11. The Economy however, underperformed compared with growth target of 4.2% for the

FY 2012 primarily due to severe energy crisis, deteriorating law and order and weakening the global

economy.

The following sectors showed growth in 2012.

a) Agriculture sector 3.1% in FY12 compared to 2.4% in FY11.

b) Industrial sector 3.4% in FY12 compared to 0.7% in FY11.

c) Service sector, the largest contributor ( over 55%) in GDP, 4% in FY12 as compared to 4.4%

in previous year

Inflationary pressure eased significantly as CPI reduced from 13.7% from FY 2011 to 11% in FY 2012 and further to 6.9% as on December 2012. Rising trade deficit to $15.5 billion in 2012 as against $10.5 billion from previous year. Despite the challenging economic front, banking sector showed sustainable growth as lending scenario remain slightly stable in 2012 compared to previous year. HBL domestic deposit growth at Rs. 1041 billion witnessed robust growth of 32% which was much above the industry growth of 11%. HBL continued its financial and business growth despite of current economic crisis to the country [HBL, 2012].


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PAKISTAN INFLATION RATE REVIEW

Socio-Cultural Environment

Socio economic culture depends on the society’s norms, belief, lifestyle and education. In a country

like Pakistan where wealth is unevenly distributed with vast rural population and most of the people

in rural areas living below the poverty lines definitely affects the economic activities in the country

which results less development and growth in the society. Keeping money into bank accounts was

not very common in Pakistan, but Islamic Banking has played a revolution role in the Banking sector


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as HBL has showed robust growth in Islamic Banking deposit by 31% in 2012 to Rs, 31 billion.

Through schemes HBL aware people the importance of savings money through advertising and

visiting to schools and colleges. HBL has outreach to every person from corporate client to a

common man being a reliable bank for decades. Recent increase of interest rate on PLS saving

account was the initiative taken by SBP to promote saving concept amongst the people. Recent

introduction of PAKISTAN CARD and WATAN CARD in flood affected areas of Pakistan increased

the popularity and importance of Banking.

Technological Environment

The impact of I.T has significance impact over Banks’ financial and business performance. HBL is

also striving to achieve high value image in the market by providing services to fulfill customer needs

efficiently and effectively.

Following Services are provided.

a) HBL Internet Banking ( e.g. online transfer of money, Mobile easy loads, Utility bill payments,

credit cards payments , Bank statements , cheque book request, personal setting etc.)

b) HBL ATMs

c) HBL Mobile Banking Services

d) Debit Card Services

e) Phone Banking Services

f) User friendly mobile Application for different brands. (Wearehbl.com, 2012)

The information technology group keeps its self aligned with HBL’ strategic goal and left no stone

unturned in assuring speedy and uninterrupted services as well as secure processing environment

and safeguard customer’s assets. Constantly increasing number of branches and ATM’s which

makes HBL different from other bank.

(Hbl.com, 2013)


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(3.5) FINANCIAL ANALYSIS

Financial statements for banks present a different analytical problem than statements for

manufacturing and service companies. Therefore, it was important to differentiate the framework use

for financial sector and non financial sector. For that reason, I had to go through key financial ratios

of financial sector and guidance taken from “Evaluation Committee of the Joint Committee of

ICAP and ICMAP” evaluation criteria 2013.

(www.icap.org.pk, 2012)

Profitability ratios

Profit and Return

Profit before Tax Ratio

Scrutinizing each year individually, following facts revealed from the annual reports of HBL. The

profit before tax ratio increased nominally to 34.82% in 2011 which was 33.25% in 2010. This

increase is mainly due to decline in provisioning expenses of HBL by 14% to Rs. 6.7 billion. Decline

of provision charge was mostly because of higher general provisioning in 2010 against Agri finances

in flood affected area, amounting to Rs. 775 million.

PBT increased by 27% to Rs. 34.3 billion in 2011. Profit before tax ratio decreased by 5% to 29.88%

in 2012, but overall the Profit before tax increases by 1.7% to Rs 34.9 billion as a sluggish growth

from previous year. The above result was affected slightly by admin expense which rose by 5.9%.

Pre- Provision Profit increased by 18% to Rs. 41.0 billion in 2011 and 2.7% to Rs. 42.14 billion in

2012. The group Profit after tax (PAT) Rs. 22.4 billion in 2012 as compared to 22.3 billion in 2011,


http://www.icap.org.pk/

Syed Tanveer Ali

reflecting an increase of 0.1% and Rs. 17.03 billion in 2010 as compared to 2011 reflecting an

increase of 31% in 2011 to all time high (FY 2010 to FY 2012).

Net Interest Income Analysis

Net interest income increased by 20% to Rs. 56.4 billion and 2.4% to Rs. 57.8 billion in 2011 and

2012 respectively, driven by improved yield and volumetric growth in government securities.

[HBL 2012, pg.41]

Also advances increased by 1.65% to Rs 55.66 billion from Rs. 54.76 billion in 2010 which was also

the reason for high profitability in 2011. Although in 2012, interest on advances decreased to Rs.

52.95 billion which is 5.0% from previous year due to decrease in KIBOR (Karachi Interbank Offered

Rate), but the overall gross interest income rose by 18.5% to Rs 116.8 billion.

27%

31%

-12%

18%20% 20%

% Growth 2011 VS 2010

Profit

bef

ore

tax

Profit

afte

r tax

Provis

ion

Pre- P

rovis

ion P

rofit

s

Net M

arku

p inc

ome

Non M

ark-

up e

xpen

ses

1.8%

0.4%

8.2%

2.7%2.4%

6.6%

% Growth 2012 vs 2011


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Gross Yield on Average Earning Assets

Gross yield on earning assets help us to measure the profitability. Better ratio results shows good

utilization of earning assets by a

bank to earn returns.

If we compare or analyze the

utilization of earning assets by HBL

management it clearly reveals that in

2010 GYEA was 11.44 % which

further improved by 3.7% to 11.86% in 2011. The difference depicts minor change in positive

direction. This could be due to reasons that HBL’s growth advance remained under pressure due to

lack of credit demand during 2011 which extended into 2012 due to low credit demand, shrinking

spreads and investment in Government papers ( Government extensive borrowings). HBL’s gross

advances were almost flat during 2011 at Rs. 503 billion. Further in 2012, HBL’s gross advances

rose to Rs. 545.8 billion but HBL reported a decline in GYEA by 12% to 10.43%. This decline may be

attributed interest rate belling slashed to 9.5% in 2012 which also impacted on KIBOR (Karachi inter-

bank offered rate).

2011 Vs 2010 2012 Vs 2011

-50

0

50

100

150

200

250

300

350

400

Lendings to financial in-stitutions

In-vest-ments

Advances

Am

ou

nt

In b

illio

n

2010 2011 2012 -

100

200

300

400

500

600

700

800

Changing in Earning Assets

Lendings to financial insti-tutions

Investments

Advances

Am

ou

nt

in b

illio

n

[HBL Annual Report (2010-2012)]


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Return on Average Equity

After going through the ROE,

there is an upward pattern of

increase in the shareholders

equity. The ROE rose by 15.6%

to 21.82% in 2011 compare to

31.14% of previous year. This

was due to increase of net income by 31.1% in 2011. The reasons behind that top line interest

income increased by 21% to billion 98.5 million and interest income on advances increased only by

1.6% to Rs. 55.7 billion and Interest income on advances reduced by 5.0% to Rs. 52.9 billion in

2012.

In 2012, ROE decreased to 20.4% even though interest income rose by 18.5% to Rs.116.8 billion.

Interest expenses also increased by 39.9% which was all the time high over three years from 2010-

2012. Administrative expense of the Bank rose by 21.4% YOY to Rs. 29.4 billion and 5.6% to Rs.

31.1 billion in 2011 and 2012 respectively. Admin expense slightly worsened in 2012 from 2010 and

2011. In 2011 it is noted that excluding retirement benefit charge, admin expense to income ratio

improved marginally to 39.1% from that of previous year. HBL added 33 new branches in 2012

which also increased the cost, but will be adding value to HBL and profitability will be improved in the

future. Occupancy related expense has been increased in 2012 which consequently affected the

overall return of the Bank. Total non markup income witnessed a growth of 16% to 14.8 billion in

2011 and 8% to 15.9 billion in 2012. In 2011 result of all associates improved which resulted in high

share of profit witnessed in Income statement. Income from dealing in foreign currency also

increased by 17.8% in 2011 but further it declined by 31.6% in 2012. Dividend income rose by 27%

and 12.8% in 2011 and 2012 respectively.


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Return on Average Total Assets

The industry average ROA After tax rates of local privates’ banks were 0.9%, 1.5% and 1.5% in

2010, 2011 and 2012 respectively.

[Statistics of the banking system (State Bank of Pakistan, 2012)]

Overall HBL performance

compared to industry was better

which was driven by higher

profitability in 2011 and 2012

respectively. Although HBL own

performance was disappointing in

2012 compared to 2011. The main reason could be trimming down the discount rate which was

predicted in second quarter of 2011 and the impact goes on since then, which affected the

profitability in 2012 as well. The key investment made was the government borrowings from

commercial banks which helped commercial banks to improve their profitability.

Habib Bank Limited


Syed Tanveer Ali

Asset Quality and Liquidity Ratios

Advance to Deposit Ratio (ADR) and Investment to Deposit Ratio (IDR)

An analysis of HBL’s advances vis-a-visa investments over three year’s period shows that there is

continues decline in advance-

to-deposit ratio (ADR), while on

the other hand IDR has been

on the rise. This symptomatic

of HBL’s cautious lending.

According to the SBP data the

average ADR were 61.13%,

52.0% and 48.1% in 2010, 2011

and 2012 respectively.

[Statistics of the banking

system (State Bank of

Pakistan, 2012)]

In 2010 ADR was 61.5% which

means higher the ratio the

higher the risk to cover the unforeseen fund requirement to finance profitable investments or to

maintain the liquidity. In 2010, HBL had to arrange finance from “International Finance Corporation

(IFC) amounting to US $ 50 million. The loan is unsecured and subordinated as to payment of

principal and interest to all other indebtness of the group (including deposits). But the ratio was

parallel to industry average.

[HBL, 2012, p. 57].

The urge to earn profits pushing banks to keep on investing in private sector but lack of credit

demand pushed banks to invest in government securities since the risk free rate was given as high

as 14% in 2010. But from Sept 2008 ADR fell to 56.7% in June 2011. Local private banks have been

keen to switch their asset mix from advance to investments mostly placing money in to government

papers. Further, Government heavily relied on Borrowings from the banking sector which further

reduced banks appetite for private sector credit.

[Financial Stability Review (SBP 2011)]

Investment to Deposit Ratio depicts increasing trend since 2010. The investments in government

securities increased, which led to improvement in interest income.


2012 2011 2010Advances (NET) 499,817,906 457,367,656 459,750,012 Total Deposits 1,214,963,700 933,631,525 747,374,799 Advances to deposits Ratio 41.1% 49.0% 61.5%

2012 2011 2010Total investment 797,094,548 418,604,147 285,248,460 Earning Assets 1,321,740,709 917,552,832 744,998,472 Investment to Deposit ratio 60% 46% 38%

Investment to Deposit ratio (IDR)

Advances to deposits Ratio

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Graphical Representation of IDR and ADR Ratios Over three year’s period

Source: [Company Annual Report]

INFECTION RATIO


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NPLs of a Bank are driven due to number of reasons including economic activities, legal system

unexpected shock and credit evaluation ability of banks etc. NPLs also influence on the banking

spread. In case of Pakistan the

banks are required to provide for the

amount of Nonperforming loans after

adjusting permissible partial benefit

of collateral. NPLs had reached to

14.4% by the end CY10 against

5.7% in CYO6; more than doubled in

just 4 years. Further it has reached to 13.8% and 13.2% in 2011 and 2012 respectively.

[Financial stability review (SBP First half 2011, p.22)]

HBL outperformed the industry in all years from 2010 to 2012. In 2011 it inclined to 11.2% which is

almost 5% increment in the NPLs. This was mainly due to hike in interest rate in 2011. However, a

sizeable drop in infection ratio by 8.3% helped HBL to improve its profitability as the interest rates

slashed to 9.5% in 2012. HBL availed the benefit of FSV (Force Sale Value) against NPLs. HBL had

taken the benefit from this regulation and has maximized the profits which adds value to the

stakeholders wealth.

Interest Spread and Gross Spread Ratio and CASA Analysis


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The spread has decreased in 2012 due to

yields on earning assets dropped more than

the fall in cost as deposits has risen

dramatically in 2012 leading to growth in total

interest expense beside the rise in the

minimum return on PLS account.

The decrease in CASA ratio indicates that

bank is moving towards expensive source of

finance. The fixed deposits increased by

36.4% and 38.4% in 2011 and 2012

respectively, whereas CASA declined to 69%

in 2011 from 72% in 2010 and further

decreased to 67% in 2012.

Gross markup income rose by 18.5% to

Rs.116.5 billion in 2012 and 21.2% in 2011.

This increased due to robust investment

which rose by 64% and 90.4% in 2011 and

2012 respectively. Net interest income

increased by 20% to Rs 56.4 in 2011 billion

and by 2.4% in 2012 driven by volumetric

growth in Government securities. Markup

expenses also rose in line with markup

Income (Up 23% in 2011) and it witnessed

higher increase with 39.9% growth in 2012

as compared to gross markup income by

18.5%. This is primarily due to strong

deposits growth and consequently increases

in cost of deposits. Gross spread can be controlled in the future by improving CASA ratio.

Risk Adequacy and Capital Structure Ratio

Capital Adequacy Ratio


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The adequacy of capital is tested

with reference to the risk weighted

assets. CAR of a Bank tells that

bank is that much capable of

absorbing loss before any loss

transfer to depositors.

HBL’s CAR stood at 15.81% in

21012 as against the State Bank of Pakistan’s requirement of 10 per cent in 2012. There is a consistent

increase in paid up capital of bank

which helped HBL improved its CAR by

issuing bonus shares to shareholders.

Although Risk weighted assets of HBL

increased by 4.28% and 14.74% in

2011 and 2012 respectively. The paid

up capital of HBL stands at Rs. 12.12

billion which meet the SBP minimum paid-up capital requirement. The industry average CAR was 13.6 %

( FY10), 14.4 %( FY11) and 15.1 %( FY12). Which means HBL has successfully maintained its CAR and

above the industry.

Weighted Average cost of Deposits

Banks cost of deposits has been

increased from 2010 to 2012.

Since the announcement made

SBP on May 1st 2012 to increase

the interest rate on PLS accounts

from 5% to 6% also impacted the

bank’s profitability, which increased

the interest on deposits. CASA ratio slightly deteriorated to 67% from 69% in 2011. Consequently,

cost of deposits rose to 6.12% in 2011 and 6.46% in 2012. Increasing trend could be affected upon

profitability in the future.

INVESTMENT / MARKET RATIOS

Earnings per Share (EPS)


2012 2011 2010Interest on deposits 51,225,796 37,971,786 30,793,996 Weighted Average Deposits( Excl. Non Remuneative) 792,369,831 620,722,988 540,530,916 Weighted Average cost of Deposits 6.46% 6.12% 5.70%

Weighted Average cost of Deposits

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Earnings per share had been increased by 20% in FY11 and 0.3% in FY2012. The reason of

increase in EPS is the 32% jump in PAT in FY11. Group PAT increased to Rs. 22.4 billion in 2012

compared to Rs. 22.3 billion in 2011, reflecting an increase of 0.1%. The EPS for the three years

were Rs. 15.26 (2010), Rs. 18.30(2011) and Rs. 18.36 (2012).

There was consistent increase In Bank’s Net interest income and Non markup income.

Price Earnings Ratio

The High P/E ratio generally suggests increased demand because investors expect earnings growth.

P/E ratio is calculated as market value of share / EPS. The P/E ratio of HBL over three year’s period

was 6.42 (FY10), 5.80 (FY11) and 6.42 (FY12). Decrease in P/E ratio in 2011 by 27.5%. Reason of

decline may be due to decrease in share value of HBL. Market share price of HBL dropped by 13%

to Rs. 106.08 (closing rate 2011). Further share price increased by 11% to Rs. 117.81 in 2012 which

was Rs 121.94 in 2010.

Dividend Cover Ratio

Divided cover ratio had been increased to 2.61 times in 2011 as compared to 2.35 times in 2010.

Reason for increase is the increase in the Profit after tax which had increased by 31% in 2011.

Further in 2012 there was only a minor increase in PAT by 0.1% in 2012 and cover ratio fell down to

2.45 times as annual dividend per share had been increased on consistent basis.

HORIZONTAL ANALYSIS

Comparing the financial performance of a company over the years does not give a fair view of

company’s financial performance. For better result and comparison we need to compare the


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company with its close competitor. In this scenario we will analyze HBL with Muslim Commercial

Bank which has a market share of 23.6% in the banking industry as compare to HBL’s share of

nearly 16%.

A comparison of the Major ratios for 2012 is presented below.

[Annual Reports of HBL & MCB, 2012]

A brief comparison of HBL vs. MCB is presented here under based on above ratios.

Profitability


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Despite the fact that HBL’s own performance over the years was constantly improving year on year,

which is a good indicator for the company’s prospect, but MCB clearly shows an impressive

performance as compared to HBL in terms of Profitability ratios. HBL interest earnings growth is

18.5% in 2012 as compare to MCB’s growth of 0.3%. There is minor difference in Gross yield on

earning assets of both Banks. Return on equity of HBL slightly worsened from previous year and

also below to MCB ROE but above the industry average. HBL has outperformed in terms of growth

in deposits which reached to Rs. 1 Trillion in 2012. Comparing cost to income ratio and return on

assets are below to MCB ratios but overall HBL has to manage its cost in the future to get the higher

ratio than this time.

Asset Quality and Liquidity Ratios

Due to several macro economics problems in the country and energy crisis has limit the Banks

abilities to provide credit to private sector due to low demand. Both Banks has same increasing trend

of IDR ratio and decreasing trend of ADR while Banks placing money into Government papers.

Since HBL’s infection ratio has improved by 8.3% whereas MCB’s by 8.7%. Interest spread of HBL is

5.07% compare to 4.75% of MCB, which shows a sign of good profitability over MCB. MCB has been

maintaining its CASA ratio which is 85% in 2012 which helped in obtaining cheaper deposits as

compare to HBL which has 67% in 2012 slightly worsen from previous year. Gross spreads of both

banks down in 2012 over previous year due to slow profitability. Reasons of low MCB spread was

the deposits rates increased to six percent, but lending rates had declined in 2012 which contracted

the spread of MCB.

Risk Adequacy and Capital Structure Ratios

HBL has been maintaining CAR with the statutory requirement which is constantly increasing and

boosting the shareholder’s confidence. MCB’s CAR is higher than HBL but overall HBL performed

above the industry average which was 15.1% in Dec 2012. Risk weighted ratio of HBL has a

declining trend and improved as compared to MCB which has 55.17% in 2012 as against HBL’s

48.25%. This shows that HBL has secured investment e.g. keeping collateral as against loans. Cost

of deposits of HBL is a higher than MCB which is effecting HBL’s profitability.

Investment Ratios

Despite the economic crunch impact the economy in 2011 which had a spillover effect in 2012, HBL

tried maintain its market goodwill gaining increment in share price which rose to Rs. 117.81 helped


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improving the P/E ratio which showed a better platform for the investor to invest in. Showing great

profits in the coming years will help HBL further improve its market. MCB has good P/E and EPS

ratio compared to HBL, major reasons is the increase in total number of ordinary shares of HBL and

MCB. MCB has posted outstanding increase in shares price in 2012 which has given an alarming

sign to HBL in terms of competition in market.

(3.6) CONCLUSION AND RECOMMENDATION

Detailed financial and business analysis of HBL concluded that HBL’s own performance has been

improved from previous years and striving to capture market share in the Banking industry. The

Banking industry facing a sluggish growth which is affecting almost every Bank in the industry.HBL

has outperformed the industry in deposits growth and profitability has been consistent as compared

to previous years.

Besides having research on financial strength, performance, and largest market share of HBL, there

is an important factor which is not in terms of numbers. This is what you call reliability and

consistency. HBL justifies it being the first commercial bank to be established in Pakistan in 1947

with consistent results.

I personally think, only those organizations are likely to grow which consider their customers’

satisfaction and betterment. Those who believe that their overall success is nothing but the by-

product of that satisfaction they have created for their customers and that’s it.

On these lines, I consider it being safe as an investor or depositor, as millions of other HBL

customers find it reliable and don’t regret.

HBL has all strength to provide better performance than its competitors by spending money on

training programs to make employees more efficient to deal with derivatives product and efforts put

to recover non performing portfolio by comparing current performance with industry, and improve

profitability by providing secure loans to private sector and update 5 years strategy and keep

maintain its position in TOP 5 Banks.

HBL has all potential to support private sector which have been severely affected by recent

economic crisis, hence HBL need to manage classified portfolio using specialized and complex

relationship skills to support the private sector as engine for growth. HBL has been working on it.

Overall comparison shows that HBL has to perform outstanding in coming years as MCB has been

improving in the market in terms of all factors and to remain competitive, HBL needs to avail the

opportunities in next few years.


Documents

Research and Analysis Project New Updated