The HBZ group has a rich tradition of banking and commerce dating back to over 160 years. With its headquarters based in Switzerland, the HBZ group operates in Hong Kong, Singapore, United Arab Emirates, Kenya, South Africa, United Kingdom and North America and boasts an international ranking of 687 in terms of capital. Habib Metropolitan Bank has its focus mainly inclined towards trade financing and retail financing. Besides, the bank also provides innovative consumer and e-banking solutions to its customers nation-wide.
Moreover, the bank's Islamic banking division caters to the needs of customers seeking Shariah compliant products. PACRA has allotted both long-term and short-term ratings of at "AA+" and "A1+", respectively. These ratings are the highest amongst the local sector private banks and indicate a very low probability of credit risk emanating from a very strong capacity for timely payment of financial commitments.
Financial Performance, 1HCY13 No wonder! The top line took the brunt of low interest rates and shed 12 percent year on year in the first half of CY13. The decline also seems to have come on the heels of the banks bias towards low-yielding investments.
During 1H CY13, investments of the bank grew by 50 percent year on year pushing up its Investment-to-Deposit Ratio (IDR) 82 percent from 52 percent in the corresponding period of last year. Conversely, advances dropped by 4 percent year on year during the similar period which plopped its ADR down to 49 percent in 1H CY13 from 53 percent during the similar period of last year.
For a small bank like HMB with essentially high cost of funds, does finding a safe haven in government securities make sense? Well, from the sight of deposit composition, the answer seems: Yes!
HMB has impressively improved the proportion of its low-cost deposits over the years (see CASA ratio) which prevented the bank's spread ratio from falling amid dropping interest rates and bank's enhanced focus on government securities. That said; one disturbing factor is a massive growth in bank's borrowings from Rs 20.5 billion in 1H CY12 to Rs 80.3 billion in 1HCY13. This raises question marks on the bank's deposit mobilisation during the period.
Besides drop in mark-up expenses, another boon for the bank during the period was lower provisioning against non-performing loans and reversal against diminution in the value of investment. The drop in the two makes fair sense. Due to HMB's restrictive lending off-late, booking excessive provisioning expenses makes no relevance. Besides, drop in interest rates might have boosted the value of the bank's investments and hence reversals were made against their diminution in their value. Both the heads collectively placed down the pointer of provisioning expenses by 27 percent year on year in 1H CY13.
Keeping its eggs in different baskets is what that also worked well for HMB. During 1H CY13, non-mark-up income of HMB grew by 10 percent year on year which mainly came on the heels of gain on sale of securities. Things that appear rosier thus far were spoiled by non-mark-up expense which grew by 14 percent year on year. This prevented HMB's net profit from making growth which ended up losing its grounds by 5 percent year on year.
Summing up Past Performance (2011-12) An overview of HMB's performance over last year speaks volume of its ability to keep its top line intact amid monetary easing. The downtick of 0.4 percent year on year in top line is negligible when seen in the context of dropping interest rates and bank's focus on low-yielding investments. Then HMB's deposit growth of 17 percent year on year is also what that deserves recognition. Much admirable is the fact that deposit growth comes on the heels of low-cost deposits as evident by its CASA stepping up.
The inclination towards low-cost deposits also sustained HMB's mark-up expenses giving sufficient room to its spread ratio. Over the year, loans, cash credits, running finances, etc, advanced by the bank grew over the period, the downtick witnessed in gross advances came on the back of ijarah financing. Investment, although grew from 2011 to 2012, however, it is not visible in the investment-to-deposit ratio due to tremendous deposit growth.
The Achilles heel is the bank's soaring non-performing loans (NPLs) which grew by 15 percent year-on-year in 2012. However, the bank is also increasing the provisions proportionally to be on the safe side.
Future Outlook The hike of 50 basis points in the discount rate bodes well for the banking sector and is expected to push the margins up. Given the inflation outlook of 11 - 12 percent by the end of this fiscal year, more rate hikes appear to be in the offing to keep the real interest rates in the positive zone.
With no change in the floor rate of saving deposits, reversal in the monetary cycle would greatly liberate banks' constricted margins. However, this might further encourage the banks to continue relying on risk-free securities rather than venturing in the private sector.
Besides, the proposed deposit insurance scheme is also expected to bode well for the deposit mobilisation drives of small banks. While given the history for the past two years, SBP doesn't usually allow banking sector to enjoy freely. Is another hike in the floor rate of saving deposits on cards? This will be figured out soon.
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HABIB METROPOLITAN BANK (CONSOLIDATED P&L)
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Rs (mn) CY11 CY12 1HCY13
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Markup Earned 27,263 27,155 11,724
Markup Expenses 19,536 18,822 7,713
Net Markup Income 7,727 8,333 4,011
Provisioning / (Reversals) 2,755 2,694 1,035
Net Markup Income after provisions 4,973 5,639 2,976
Non Mark-up / Interest Income 5,199 5,458 2,966
Operating Revenues 10,172 11,097 5,942
Non Mark-up / Interest Expenses 5,527 6,059 3,245
Profit Before Taxation 4,645 5,038 2,697
Taxation 1,356 1,645 908
Profit After Taxation 3,289 3,393 1,789
EPS (Rs) 3.14 3.24 1.71
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Source: Company Accounts
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HABIB METROPOLITAN BANK - KEY RATIOS
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Key Indicators CY11 CY12 1HCY13
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Infection Ratio 14% 17% 16%
Coverage Ratio 65% 70% 76%
Spread Ratio 28% 31% 34%
Capital Ratio 9% 9% 8%
IDR 80% 74% 82%
ADR 59% 49% 49%
CASA 48% 50% 57%
ROA 1.14% 1.13% 0.52%
ROE 13% 12% 6%
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Source: Company Accounts
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