Posts strong financial results for first quarter of 2016
Habib Bank Limited (HBL) has recently achieved a landmark in the banking history by becoming the first Pakistani bank to receive a license for opening a branch in Urumqi in Western China. The Bank expects that the branch will be operational by the end of the year and will further cement links with China. With ample liquidity and a sound capital adequacy ratio of 17%, HBL is well positioned to leverage growth opportunities related to the China-Pakistan Economic Corridor (CPEC).
The Bank remains focused on maintaining its demonstrated track record of growing low cost deposits while prudently managing its costs and credit quality.
Interestingly, the banking industry in Pakistan despite considerable growth both in conventional and Islamic banking and with stellar growth in financial health is primarily due to secure lending in the government papers like Treasury Bills, Pakistan Investment Bonds and Sukuk, which is lacking foreign participation as most of the European or foreign banks left due to persistently volatile economic conditions prevailed during previous governments in Pakistan.
The situation is, however, taking a turn followed by China-Pakistan Economic Corridor plan attracting most of the global economic players while the good economic policies and decisions were yet another reason for attracting foreign banks.
Accordingly banking channel with major business partners like Iran, Turkey and Russia are likely to be restored paving the way for opening bank branches by the foreign banks in Pakistan.
Strong financial performance
HBL has declared a consolidated pre-tax profit of Rs13.9 billion for the first quarter of 2016 with profit after tax of Rs9.0 billion.
Consequently, earnings per share for the quarter were Rs6.15 along with which the Bank declared a dividend of Rs3.50 per share (35%).
HBL grew its average balance sheet by 15% over the first quarter of 2016, with average current deposits growing by Rs 81 billion. The domestic CASA ratio now stands at 89% and the cost of domestic deposits reduced to 2.8% for Q1 2016. This somewhat alleviated the continued downward pressure on margins, and enabled HBL to increase net interest income by 6% to Rs20.2 billion for the quarter ended March 31, 2016. Non mark-up income, excluding capital gains, increased by 12% over the first quarter of 2015, as fees and commissions rose by 25% to Rs 4.3 billion for Q1 2016. This growth was driven mainly by increased income from Home Remittances and a doubling of fees related to both credit and debit card activity. Other fee drivers such as Bancassurance, trade and general banking fees continued to make significant contributions.
Administrative expenses were reduced by 6% over the previous quarter, but increased compared to Q1 2015, mainly due to the sponsorship of the Pakistan Super League and increase in the branch network. During the current quarter HBL further expanded the reach of its ATM network to nearly 2,000 ATMs and now has almost 14,000 POS terminals to increase card acceptance and provide customers with further convenience. Provisions reduced by 36% over Q1 2015, despite conservative provisioning by the Bank and the coverage ratio remains robust at 88.5%.
Consolidation in banking industry
The consolidation of Pakistan’s banking industry has received yet another shot in the arm with the announcement of preliminary, non binding discussion on merger of NIB Bank, Pakistan’s 12th largest bank by market cap, into MCB Bank Limited (MCB).
It is believed that the merger will likely create synergies for both entities. For MCB, the key rationale is NIB’s branch network while NIB’s shareholders can count on potential price discovery via the merger. That said, precedents suggest MCB is not known for paying up for acquisition and NIB deal, if comes through, will be first such deal since its privatization.
Financial and strategic rationale for MCB
MCB Bank has been on a lookout for the acquisition target among local banks for quite some time and the current discussion for merger marks third such attempt in the past three years.
Adequate liquidity and capital buffer (CAR of 19%) provides financial muscle to the Bank to grow its risk asset. Strategically, we see two reasons for the Bank: (1) competition in the number of branches, a key source of low-cost deposits for MCB, is heating up as mid-sized banks have rolled out aggressive branch expansion plans, and (2) the need for buying growth for MCB’s Islamic banking arm, MCB Islamic, which is yet to start operation. Acquisition of NIB branch network will surely give MCB a major head start.
In the past five years, MCB has been a laggard in branch expansion and has opened only 125 branches since 2010 or cumulative 11% growth in branch network. Acquisition of NIB offers MCB a chance to grow its network by 14%.
The rationale of merger for NIB Bank is much more convincing and include financial (low capital adequacy of 12.5%, high cost to income of 95% in CY 2015 adjusted with capital gains) and strategic perspectives.
NIB can be described as a small fish in an industry which has high concentration.
With 21% of total loan book currently classified, heavy cost structure, low interest rate environment and adverse changes in the minimum deposit rate last year, the bank’s earnings and business turnaround looks stretched. Apart from branches, NIB can offer many areas for potential value creation in the merger talks including cost rationalization whereby most of the head office cost will be slashed in the merged entity, recovery of loans (65% of classified loans are in textile, engineering and commercial segments.