Hbl Operational Management

...

1.5 HBL’s retail bank has integrated the branch network and distribution channels to ensure optimum rollout of key products and initiatives. In 2014, the business successfully changed its deposit mix, thus helping to offset the impact of regulatory changes on the minimum savings deposit rate. HBL has maintained its leadership position with market share of deposits stable at around 15%. This effort has been supported by improving service levels across the network as well as a target oriented sales culture.

- REVIEW OF THE BANKING SECTOR

PERFORMANCE AND PROSPECTS

2.1 In Pakistan, the commercial banking sector is continuing to perform an essential role in contributing to the country’s economic growth (4.24 percent in 2014-2015 as compared to 4.07 percent last year). However, due to the declining interest rates in the current regime there has been a skimming of spreads which impacts profits. Medium sized banks are best placed in the current scenario as they are growing at a much faster pace than the Big-5, in terms of asset generation and branch network. Four out of the Big-5, have either experienced a hike in cost of funds or drop in deposit market share (Allied Bank Ltd. being the exception). Foreign Banks have experienced a declining market share (some are exiting) as local banks catch up is terms of asset quality and technology.

2.2 The profitability of banking sector of Pakistan remains sound during second quarter of 2015. There was robust earnings and high solvency ratio which led to sound profitability of banking sector. The banking industry pre-tax profit surged to 49 percent on yearly basis and mainly attributed to increased net interest income, increased non-interest income and lower provision charges. The increase in net interest income is attributed to bank’s high investment in long PIBs. This mitigates the negative impact of declining interest rate on net interest income. Along with that, deposits showed growth of 13 percent as compare to 10 percent in 2nd quarter of 2014 which contributed positively in net interest income of banks. Non-interest income also increased, driven by higher capital gains and fee and commission income. Higher capital gains on PIBs were realized by banks. Fee commission income also grew due to increasing home remittance business, bank assurance, trade volume, and card business. However new taxation measures announced in federal budget (2015-2016) is hurting profitability of banks as banks are now liable to pay 4 percent tax on bank’s income of 2015 and also liable to pay uniform tax of 35 percent on all sources of bank’s income such as dividend income, capital gains etc.

2.3 Macroeconomic conditions towards the end of FY15 have further improved compared to the beginning of the fiscal year. Current account deficit has narrowed down; average annual inflation is significantly below the target; there is a marginal uptick in real GDP growth; and foreign exchange reserve buildup continues. All these developments were reflected in the recent upgrades in outlook by international rating agencies that have further improved investor confidence. The current macroeconomic stability achieved through domestic policies and favorable external developments provide an opportunity to focus on reforms that will put the economy on sustainable growth path. With contraction in imports, led by sharp decline in oil prices, and strong growth in remittances, the external current account deficit at $1.4 billion during Jul-Apr FY15 is around half of the deficit recorded in the corresponding period of last year. The improvement has overshadowed lower surplus in capital and financial account, especially weak foreign private investment. Overall, this has supported the reserve building efforts with net SBP reserves rising from $9.1 billion as of 30th June 2014 to $12.5 billion as of 15th May 2015. They are expected to increase further due to subdued outlook of international oil prices, successful continuation of IMF program, and realization of expected official foreign inflows. Increase in foreign private inflows can further strengthen this outlook and sustain stability in the foreign exchange market.

2.4 The inflation continues with its downward trajectory in this fiscal year. The year-on-year CPI inflation has declined to 2.1 percent in April 2015 from 8.2 percent in June 2014. The decline in inflation during the current fiscal year has been broad based as all the headline and underlying measures of inflation have recorded deceleration. Soft international commodity prices, stability in exchange rate, contained government borrowings from SBP, moderate aggregate demand, and SBP’s earlier conservative monetary policy stance have remained the key factors in controlling inflation this year. Going forward, continuation of inflation at lower levels is reflected in the latest IBA-SBP survey of May 2015 that reports subdued inflation expectations. However, uncertainty about international oil prices and possible adjustment in domestic energy prices are the main risks to this inflation outlook. Credit growth during Jul-Mar FY15 has remained well diversified in terms of coverage and type of finance. All three sectors of the economy – agriculture, manufacturing and services – availed credit both for working capital and for fixed investment purposes. The highlight remains the loans to private sector businesses in fixed investment category that increased to Rs84.4 billion in Jul-Mar FY15 from Rs50.3 billion in the same period of last year. However, owing largely to decrease in commodity prices, loans in the working capital category dropped to Rs90.3 billion in Jul-Mar FY15 from Rs223.8 billion in the same period of FY14. Improving investor confidence, buoyant construction activity, continuous stability of the banking system, and the recent monetary easing are expected to positively impact credit uptake in the coming months.

2.5. The macroeconomic improved the state bank of Pakistan kept the percentage at 10.0 percent during 2014, and towards the end of the year, cut the discount rate by .50 percent to 9.5 percent. The monetary easing has continued into 2015 on the back of highly declining inflation numbers. During the year, the Banking sector took advantage of the major contribution of Pakistan’s domestic government debt by increasing investments in Pakistan Investment Bonds The asset quality observed some deterioration during Jun-15 as NPLs increased by 1.6 percent YoY 5.8 percent) to PKR 630 billion Most of the increase came from agriculture loans due to seasonal factors

2.6 The relatively smaller banks who might not have succeeded in developing specific market niches would continue to fight for survival and might well become candidates for acquisition