Oct 26 - Nov 01, 2009

Habib Bank Limited (HBL) has remained the largest amongst 25 local private banks in Pakistan in terms of assets, advances, deposits, and equity in June 2009. The bank posted Rs43.54 billion non-performing loans (domestic and overseas) by end of June, witnessing an upward trend in NPLs from Rs40.05 billion in 2008. HBL has foreign operations, and associates and joint venture companies in 25 countries including Nigeria, Kenya, Nepal, and Kyrgyzstan. It is also the country's largest private bank because of having extensive branch network of 1450 branches.

With being amongst top five banks in Pakistan comes major share in recessionary fallouts. Luckily, this has not really happened as HBL similar to other banks enabled to prevent reversal in profitability graph in the midst of heightened credit risks since the later half of calendar year 2008 because of less exposure to private sector-risk bearing portfolios especially when economy is in downturn.

Another reason was the improving shock absorbing power of banks bequeathed from past healthy balance sheets, what Mubashar Maqbool observed.

Group head commercial and retail lending HBL, during an interview with Page, said wave of bad debts was generated mainly in small and medium markets. Small and medium enterprises have no or less capacity to absorb shocks emanating from recessionary pressures, he said adding 'therefore commercial lending is stagnant nowadays while NPLs are tapering off now'.

HBL has 14 percent share in overall advances and investments of financial institutions in the country, according to him. The slackened industrial production in large-scale manufacturing hit directly middle market segment comprising of automobile vendors, parts suppliers, steel producers, etc., which form target market of retail and commercial lending group, and that faced production slowdown in effect. Infection ratio in this portfolio was high.

According to him, both economic slowdown and high interest rates were catalyst to non-performance of loans. Banking system progress is directly proportional to GDP growth if GDP improves banks grow, he said. Demand of credit [from private sector] declined due to economic tailspin and since opportunities were decreasing for quality lending, banks had to divert liquidity to risk aversive public borrowing, he maintained.

Referring to policy rate announcement in September in which central bank kept the discount rate at 13 percent some analysts commented this would benefit banks earn through high net interest income. High spread (difference between deposit and lending rates) is widely criticised. Net interest income continues to be essential profit-spinner of banks.

He is of the view that monetary policy does not intend to help banks increase earning, but it is directed to control inflation and subdue demand. Commodities prices are rebounding-prices of oil and steel and electricity are increasing-what would be the impact of this on inflation and subsequently policy rate remains to be seen, commented Mubashar. 'I think government and SBP are on the same page to stabilize the economy. Policy rate is gradually reducing.'

HBL retail and commercial lending ranges in between half a million to 300 million rupees and that is for medium sized companies with a turnover of at least Rs50 million. Besides, it grants working capital for one year and finances fixed assets (demand financing) and commodity operations.

Mubashar Maqbool expected dominancy of government loans in assets composition throughout this fiscal year. 'In this fiscal year, private credit may continue to be under pressure of dampened economic activities.' However, he said gradual growth would emerge in the middle of the next year. It was important to acknowledge, he said, that first priority of banks were to finance private sector because of its having multiplier effects. 'Business with private sector is more growth-inducing.' It is due diligence and cautiousness of banks instead of reluctance to private credit. Right now, there is a lack of opportunity in private sector, but there is lot of potential in middle market, according to him.

Coming years will be important for HBL targeting large number of small and medium enterprises through restructuring process of retail lending and revamping internal credit procedure, which presently is time taking. "We will open 80 to 100 credit hubs in the main regions across the country, which would support branch staff to expedite SMEs lending. Making of tailor-made products is essential component of redesigning process. We will make soft launch of small business finance up to Rs10 million by early next year."

There are around 0.55 million SMEs in Pakistan and cottage industry has constrained access to credit, he said adding getting credit for it is quite difficult. 'What we will do is to quicken credit turnaround.' Through process reengineering, he believed, credit approval would be in a fraction of time. Next year, the bank would also enhance financial outreach to local as well as multinational companies, he said.

The idea behind restructuring is to reduce administrative expenses. Administration expenditures represent the major potion of gross expenditures of all banks. Until end of first half of calendar year 2009, these expenses depicted five percent growth year on year standing at 49.3 percent. The heavy expenditures digest major chuck of bank's earning. Banks' continued investment on IT facilities and overheads increased the administration expenses in first half. HBL has invested considerable amount in bolstering computer technologies to improve and accelerate transactions. Investments in automation minimize manual works. This does not lead to downsizing as business volumes would also increase in proportion to expansion, said Mubashar.

Basic objective of the next year resolution is to support financially SMEs increase its share in GDP, he concluded.