WHEN the board of directors of Bank Al Habib meets later this week to review the bank’s third quarter accounts, investors and stakeholders will be looking to gauge if the rise in the firm’s bad loans since last year was a temporary blip or a sign of deeper troubles.

Sector analysts often mention BAHL as among the top banks in terms of asset quality. This is mainly owing to the fact that it maintains sizable provisions against toxic debt and investments, which exceed those required under the central bank’s prudential regulations.

Its coverage ratio — a measure of protection against non-performing assets — rose to 147pc by June from 134pc by March, according to JS Global Capital analyst Amreen Soorani.

However, in addition to the provisions, the bank’s asset quality has benefitted from the outsized increase in its holdings of long-term, risk-free government bonds.

Last year, its net investments went up by a sizable 38.2pc — with most of the growth coming in risk-free high-yield Pakistan Investment Bonds (PIBs) — against the industry’s growth in investments of 23.3pc. And its net advances grew 8.2pc, against the industry’s loan growth of 9.9pc during the year.

But the bank’s stock of non-performing loans (NPLs) also exploded last year, forcing it to start jacking up its provisions. The bank’s NPLs amounted to over Rs5.02bn by end-2014, up a significant 36pc from Rs3.7bn by end-2013. On the other hand, the industry’s bad debts had dropped to Rs605bn from Rs607bn during CY14, according to central bank data.

And the bank’s NPLs have continued to rise this year, reaching almost Rs5.3bn by end-June.

According to the bank’s annual report for CY14, the textile sector — comprising the spinning, weaving, composite and readymade garment segments — had the highest share in its NPL portfolio, with over Rs3.06bn in classified advances by end-December. The industry was also responsible for over one-third of the yearly increase in the bank’s bad debts in CY14.

Higher provisioning and tax expenses failed to dent BAHL’s earnings for the first half of the year

Meanwhile, NPLs from the ‘iron and steel’ industry, at Rs753.6bn, had the second highest share in the bank’s toxic advances portfolio. Interestingly, BAHL had no NPLs in this category in CY13.

And ‘commerce and trade’ had the third highest share in the NPL pie at Rs619.7bn, suggesting that the rout in oil and commodity prices last year had at least some impact on the health of the bank’s loan book.

Provisions: It has been only this year that the bank has started to seriously increase its provisions against NPLs, suggesting that it first used its already high level of provisions to absorb loan losses. But with the continual rise in its bad debts, the bank booked Rs1.13bn in provisions against NPLs during the first half of this year (1HCY15) — an 835pc increase over 1HCY14.

Financial performance in CY15: But the higher provisioning failed to dent the bank’s earnings. And despite the imposition of a one-time super tax in the FY16 budget, BAHL’s unconsolidated after-tax profit for 1HCY15 rose 14pc to Rs3.36bn, against Rs2.94bn in 1HCY14. Its earnings-per-share worked out at Rs3.02, up from Rs2.65 last year. The bank did not declare any dividend for the period.

Most of the bottom-line growth was owing to the rise in the bank’s interest income, which went up 23.5pc to Rs25.4bn during the half-year. And the bank’s investment book was largely responsible for this. By end-June, BAHL had a cumulative Rs176.2bn parked in PIBs — an increase of Rs24bn from end-2014 levels.

It had another Rs144.7bn in Treasury bills, while its listed equity holdings were valued at Rs4.4bn.

Meanwhile, the bank’s PIB and equity holdings helped it book Rs332.4m in capital gains during the second quarter, up significantly from just Rs3.9m it had booked last year. This, in turn, propelled its non-interest income to Rs2.65bn for 1HCY15. Other major contributors to the higher non-funded income included earnings from dividends (up 73.7pc to Rs386.4m) and fees and commissions (up 10.8pc to Rs1.15bn).

One area where the bank has outperformed the industry is deposit mobilisation, particularly in the second quarter (2QCY15). BAHL’s total deposits reached Rs489.4bn by end-June, up 9.6pc from end-2014. In the same period, the banking industry’s deposit base expanded by 8pc.

“BAHL’s deposit growth clocked in at 17pc year-over-year in 2QCY15 vs the industry’s growth of 13pc YoY, increasing its market share by 19 basis points to 5.4pc, as its branch network crossed the 500-mark,” highlighted JS Global‘s Soorani in a research note.

And most of the growth in the deposits came in the low-cost current and savings accounts (Casa) category. During 1HCY15, non-remunerative current accounts grew 16pc to Rs170.35bn, while savings accounts went up 9.3pc to Rs143.1bn. And its high-cost fixed deposits declined marginally to Rs103.1bn.

On the other hand, the branch network expansion contributed to a hefty 33.6pc rise in the bank’s non-core expenses, which amounted to around Rs6bn during 1HCY15.

Meanwhile, the relatively moderately traded BAHL stock is down around 12.7pc year-to-date, and closed last Wednesday at Rs42 a share. That compares with the benchmark KSE-100 index’s modest 3.9pc increase during the same period.

Published in Dawn, Business & Finance weekly, October 12th, 2015

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