HABIB Bank Ltd reported higher earnings across the board when it recently announced its third quarter results.

The unconsolidated pre-tax earnings of the country’s largest bank — which has almost Rs2tr in assets — for the first nine months of the year (9MCY15) jumped 43pc to a hefty Rs45.2bn, against Rs31.6bn in the same period last year.

And while changes in the tax structure introduced in the FY16 budget did have an impact — the bank’s tax bill for the nine months rose by around Rs7bn to Rs18bn — HBL’s post-tax profit clocked in at Rs27.1bn, a decent improvement of 32.2pc over last year.

Its earnings-per-share worked out at Rs18.48 for 9MCY15, up from Rs13.97 in 9MCY14. It announced a dividend of Rs3.5 per share, taking its overall payout to Rs10.5 per share so far this year.

Despite the overall growth in profits, there are signs that HBL’s overseas operations are starting to feel some heat from the global oil price slump

Core segment: The bank’s investment book crossed the Rs1tr-mark in the third quarter (3QCY15) and reached a mammoth Rs1.1tr, up 27.6pc from Rs880bn at end-CY14.

Unsurprisingly, a big chunk of that increase — of around Rs81.3bn — came in the bank’s Pakistan Investment Bond (PIB) holdings, which reached Rs385.2bn by end-September. However, short-term Treasury bills grew by a larger Rs129.5bn to around Rs580bn during the period.

That compares with a slight drop in the bank’s net advances to Rs554.6bn in the same period. But the hefty portfolio of PIBs — which carry a premium of around 2.5-3pc over the central bank’s deposit rate — is likely to compensate for any loss in core income from advances and other assets.

Meanwhile, there are signs that HBL’s overseas operations are starting to feel some heat from the global oil price slump.

“The asset quality of the overseas loan book may potentially deteriorate further [owing to] the weakening of GCC economies, particularly the UAE. Consequently, the non-performing loan ratio of overseas loans jumped to 11.4pc by September from 10.6pc in September 2014,” wrote Elixir Securities analyst Iqbal Dinani in a research note last week.

In fact, NPLs have emerged as somewhat of a concern for HBL this year. The bank’s stock of bad debts had risen by around Rs438m to Rs69bn by end-September. The bank clarified that this includes Rs1.07bn in NPLs that are guaranteed by the government and excludes nearly Rs2bn in bad loans it has provided to PIA (which are also guaranteed by the government).

The higher NPLs forced the bank to raise its provisions against them to Rs2.58bn from Rs751.6bn in 9MCY14. “The provisions increased … mainly as a result of aging of previously classified names as well as a conservative view taken by the bank on certain borrowers. The coverage ratio has risen to 87.8pc [by] September, [from] 83.3pc in December 2014,” HBL’s President and CEO Nauman Dar wrote in his third quarter report to shareholders.

Deposits: The bank — making full use of its network of around 1,600 branches — heightened its efforts to shore up low-cost deposits. Its customer current accounts grew 5.7pc to Rs495.2bn in 9MCY15, while its savings accounts went up 9.3pc to Rs717.4bn. Meanwhile, its high-cost fixed deposits dropped 17pc to Rs242.1bn.

This deposit mix helped the bank curtail its interest expenses, as these declined 1.3pc to Rs50.5bn in 9MCY15. This, in turn, led the bank to post a decent 18.5pc growth in its net interest income (before provisions), which clocked in at Rs57bn.

Margins: Sector analysts have been quick to jump on recent news reports that the average banking spread — the difference between banks’ average lending and deposit rates — had dropped to a multi-year low of 5.38pc in September, down 13 basis points from August. During 9MCY15, banking spreads dipped 37bps to 5.65pc.

Taurus Securities analyst Rohit Kumar attributed this to a “re-pricing of [the industry’s] loan portfolio post-continued monetary easing”.

However, HBL’s CEO pointed out that his bank witnessed a meagre 6bps drop in its overall margins “despite the average interest rate in 9MCY15 being 254bps lower than in the same period last year”.

Non-core segment: Most banks have been supplementing the slowdown in their core earnings this year by booking outsized capital gains on their equity and government bond dealings. And HBL is no exception.

The bank booked a huge Rs10.6bn in capital gains in 9MCY15 — half of which (Rs5.23bn) came in the third quarter alone. By comparison, it had booked overall capitals gains of Rs886m in 9MCY14.

Apart from this, the bank’s non-core segment also benefited from improvements in fee- and commission-based income (up 30.2pc to Rs11.1bn), dividend income (up 83pc to Rs1.6bn) and unrealised capital gains (Rs65.2m against a loss of Rs9.1m last year) during the nine-month period.

All of this boosted the bank’s non-interest income for 9MCY15 by 91pc to almost Rs26bn.

The bank’s CEO attributed the growth in fee-based income to “growth in bancassurance, card-related fees, remittances and [higher] investment banking income”.

“Given its nationwide [reach] and strong presence in rural areas, the bank is ideally placed to cater to incremental demand for banking services in the wake of improving economic activity. This will not only support organic growth, but also supplement fee-based income due to growing general banking transactions and cross-selling of various products like mutual funds and insurance products etc,” concluded Elixir’s Dinani.

Published in Dawn, Business & Finance weekly, November 2nd , 2015

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