THE recent trend of banks relying on capital gains to shore up their earnings in a declining interest rate scenario is clearly not just limited to the big banks.

Habib Metropolitan Bank (HMB) — a mid-sized bank with Rs539.3bn in assets — had booked a significant Rs4.5bn in capital gains in the nine months ending September 30 (9MCY15).

Virtually all banks in the country have piled up their investment books with government debt papers — Treasury bills and Pakistan Investment Bonds (PIBs). According to latest central bank data, banks’ holdings of T-bills, PIBs and Sukuks (Islamic bonds) amounted to a huge Rs5.96tr by end-September.

When interest rates are on a decline, newly issued bonds generally carry lower yields than bonds that were issued earlier. Investors put more value on the bonds that are paying a higher yield, leading the prices of those bonds to rise in the secondary market. As a result, when banks sell these bonds, they are able to realise sizable capital gains.

In HMB’s case, much of the capital gains were booked in the first half of the year, as the bank earned a relatively lower Rs49m under this head in the third quarter (3QCY15), against a loss of Rs3.3m in 3QCY14.

The higher capital gains boosted the bank’s overall non-interest income by a hefty 120pc to Rs7.8bn in 9MCY15. Income from fees and commissions (up 17.8pc to Rs2.09bn), dividends (up 239pc to Rs126m) and forex dealings (up 10pc to Rs792.6m) were other contributors to the higher non-core income.

Meanwhile, the bank’s investment-to-deposit ratio — at almost 98pc — is among the highest in the industry. Its net investments reached Rs363.3bn by end-September, up a sizable 69pc from end-2014.

Given the rout in commodity and oil prices since last year, the extent to which the trade-centred bank’s loan book stands exposed remains to be seen

A large chunk of these investments — Rs142.6bn — were in PIBs, with another Rs190.5bn in Treasury bills. The bank’s PIB portfolio grew 42.6pc during 9MCY15, while its T-bill holdings rose 124pc. In comparison, the bank held only Rs1.02bn worth of listed equities.

Simultaneously, its net advances shrank 10.2pc to Rs120.5bn from Rs134.2bn last December.

In a recent interview with an English daily, HMB’s president and CEO, Sirajuddin Aziz, defended the bank’s practice of piling investments on its balance sheet, referring to muted credit demand from the private sector and ‘entrepreneurs’ and to the government crowding out private businesses from accessing bank credit.

Over the years, HMB has developed a reputation of being a trade-centred bank that caters to the financing and commercial needs of business houses. But given the rout in commodity and oil prices since last year, the extent to which the bank’s loan book stands exposed remains to be seen.

The ‘trade and sales’ segment had contributed over half (or Rs4.2bn) of the bank’s consolidated pre-tax earnings of Rs7.34bn in CY14, the last period for which detailed data is available.

The bank’s stock of non-performing loans (NPLs) virtually stayed static at Rs19.3bn during the nine months. HMB said in its latest financial statements that it availed the benefit of forced sale value to the tune of a big Rs1.8bn during the period.

Nonetheless, the bank booked over Rs1.9bn in provisions against NPLs during 9MCY15, up from Rs1.07bn in 9MCY14. However, virtually all of these provisions were booked in the first half of the year, as the bank added a relatively smaller buffer of Rs108.6m in the third quarter.

By end-2014, an overwhelming 65.6pc (Rs12.7bn) of the bank’s NPLs were concentrated in the textile sector, followed by Rs1.4bn in the ‘automobile and transport equipment’ and Rs1.2bn in the ‘export/import’ segments.

Similarly, a major chunk of its advances (Rs71.9bn) were vested in textiles, followed by power (Rs12.5bn) and the export/import (Rs6.6bn) sectors.

Meanwhile, the bank’s deposits have grown much faster than many of its peers this year. It had just over Rs376bn in total deposits by end-September — reflecting a growth of 17.5pc from end-2014. Its savings accounts went up 26.3pc to Rs118bn, while its current accounts rose by a lower 7.1pc to Rs93.1bn.

However, in a departure from industry-wide trend, the bank’s relatively high-cost fixed deposits also went up, rising 17.7pc to Rs153.2bn.

This led to a 9pc growth in the bank’s core expenses, which reached Rs16.9bn during 9MCY15. But the higher core earnings led to the bank’s net interest income rising by a healthy 33.3pc to Rs10.7bn during the period.

“Net interest income remained inflated on the back of income from high-yielding PIBs and the dip in deposit cost due to monetary easing, while nonmark-up income was augmented by substantial capital gains,” wrote Taurus Securities analysts in a recent research note.

All of this led the bank to almost double its pre-tax earnings to Rs10bn in 9MCY15 from RsRs4.6bn in 9MCY14. Its earnings-per-share worked out at Rs5.72, against Rs2.98 last year. The bank did not declare any dividend for the period.

Meanwhile, the HMB stock has been in lockstep with its banking peers this year and underperformed the benchmark index, dropping 12.3pc to Rs32.7 a share till last Wednesday, against the KSE-100 index’s positive return of 7.4pc during the period.

Published in Dawn, Business & Finance weekly, November 9th, 2015

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