IT is interesting to note that, generally speaking, small- and medium-sized banks have not been excluded from the profit-making spree that the banking industry has been on this year.

While limited by their branch outreach and deposit bases, mid-sized banks like Habib Metropolitan — with Rs377.4bn in assets — managed to post impressive growths in earnings by aggressively investing in high-yielding government papers and by often curtailing their lending activities.

In the half year ending June 30 (1HCY14), the bank’s Pakistan Investment Bond (PIB) portfolio mushroomed from Rs59.9bn to Rs120.7bn — a big increase of 101.5pc. PIBs formed roughly 58.7pc of the bank’s net investments of Rs205.5bn.

But unlike some other banks that simply diverted most of their Treasury bill holdings to PIBs, HMB kept its T-bill portfolio virtually unchanged during the period. It had Rs53.4bn parked in T-bills by end-June, down only slightly from Rs54.4bn by last December.

The bank curtailed its lending in the six months till June, and diverted most of the funds towards safer Pakistan Investment Bonds

And the impact of the heavy PIB purchases was clearly visible on the bank’s core income, which advanced 23.2pc to Rs15.4bn. The bank also piled on equities onto its investment book, valued at around Rs895m by period-end.

The strong core income enabled the bank to post a healthy 18pc growth in bottom line, which clocked in at Rs2.1bn for 1HCY14, against Rs1.78bn in 1HCY13. Its earnings-per-share worked out at Rs2.01, up from Rs1.7 last year. The bank did not announce any dividend.

The half yearly earnings growth came after a rather subdued 3.5pc rise in after-tax profit for CY13. “In spite of operating amidst a relaxed monetary stance and low interest rates for most of the year, enhanced cost efficiency, improved liability profile and provisioning cushion allowed profitability to be maintained,” the bank’s CEO, Sirajuddin Aziz, had explained in his annual report to shareholders.

Advances: The bank seemed to have run into some rough ground as far as advances are concerned, noting a surprising build-up in non-performing loans (NPLs) in the six-month period.

This led to a cautious over lending, as net advances dropped 8.7pc to Rs118.5bn. NPLs, on the other hand, rose 4.6pc to Rs17.75m in 1HCY14. And while this would have forced the bank to hike its provisions against toxic debt, HMB clarified that it had availed the benefit of forced sale value (FSV), which helped it reduce its provisions against NPLs by Rs209m.

“Had the benefit of FSVs (including those availed up to previous year) not been taken, the specific provision against NPLs would have been higher by Rs3.27bn, and accumulated profit would have been lower by Rs2.13bn,” the bank wrote in its half yearly report.

Besides, the bank made a reversal in provisions against sour investments of Rs3.88m, helping it to keep overall provisions in check at Rs958.8m.

Non-core income: Meanwhile, income from non-interest-based operations disappointed shareholders, declining 5.4pc to Rs2.57bn during the period. Big drops of 30pc drop in capital gains to Rs804.8m and of 54pc decline in dividend income to Rs18.2m were largely responsible for this.

However, HMB is likely to earn a decent amount of income from advisory fees and commissions in the coming quarter, from its role as a ‘banker to the offer’ for the initial public offering of Engro Powergen Qadipur Ltd — Engro’s first foray into the independent power producing segment — which is scheduled for this week.

Deposits: Banks are engaging in increasingly tougher competition with each other to secure customer deposits by giving incentives like higher profit rates on balances above a certain threshold, besides offering some basic services and products for free. And while the big banks have the advantage of name recognition and extensive branch networks, the mid-sized HMB was able to outpace the broader industry’s deposit mobilisation in 1HCY14.

The bank’s total deposits stood at over Rs277bn by end-June, up a sizable 12pc from Rs243.3bn at year-end. The banking industry’s deposit base had expanded by a more modest 5.6pc during the same period.

However, in a worry for the bank, only 28.6pc (or Rs79.4bn) of its customers’ deposits are in current accounts, with the vast majority, or Rs189bn, parked in high-cost fixed deposits and savings accounts. Most of the growth in deposits also took place in fixed and savings accounts.

This clearly had an impact on the bank’s interest expenses, which shot up 24pc to reach Rs10.3bn.

Non-interest expenses: The bank’s non-core expenses rose by around 14pc to Rs3.68bn, reined in by a drop in ‘other charges,’ as administrative expenses had risen by 15.3pc to Rs3.62bn.

Valuation: With stock valuations of a few big banks stretching in the face of the overall bull market run over the past two years, sector watchers are now increasingly shifting their focus to mid- and small-sized banks, which have more room for growth in terms of branch expansion and deposit mobilisation.

At the stock market, HMB’s stock of par value Rs10 has picked up over 20pc so far this year, and closed last Wednesday at around Rs30.7 per share.

Published in Dawn, Economic & Business, September 22nd, 2014