HABIB METROPOLITAN BANK

June 2009

Graduate School of Management
INTERNATIONAL ISLAMIC UNIVERSITY ISLAMABAD
http://www.iiu.edu. pk/

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HABIB METROPOLITAN BANK
June 2009

HABIB METROPOLITAN BANK

Analysis of Financial Statements
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June 2009

Presented To: Sir Wasim Ullah
MBA (LUMS)

Project:
Financial Analysis of HMB Pakistan

Presented By:

Muhammad Farooq
Reg#3440-FMS/MBA/S08 (19B) +92 333 6836340

Muhammad Khalil Hussain
Reg#3443-FMS/MBA/S08 (19B) +92 333 9835303

Muhammad Ahsan
Reg#3427-FMS/MBA/S08 (19B) +92 333 5023773

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BANKING INDUSTRY OF PAKISTAN
Governor State Bank of Pakistan Syed Salim Raza has said that Pakistan's banking industry had tremendous potential for further investment in the financial sector of the country. Banks play very important role in the economy of a country and Pakistan is no exemption. Pakistan has a well-developed banking system, which consists of a wide variety of institutions ranging from a central bank to commercial banks and to specialized agencies to cater for special requirements of specific sectors. Major factors like global financial disorder, economic slowdown and strict monetary policy were on the top but Pakistani bank cater all these problems. HMB is one of the top ten banks it is expected to play a major role in pioneering these newer markets. We expect to see mergers and takeovers in the industry because of the minimum capital requirement of PKR 6 billion, by the end of Fiscal Year 09, set by State Bank of Pakistan. Secondly because the auto loan and personal loan business suffered such heavy losses banks are looking for new avenues to generate income.

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HABIB METROPOLITAN BANK
Habib Metropolitan Bank was incorporated in Pakistan as a Public Listed Company in 1992 under the name, Metropolitan Bank Limited. The Bank began duly licensed, full scheduled commercial-banking operations in Oct 1992. From Oct 1992 to Sep 2006, remained a highly rated bank and, vide its nationwide 51-branch on-line network, established as a distinguished provider of trade finance services. On October 26, 2006 Habib Bank AG Zurich`s Pakistan Operations merged into Metropolitan Bank Limited and the merged entity was named Habib Metropolitan Bank Limited (HMB), Headquarters in Switzerland, the HBZ Group also operates in Hong Kong, Singapore, United Arab Emirates, Kenya, South Africa, United Kingdom and North America. HMB operates in all major cities of the country with over 100 branches throughout Pakistan. HMB has its primary focus on retail banking and trade finance and also offers highly innovative E-Banking solutions and Consumer Banking to its customers. HBZ (incorporated 1967) enjoys International ranking of 687 in terms of capital. The Bank’s Islamic Banking Division is fully capable of catering to customers seeking Shariah compliant products.

Credit Rating:
The Pakistan Credit Rating Agency (PACRA) has assigned a long-term rating of “AA+” and a shortterm rating of “A1+” to Habib Metropolitan Bank. These ratios give a high quality rating towards bank’s payment and shows a very little/ no risk towards default.

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BASIS OF PREPARATION
In accordance with the directives of the Government of Pakistan regarding the conversion of the banking system to Islamic modes, the State Bank of Pakistan (SBP) has issued various circulars from time to time. Permissible forms of trade-related modes of financing include purchase of goods by the banks from their customers and immediate resale to them at appropriate marked-up price on deferred payment basis. The purchases and sales arising under these arrangements are not reflected in these financial statements as such but are restricted to the amount of facility actually utilized and the appropriate portion of mark-up thereon.

COMPETITORS:
Arif Habib Bank MCB National Bank Of Pakistan Bank Al-Habib Standard Charterd Bank Bank Alfalah

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SWOT ANALYSIS
STRENGTHS:

Large capital base. Rank in top 10 bank of Pakistan Continuous growth in ROE The bank’s management realizes the necessity of existence of effective internal controls to ensure smooth operations in current technical and swift business environment. Loyal management. The bank has efficient and experienced management making significant Credit rating in long-term “AA+” and in short term “A1+” The financial statements, prepared by the management of the bank present fairly the state of affairs. Loans are given only to known, reputable clients to avoid chances of fraud. Very low nonperforming loan.

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Effectively handled the current economic recession. Bank is continuously focusing on developing new and innovative products to attract their target market. Strong customer relationship. Asset utilization is very good.

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WEAKNESSES:
• • • • • • • • • • • • • Only valued client is important Bad portfolio diversification (54% advances to Textile industry) Advertisement on electronic media has not been seen. Declining standards of banking after merger. Inter-organizational conflicts after merger. Compromises upon policies to keep customers happy. Old Management. (No creativity) No further growth in branches. Majority of shares are owned by the one family. Low consumer finance. Less job satisfaction of employees. Customer facing problem of NADRA verification while opening their accounts because its process is time consuming. Promotions generally on seniority basis. Attitude of senior managers at head office has to change towards junior staff

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OPPORTUNITIES:
• • • • Scope in Islamic Banking. To go global fully Low exposure to consumer banking providing opportunity to explore the segment. The year 2009 will prove to be another demanding year for the bank with scattered. Diversification, innovation and mission driven approach are the key to success which bank should adopt.

Progressive but cautious business expansion with strategic branch network extension and introduction of innovative products in all areas of business. Branch network need extension. Should emphasize much on e-banking. Profit margin will be good. The bank being Swiss incorporated, it bank follows dual banking regulations i.e. of Pakistan as well as Switzer-land which attracts foreign investors.

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SBP policy to allow Islamic banking business separately. Bank introduces Islamic banking in country that attracts large number of people. Greater profitability can be achieved through strong internal control New schemes for deposits and finances should be introduced regularly. Opportunity to open branch in ruler area to increase its branch network and gain more profit.

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THREATS:

Adverse impact of “Credit Crisis” can badly effect on HMB. Facing a strong competition by its competitors. High reliability on only one market segment i.e. Textile. (54%) Inconsistency in government policies Increasing competition in the banking sector. Entry of many foreign banks. Strict policies of the State Bank of Pakistan. Geopolitical condition of country Global liquidity crisis has constrained banks to stop lending Current economic crunch. Political instability. Strong competition. Rising deposit rates. Foreign banks in market having more marketing budgets. People losing trust in banks. Decline in private and public sector credit due to tight monetary policy

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1.

Threat of Entry: (Medium)
1. No restriction from SBP for new banks. SBP gives free hand to enter in this industry because

there is a big scope in this industry. To start a new bank there is a need of large financial resources in order to compete with existing banks and Government current interest policy is also a problem for new entrant. 2. Existing banks have great customer loyalties and they differentiate their services.
3. New entrant’s need network of branches and to get favorable location for branches is also

difficult. Existing banks has also advantage of expertise and diversity of their branches.

2. Intensity of Rivalry among Existing Competitors:
1. Degree of difference between products is very low.
2. Competition in existing firms has very high due to numerous and equally balanced competitors.

Due to entrance of new foreign banks, competition increased. 3. There are high exit barriers due to high fixed cost, Govt. and social restriction.
4. Banking industry growth is medium to high due to competition increases day by day.

5. Some banks have new technology which gave advantage to them.

3. Threat of Substitute Products:
1. Islamic mode of financing is a substitute for conventional banking system. Habib Metropolitan bank also start Islamic banking in Karachi and Lahore.

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4. Bargaining Power of Buyers:
1. Giant client bargain highly. Products or services have no high difference. Buyer has full

information about whole banking industry in Pakistan then he/she may give tuff time for bargaining. Switching cost is not high from one bank to another; prospective banks charge low fees for switching. Banking products/services may unimportant to the quality of the buyers.

5. Bargaining Power of Supplier:
1. The State Bank of Pakistan control the whole banking industry and National Bank of Pakistan

control the securities etc. They have power given by the Govt. of Pakistan. They control the cash requirements of the banks and all other banks follow the instructions given by the SBP.

FUTURE OUTLOOK OF HMBL:
Up-till now HMBL has not been able to come up with different products in retail banking, branch banking, insurance, and mortgage. With the presence of large foreign banks like Citibank, RBS and Standard Chartered one finds it convenient to believe that HMBL faces tough competition in consumer banking from these worldwide giants. HMBL's net interest margin is one of the highest in the industry. Interest income is the major source of income for HMBL.

Portfolio of Advances and Deposits
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June 2009

Segments by class of business
Textile Exports/Imports Chemical and pharmaceuticals Wholesale and retail trade Electronics and electrical Services Automobile and transportation Power (electricity), gas, Transport, storage and Construction Individuals Cement Financial Footwear and leather Sugar Insurance Mining and quarrying Agriculture, forestry, hunting Others Total

2008 Advances Deposits Percent Percent
54.03 7.21 3.65 2.98 2.29 1.96 1.72 1.71 1.67 1.42 1.38 1.28 1.24 1.24 0.68 0.10 0.04 0.03 15.37 100 3.70 2.47 1.46 2.26 0.57 4.21 1.41 2.23 2.64 0.94 34.34 0.02 2.38 1.14 0.54 1.26 0.03 0.14 38.26 100

2007 Advances Deposits Percent Percent
57.72 7.53 2.79 2.65 2.53 2.38 1.75 1.44 1.42 1.17 1.10 0.82 0.65 0.53 0.53 0.01 0.01 0.01 14.96 100.00 4.47 2.46 2.19 0.91 0.92 35.12 2.85 1.99 1.37 1.20 4.26 0.03 0.22 3.95 2.82 0.79 0.03 0.28 34.15 100.00

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Portfolio of Advances and Deposits

Ratio Analysis

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Liquidity Ratios:
Mar-09 0.857 0.906 0.027 2008 0.845 0.888 0.098 2007 0.742 0.900 0.077 2006 0.813 0.863 0.057

Advances to Deposit ratio Earning Assets to Assets Yield on earning Assets

Advances to deposit ratio has been decreased in 2007 due to the reason that advances are
increased by 8% and deposits are increased by 18%. In 2008 the ratio has increased because advances are increased by 21% and deposits are increased by 6%. In 2009 first quarter the ratio is increased by 14% because advances are increased by 6% and deposits are increased by 7%.

Earning Assets to Assets ratio has increased in 2007 because earning assets are increased by 21%
and total assets are increased by 18%. In 2008 the ratio has fallen because earning assets are increased by 4% and total assets are increased by 5% so the ratio has decreased. In 2009 the ratio was increased because there is a significant increase in the earning assets i.e. 5.87% increase.

Yield on Earning Assets has increased from 0.057 to 0.077 in 2007 from 2006, the reasons for the
increase are the yield on assets were increased by 64% and the earning assets are increased by 21% so the ratio has increased. In 2008 the ratio has further increased because yield is increased by 32% and earning assets are increased by 4% only.

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Solvency Ratios:

Equity to assets Equity to deposits Earning assets to deposits Cash assets and Government securities to total assets

Mar-09 0.089 0.142 1.437 0.052

2008 0.083 0.118 1.262 0.063

2007 0.078 0.112 1.285 0.059

2006 0.073 0.106 1.252 0.076

Earning Assets to deposits

Equity to assets ratio is increased in2007 because equity is increased by 24% and assets are increased by 16%. In 2008 the ratio has further increased because equity is increased by 12% and assets are increased by 5%. In 2009 the ratio has further increased by 7.88% because the assets are increased by 3.79% while the equity is increased by 11.97% so increase came in ratio.

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Equity to Deposit ratio is increased in 2007 because equity is increased by 24% and deposits are increased by 18% and in 2008 the ratio has further increased because equity has increased by 12% and deposits are increased only by 6%. In 2009 first quarter, it has increased by 20.47%, the reason for the increase is deposits are decreased by 7.05% and equity is increased by 11.97%. Earning Assets to Deposits ratio is increased in 2007 due to the reason that earning assets are increased by 21% and deposits are increased by 18%. Ratio is decreased in 2008 because earning assets are increased by 4% and deposits are increased by 6%. In 2009 the ratio increased by 13.90% because earning assets are increased by 5.87% and deposits are decreased by 7.05%. Cash Assets and Govt. Securities to total assets ratio: In 2008 the ratio slightly increased because cash assets and govt. securities are increased by 12% and total assets are increased by 5%. In 2009 it’s decreased by 16.45% because Cash assets and govt. securities are decreased by 13.28% while the asset increased by 3.79%, the ratio is low because this is for the 3 months.

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Debt Management Ratios:

Debt to assets Debt to equity Capital Adequacy Ratio

Mar-09 0.911 10.18 -

2008 0.917 11.06 10.62%

2007 0.922 11.79 12.50%

2006 0.927 12.68 11.88%

Debt to equity

Debt to Assets ratio has slightly decreased in 2007 because debts are increased by 15.60% and assets are increased by 16.30%. In 2008 the ratio has further decreased because of the reason that debts are increased by 4.80% and assets are increased by 5.30% so the main reason for the decreasing trend is increase in assets more than debts. In 2009 the ratio is decreased by 0.71% because the debts are increased by 3.05% and assets are increased by 3.79%. Debt to equity ratio has decreased in 2007 due to the reason that debts are increased by 15.60% and equity by 24.40%. In 2008 the ratio is further decreased due to the reason that debts are increased by

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June 2009

4.80% and equity by 11.70% so the ratio has gradually decreased. In 2009 the ratio is decreased by 7.97% because debts are increased by 3.05% and equity by 11.97%.

Profitability Ratios:
Net interest Margin Non interest Margin Assets Utilization Equity Multiplier Net Operating Margin Tax Management Efficiency Expense Control efficiency Asset Management efficiency Funds Management efficiency Mar-09 0.93% -0.01% 3% 11.18 0.75% 134.57% 34.33% 2.92% 11.18 2008 2.73% 0.56% 11% 12.06 2.60% 69.14% 16.28% 11.06% 12.06 2007 2.15% 0.53% 9% 12.79 2.43% 66.54% 18.45% 8.77% 12.79 2006 1.93% 0.26% 6% 13.68 2.12% 66.70% 23.25% 6.07% 13.68

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Net Interest Margin increased 0.22% from 2006 to 2007 and further increased seen in 2008 which is 0.58%. In 2009 net-interest margin is only 0.93% because it’s for only 3 month.

Asset utilization ratio From 2007 to 08 the ratio further increased by 26.16% because interest income is increased by 32% and non-interest income is increased by 35% while the assets are increased by 5.35%. In 2009 the ratio is seen to be decreased by 73.58% but this is because incomes are for three months. If we examine the quarter’s performance then we can say that this is better because interest income is 17% increased and non-interest income is decreased by 17% so higher performance is seen in interest income and depressing in non-interest income. Equity Multiplier ratio: In 2007-8 the ratio was decreased by 5.65% because assets are increased by 5.35% and equity by 11.66%. In 2009 the ratio was again decreased by 7.31% because assets are increased by 3.79% and the equity is increased by 11.97%. Net Operation Margins: In 2008 the ratio was further increased by 7.09% because operating profit increased by 13% and assets are increased by 5.35%. In 2009 first quarter the ratio is less because we have taken three months profit before tax. In actual this profit is increased by 19%. Tax Management Efficiency ratio: In 2008 the ratio is increased by 3.92% because profit before tax is increased by 13% and profit after tax is increased by 17%. In 2009 the ratio is decreased by 5.37% because this is for three months profit and other reasons are profit before tax is increased by 19% and profit after tax is increased by 12%.

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Expense Control efficiency ratio is decreased by 20.63% in 2006-07 because reasons are profit before tax is increased by 34% while interest income increased by 64% and non-interest income increased by 83%. In 2008 the ratio decreased by 11.79% because profit before tax increased by 13% while interest income is increased by 32% and non-interest income is increased by 35%. In 2009 the ratio is again increased by 2.57% because profit before tax is increased by 19% while interest income is increased by 17% and non-interest income is decreased by 17%. Asset Management Efficiency ratio is increased by 44.5% because interest income is increased by 64% and non-interest income is increased by 83% and assets are increased by 16.28%. In 2008 the ratio is further increased by 26.16% because interest income is increased by 32% and non-interest income is increased by 35%and assets are increased by 5.35%. In 2009 the ratio is seen to be decreased by 73.58% but in real sense this is not as because incomes are for the first three months of the current financial year. Fund Management Efficiency ratio is decreased by 6.52% because funds are increased by 16.28% and equity is increased by 24.38%. In 2008 the ratio is further decreased by 5.65% funds are increased by 5.35% and equity is increased by 11.66%. In 2009 the ratio is again decreased by 7.31% funds are increased by 3.79% and equity is increased by 11.97%.

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EARNINGS RATIOS:
Return on deposits Return on assets Earning spread Mar-09 0.008 0.005 0.010 2008 0.026 0.018 0.029 2007 0.023 0.016 0.022 2006 0.020 0.014 0.023

Return to deposit ratio is increased by 12.92% in year 2007, this is because return is increased by 33% and deposits are increased by 18.12%. In 2008 the ratio is further increased by 10.78% because return is increased by 17% and deposits are increased by 5.83%. Return on assets is increased by 14.72% in 2007 because there is a large increase in profitability by 33% and assets are also increased by 16.28%. In 2008 the ratio is further increased by 11.29% because the profitability is increased by 17% and assets by 5.35%. In 2009 the ratio is seen to be decreased but this is not in real sense because profits are for three months. Earning spread decreased very smaller in 2006-07, this is all because of increase in interest expenses by 87% and an increase in interest bearing liabilities by 14%, due to the major increase in interest expenses, earning spread has decreased but total interest income increased by 64% and total assets by 16%has caused decrease in Earning spread. In 2008 earning spread has increased to 0.029, the reason is increase in interest income by 32%and also total interest expense to total interest bearing bank liabilities are increased, therefore, Spread earning has increased. In 2009 the ratio is 0.01 but if we check, then we come to know that ratio is 0.038 which is much higher because interest income increased by 17% and interest expenses increased by 5%.

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Return on Equity:
Net income after taxes Total equity capital ROE Mar-09 1,896,974 16,904,052 0.11 2008 3,279,736 15,096,526 0.22 2007 2,797,408 13,519,90 8 0.21 2006 2,097,203 10,869,426 0.19

ROE

The ROE was 0.19 in 2006, it has been improved in 2007 to 0.21 and further a smaller increase is found in 2008.If we examine it, this is due to the increase in net income after tax, there was also smaller increase in Equity Capital. In 2009, profits are increased by 131% but the ROE is low because we have calculated on three months profit basis. It is much higher in real sense.

Breakdown Analysis of ROE:
Net profit margin Assets utilization Equity multiplier ROE Mar-09 0.34 0.03 11 0.112 2008 0.16 0.11 12 0.217 2007 0.18 0.09 13 0.207 2006 0.23 0.06 14 0.193

If we see 3 step ROE, we find that the increase in ROE from 2006-07 is due to the Asset utilization margin, and equity multiplier and net profit margin decreased slightly. From 2007-08 the ROE has been increased slightly due to the reasons of increase in Assets, and further a smaller decrease in Net Profit Margin and Equity Multiplier. In 2009 first quarter the ROE is increased in real sense because Net profit margin is increased and assets utilization is also increased and equity multiplier is also higher because all of these figures are for first quarter.

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June 2009

EFFICIENCY RATIO:
Mar-09 102.64% 564 2008 75.99% 1,918 2007 70.97% 1,828 2006 78.04% 1,602

Operating efficiency ratio Employee productivity ratio

Operating Efficiency ratio is decreased by 9.06% in 2006-07. In 2008 the ratio is increased by 7.08 because operating expenses are increased by 44% and operating income is increased by 35%. In 2009 the ratio is further increased by 35.07%, note that this is not in real sense because the operating income/ expenses are for three months.

Employee Productivity ratio is increased by 14.12% in 2007 because pre-tax profit has been increased by 34% and no of employees was 2300. In 2008 the ratio is further increased by 4.93% because pre-tax profit has been increased by 13% and no of employees was 2473. In 2009 the ratio is further decreased by 70.60% because pre-tax profit has been increased by 19% and no. of employees was 2500.

Peer Group Analysis

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PROFITABILITY PERFORMANCES:

Habib Metropolitan Bank
2006 Return on equity (ROE) Return on assets (ROA) Net interest margin Net non-interest margin Net operating margin Earnings Per Share Earning spread 19% 1.40% 1.93% 0.26% 2.12% 4.92 2.90% 2007 21% 1.60% 2.15% 0.53% 2.43% 5.57 2.20% 2008 22% 1.80% 2.73% 0.56% 2.60% 5.45 2.31% 2006 27% 1.53% 3.29% -0.93% 2.34% 6.59 3.38%

Peer Group*
2007 26.18% 1.56% 2.97% -0.76% 2.16% 4.59 3.07% 2008 20.26% 1.33% 3.72% -1.10 1.99% 4.95 3.96%

*Peer group: Standard Chartered Bank and Bank Al-Habib

While comparing it with its Peer group, the ROE of our bank in 2006-07 is low than peer group, the increase in ROE from 2006 to 2007 is due to the Asset utilization margin, and equity

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June 2009

multiplier and net profit margin are decreased faintly. From year 2007 to 2008 the ROE has been increased slightly due to the reasons of increase in Assets, and further a smaller decrease in Net Profit Margin and Equity Multiplier. So we can say that our ROE is increasing and it is not due to highly leverage but the bank is increasing its capital.

ROA of our bank was less in 2006 but improved and crossed the peers because we have earned more and our profits are increased by 33% in 2007 and 17% in 2008 so our ROA has improved and crossed the peers’.

Net interest margin of HMB is low than peers because HMB do not invest in risky opportunity that’s why the margin is low than peers. It is widely known that higher the risk will give you higher return but they do not take more risk and emphasize on liquidity.

Non interest margin of almost all the banks are in negative and it is positive of HMB, they are earning more from non-interest sources, also this is an objective of every bank so they are leading. Net operating margin of HMB was low in 2006 and increased than from peers, because they have properly controlled on their expenses and introduced new technology to reduce the transactions and other costs.

Earnings per share of HMB was low than peer in 2006 and improved and crossed the peers, because they have increased their profitability and controlled the expenditures and properly plowed back and therefore, they have increased the shareholders wealth.

Earning spread of HMB is low than peer in all the years from 2006 to 2008 because their interest income is low, the reason for the low is they do not invest in risky portfolios they invest very keenly and prefer the liquidity due to this the world economic recession has also not affected badly to HMB unlike other banks in the Pakistan market.

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June 2009

RISK MANAGEMENT
Risk management sides are implanted in the Bank’s strategy, organization structure and processes. The HMB has adopted a solid risk management structure for credit, operations, liquidity and market risk to support the process and system.

Credit risk:
The HMB strategy is to minimize credit risk through a strong pre-disbursement credit analysis, approval and risk measurement process added with product, geography and customer diversification. The Bank, as its strategic preference, provides loans only to strong parties. Major portion of the Bank credit portfolio is Textile industry (54%) which is highly profitable business in Pakistan but it may riskier and not a good diversification of portfolio, if textile industry slump then it will crash the whole bank. The bank has very low rate of Non-performing loans. The ratios of risks are as under and we can see that they reduce the risk as per their objective. 2008 0.53% 4.08% 0.001% 0.37% 11.88% 81.30% 2007 0.90% 5.95% 0.04% 0.78% 12.50% 74.20% 2006 1.00% 7.18% 0.09% 1.00% 10.62% 84.49%

Non-performing assets to total loans and lease Non-performing assets to equity Loss to total loans Provision to total loans Capital adequacy Total loans to total deposits

Market risk:
Market risk is the possibility that fluctuation in interest rates, foreign exchange or stock prices will change the market value of financial products leading to a loss. The HMB has formalized liquidity and market risk management policies which contain action plans to strengthen the market risk management system.

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Foreign exchange risk:
Foreign Exchange Risk is the probability of loss resulting from adverse movement is exchange rates. The HMB is not in the business of actively trading and market making activities but a conservative risk approach and the Bank’s business strategy to work with export oriented (Textile) client’s gives the ability to meet its foreign exchange needs.

Interest rate risk:
Interest rate risk is the risk that the value of the financial instrument will fluctuate due to changes in the market interest rates. The HMB’s interest rate exposure is low due to the short-term nature of the majority of business transactions. Interest rate risk is also controlled through flexible credit pricing mechanism and variable deposit rates.

Liquidity risk:
HMB manages the liquidity position on a continuous basis. The Bank’s liquidity position is based on “self reliance” with a wide branch network to expand the Bank deposit base. The Bank’s liquidity profile generally consists of short-term, secured assets, in line with the Bank’s credit strategy.

Capital Risk:
No capital risk is facing by the HMB. After the merger with Habib AG Zurich, HMB’s capital increased and now it’s far above the capital requirement of SBP.

RECOMMENDATIONS
• • •

Diversify the portfolio Introduction of new products/services in the market Hire new management Give importance to all customers Increase the branches all over the country especially in metropolitan areas. Grant Agri loans Improve standard of banking Start advertisement as soon as possible


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