Research and Analysis Project New Updated

Syed Tanveer Ali
Habib Bank Limited Research and Analysis Report Page 1
Oxford Brookes University Research and Analysis Project
An Analysis and Evaluation of the business and financial
performance of HABIB BANK LIMITED’Between1st January
2010 to 31st December 2012

Syed Tanveer Ali
TABLE OF CONTENTS
SectionI
(2.0) Information Gathering And Accounting / Business Technique .................................................
(2.1)Data Collection Sources...................................................................................................................
(2.2)Details of Sources of Information Gathering ................................................................................
(2.3)Limitations of Information Gathering ...........................................................................................
(2.4)Discussion on Ethical Issues............................................................................................................
(2.5)Explanation of Accounting & Business Technique used and their Limitations ........................
SectionII
(3.0) Analysis, Results, Conclusions And Recommendations ..............................................................
(3.1) Company’s Introduction (HABIB BANK LIMITED) ................................................................
(3.2) List of Competitors .........................................................................................................................
(3.3) Graphical Comparison (HBL vs. PEERS’) ..................................................................................
(3.4) Business Analysis ............................................................................................................................
SWOT Analysis............................................................................................................................
PEST Analysis..............................................................................................................................
(3.5) Financial Analysis...........................................................................................................................
Profitability Ratios.........................................................................................................................
Asset Quality and Liquidity Ratios ...............................................................................................
Risk Adequacy and Liquidity Ratios.............................................................................................
Investment/Market Ratios .............................................................................................................
Horizontal Analysis.......................................................................................................................
(3.6) Conclusions and Recommendations..............................................................................................

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SECTION II
(2.0) INFORMATION GATHERING AND ACCOUNTING / BUSINESS TECHNIQUE
(2.1) DATA COLLECTION SOURCES
I have used just used secondary source of information in my research project as primary sources
were difficult to obtain as I was unable to arrange interviews within the Bank due to time constraints.
SOURCES OF INFORMATION
[Lib.umd.edu, (2013)]
PRIMARY SOURCE
Primary sources are original materials. They are
from the time period involved and have not been
filtered through interpretation or evaluation.
Primary sources are original materials on which
other research is based. They are usually the first
formal appearance of results in physical, print or
electronic format. They present original thinking,
report a discovery, or share new information.
Examples include
a) Interviews (e.g., oral histories, telephone, e-
mail)
b) Journal articles published
c) Survey Research
d) Web site. Etc.
SECONDARY SOURCE
Secondary sources are less easily defined than
primary sources. Generally, they are accounts
written after the fact with the benefit of hindsight.
They are interpretations and evaluations of
primary sources. Secondary sources are not
evidence, but rather commentary on and
discussion of evidence. However, what some
define as a secondary source, others define as a
tertiary source. Context is everything.
Examples include
a) Bibliographies (also considered tertiary)
b) Commentaries, criticisms
c) Textbooks (also considered tertiary);
d) Dictionaries, Encyclopedias. Etc.

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(2.2) DETAILS OF SOURCES OF INFORMATION GATHERING
The key task to progress through the research is to gather the relevant information related to topic to
achieve the desired outcome because this may subsequently affect on the quality of the research
work. Therefore extensive research was required along with the filtration and assessment of relevant
information through relevant business and accounting tools. As suggested in the BSC INFO PACK I
have used secondary sources of information as part of research report as all the information was
available through secondary sources.
SECONDARY SOURCES
 Textbooks
I used ACCA’s official publishers’ textbooks of BPP and Kaplan and Institute of Banker Pakistan
(IBP), in particular texts for F7, P2 and P3 and stage I & II books of IBP were used comprehensively
during the project. These books proved to be invaluable and provided help in analyzing and
computing the financial ratios and understanding the company’s business strategy and tactics.
 Audited Annual Reports
The authentic source of information about company’s financial and key non-financial performances is
its printed annual reports and it also include other valuable pieces of information leads to insight of
company’s affairs. This is the major source of information in the analysis part of this report. The
audited annual reports of HBL and MCB were obtained from Head office and official website of both
banks.
 Articles
ACCA technical articles, Local newspapers and other sources were referred during the research
process. Following are the sources which were used:
 Students Accountant Magazine
1. Grade ‘ A ‘ Rap [Shane Johnson, 2009]
2. Working with the best mentor [Alastair Neilson, 2009]
3. Performance Appraisal [Bobie Retallack , 2010]
4. How to approach performance appraisal questions [Steve Scott, 2006]

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 Newspapers
1. Business Recorder
2. Daily Times
3. The News
 Research Articles ( Accessible/Published Online)
 INTERNET
Internet was a great tool to help me complete my research. Since I often spend hours on researching
different things on internet, it was easiest source to gather information. I gathered most of the
information from different websites using different search engines such as Google and Yahoo.
Official websites of HBL and MCB were of great importance in terms of respective company profiles
and news updates. The time to extract relevant information from loads of information was quite time
consuming.
(2.3) LIMITATION ON INFORMATION GATHERING
Firstly the data used for the research report is mainly secondary and was collected from many
different sources mentioned above. Relying too much on secondary sources may not provide
accurate and complete information as information from internet may not be reliable and authentic.
Therefore extreme care was taken to ensure that no conflict arises between the facts and figures as
mentioned in financial statements and those in the publications.
Secondly, there was a time constraint too because as I mentioned above that HBL is one of the
largest domestic private bank so loads of information was available and the time to extract relevant
information was a bit difficult exercise which consumed hours. There was a threat that some
important piece of information may have been ignored.
Thirdly, due to limitations of words of this project I had to be more specific to just depict the important
matters and information.

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(2.4) DISCUSSION ON ETHICAL ISSUES
I faced few ethical issues which came up during information gathering and the ways I tackled them.
 I had easy access to the some extent to inside information and there was a threat relating to
confidentiality. Before proceeding on the project I had to inform the management of HBL about
the research and took the written permission.
 Temptation to buy existing reports or paying someone to write the report for you.
(2.5) ACCOUNTING & BUSINESS TECHNIQUE USED AND THEIR LIMITATIONS
We can use several accounting and business techniques to evaluate a company’s performance. I
have used three accounting and business technique in my research report and applied on the
gathered information. Following are the techniques and their limitations:
1) Ratio Analysis
A tool used by individuals to conduct a quantitative analysis of information in a company's financial
statements. Ratios are calculated from current year numbers and are then compared to previous
years, other companies, the industry, or even the economy to judge the performance of the
company. Ratio analysis is predominately used by proponents of fundamental analysis.
(http://www.investopedia.com/terms/r/ratioanalysis.asp, 2013)
Limitations:
1) Ratios, calculated using past data, don't provide complete information for future forecasting.
2) Management's choice of accounting policies--the specific principles and methods of preparing
and presenting financial statements may have a significant effect on key ratios.
[Limitations of Financial Ratios | eHow (Damoah, 2002)]
3) Incorrect or inaccurate data may give false results and interpretation of ratios.
Vertical Analysis
A method of financial statement analysis in which each entry for each of the three major categories
of accounts (assets, liabilities and equities) in a balance sheet is represented as a proportion of the
total account. The main advantages of vertical analysis are that the balance sheets of businesses of

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all sizes can easily be compared. It also makes it easy to see relative annual changes within one
business.
Limitations:
1) The company may engage in a unique activity in one year that skews the results of the
analysis.
2) If the companies operate in different industries, they may report different asset percentages,
making the comparison lack meaning.
[Base Amount of a Vertical Analysis | eHow.com, (McIntosh, 2001)]
Horizontal Analysis
A procedure in fundamental analysis in which an analyst compare ratios or line items in a company's
financial statements over a certain period of time. The analyst will use his or her discretion when
choosing a particular timeline; however, the decision is often based on the investing time horizon
under consideration.
(Investopedia.com, 2013)
Limitations
1) Being highly dependent on the selection of base year and the period under examination in the
financial model
2) Horizontal analysis provides little insight into why the trend occurred in a financial model.
Reference: [Financial Modeling Guide, (n.d)]

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2) SwotAnalysis
SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. By definition, Strengths
(S) and Weaknesses (W) are considered to be internal factors over which you have some measure
of control. Also, by definition, Opportunities (O) and Threats (T) are considered to be external factors
over which you have essentially no control.
SWOT ANALYSIS FRAMEWORK
(http://www.managementstudyguide.com/swot-analysis.htm, 2008)
Limitations of SWOT Analysis
 The SWOT framework emphasizes the elements of strengths, weaknesses, opportunities
and threats, but provides no real guidance on how individual organizations can identify these
elements for themselves.
 Organizations also may have difficulty determining whether something in their external
environment presents an opportunity or a threat, and the SWOT framework does not offer a
way to distinguish them.
[Hall, (n.d).]

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3) PEST Analysis
The PEST analysis is used in the process of environmental scanning. It gives an overview of the
different macro environmental factors that the company has to take into consideration. It is a helpful
strategic tool for perceptive market growth or decline, potential, business position and direction for
operations. The Factors are:
 Political factors
 Economical factors
 Social factors
 Technological factors
[(http://www.ukessays.com/essays/marketing/marketing-planning-is-a-logical-sequence-of-events-marketing-
essay.php, (2008)]
Limitations:
 The external factors considered during PEST analysis are dynamic and they change at a
very fast pace.
 Collecting enormous amounts of relevant data from the right sources becomes a bit of a
problem, especially since most of the pertinent data must be collected from external
agencies.
[Limitations of a PEST Analysis (Sidharth Thakur and Ginny Edwards, 2010)]
(Brighthubpm.com, n.d.)

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SECTION III
(3.0) ANALYSIS AND RESULTS
(3.1) COMPANY’S INTRODUCTIONS:
Introduction of Habib Bank of Pakistan:
HBL was the first commercial bank to be established in Pakistan in 1947. Over the years, HBL
has grown its branch network and become the largest private sector bank with over 1,500
branches and 830 ATMs across the country and a customer base exceeding five million
relationships.
The Government of Pakistan privatized HBL in 2004 through which AKFED acquired 51% of the
Bank's shareholding and management control. HBL is majority owned (51%) by the Aga Khan
Fund for Economic Development, 42.5% of the shareholding is retained by the Government of
Pakistan (GOP), whilst 7.5% is owned by the general public i.e. over 170,000 shareholders
following the public listing that took place in July 2007.
With a presence in 25 countries, subsidiaries in Hong Kong and the UK, affiliates in Nepal,
Nigeria, Kenya and Kyrgyzstan and rep offices in Iran and China, HBL is also the largest
domestic multinational. The Bank is expanding its presence in principal international markets
including the UK, UAE, South and Central Asia, Africa and the Far East.
[REF http://www.hbl.com/about-us.php]

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(3.2) List of Competitors
The competitors Analysis has made by gathering data of Top 5 banks from their respective Annual
Reports of 2012.

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(3.3) Graphical Representation ofHBL vs.PEERS’ Analysis
HBL
30%
NBP
25%
MCB
15%
UBL
18%
ABL
12%
Assets
HBL
24%
NBP
19%
MCB
23%
UBL
21%
ABL
13%
Deposits
HBL
24%
NBP
19%
MCB
23%
UBL
21%
ABL
13%
Investments
HBL
24%
NBP
19%
MCB
12%
UBL
21%
ABL
13%
Advance
HBL
25%
NBP
18%
MCB
24%
UBL
21%
ABL
12%
Profit before Tax
HBL
24%
NBP
19%
MCB
23%
UBL
21%
ABL
13%
Profit after tax

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(3.4) BUSINESS ANALYSIS
Business Performance of HBL can be evaluated through application of business models that would
help in evaluating the company’s core activities, internal and external appraisal
SWOT ANALYSIS
Positive Negative
Strengths Weaknesses
I
N
T
E
R
N
A
L
F
A
C
T
O
R
S
 HBL has good reputation and prestigious
background since 1947. HBL has won two
Global Finance Awards 2010.
 HBL has wide branch network of 1540
branches reaching out to every corner of the
country.
 Payment services (Includes cash
management, branchless banking and
alternate delivery channels) growing faster.
Cash management showed growth by 42%.
 HBL has over 1400 branches making best
use of technology and increasing customer
based by providing extensive online
services.
 HBL has created an excellent brand image
through advertisement and capturing market
share.
 Proper training to employee makes
employees more capable of dealing complex
issues.
 Majority of the customers are unaware of
products of HBL. That requires heavy
media campaign of those products.
 Retention of Bank employees is
becoming a problem for HBL due to less
salary giving to employees, as new
Banks and foreign Banks recruiting
experience staff of big Banks.
 Customer dissatisfaction can be seen in
branches in peak hours, where the staff
does not facilitate the customer in quick
manner.
 Other Islamic bank showing extensive
growth, HBL also need to expand its
Islamic banking operation.
 Internet Banking, Mobile banking should
be offered at cheaper prices as other
Banks such as Foreign Banks offering
the same at cheaper price.

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Positive Negative
Opportunities Threats
E
X
T
E
R
N
A
L
F
A
C
T
O
R
S
 Large Deposits can be used to expand its
lending portfolio to private sector.

 Being the largest bank HBL can help SME’s
and Agri financing by providing loans on less
strict covenant.

 New government has been formed which can
provide boost to economy in coming years,
HBL has all potential to best use of the future
opportunities.
 Talent development and potential employee
retention would be beneficial for HBL.
 HBL can add value into its services by
training and skill enhancement program.
 HBL acquired CITI Bank’s consumer portfolio
which shows that HBL is committed towards
increasing customer based and finding
opportunities.
 High competition in the market by other
banks offering innovative products on
regular intervals.
 Lack of credit demand from private
sector, shrinking banking spread which is
impeding Banking sector growth.
 Banks may be restrained from heavily
investing in Government papers in the
future. (High tax would be charging on
returns).
 New policies such as revision of minimum
interest on PLS saving from 2% to 6%
can cause troublesome for Banks’
profitability if such policies continue to be
issued in the future.

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PEST ANALYSIS
Political Environment
Political environment of a country plays an important role for business sectors to have consistent
policies and implementation that increases resilience to accommodate shocks that affects
macroeconomics such as inflation. Unfortunately in Pakistan, there has been no consistency in
political environment for decades which lead to weak policies and implementation and result in
erratic economic growth. Government is responsible for making the fiscal policies which directly
affects financial sector. In recent years Government of Pakistan had borrowed extensively from SBP
and commercial Banks to keep the government spending in flow, which ultimately effected the
economical environment.
[Monetary Policy Decision (SBP, 2012)]
Due to lack of political instability which leads to weaken legal framework, the decline in investment to
GDP ratio to historically low can be noticed. Financial sector focus remains on upcoming election
rather macro-economic reforms, hoping economic reforms policies which enhance opportunities for
banking sector to grow further in coming years.
Economical Environment
The economic situation of country had become worse in 2008; since economic condition started
recovery witnessed a modest recovery in 2012. In 2012, the real GDP grew by 3.7% as compared to
3% in FY11. The Economy however, underperformed compared with growth target of 4.2% for the
FY 2012 primarily due to severe energy crisis, deteriorating law and order and weakening the global
economy.
The following sectors showed growth in 2012.
a) Agriculture sector 3.1% in FY12 compared to 2.4% in FY11.
b) Industrial sector 3.4% in FY12 compared to 0.7% in FY11.
c) Service sector, the largest contributor ( over 55%) in GDP, 4% in FY12 as compared to 4.4%
in previous year
Inflationary pressure eased significantly as CPI reduced from 13.7% from FY 2011 to 11% in FY
2012 and further to 6.9% as on December 2012. Rising trade deficit to $15.5 billion in 2012 as
against $10.5 billion from previous year. Despite the challenging economic front, banking sector
showed sustainable growth as lending scenario remain slightly stable in 2012 compared to previous
year. HBL domestic deposit growth at Rs. 1041 billion witnessed robust growth of 32% which was
much above the industry growth of 11%. HBL continued its financial and business growth despite of
current economic crisis to the country [HBL, 2012].

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PAKISTAN INFLATION RATE REVIEW
Socio-Cultural Environment
Socio economic culture depends on the society’s norms, belief, lifestyle and education. In a country
like Pakistan where wealth is unevenly distributed with vast rural population and most of the people
in rural areas living below the poverty lines definitely affects the economic activities in the country
which results less development and growth in the society. Keeping money into bank accounts was
not very common in Pakistan, but Islamic Banking has played a revolution role in the Banking sector

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as HBL has showed robust growth in Islamic Banking deposit by 31% in 2012 to Rs, 31 billion.
Through schemes HBL aware people the importance of savings money through advertising and
visiting to schools and colleges. HBL has outreach to every person from corporate client to a
common man being a reliable bank for decades. Recent increase of interest rate on PLS saving
account was the initiative taken by SBP to promote saving concept amongst the people. Recent
introduction of PAKISTAN CARD and WATAN CARD in flood affected areas of Pakistan increased
the popularity and importance of Banking.
Technological Environment
The impact of I.T has significance impact over Banks’ financial and business performance. HBL is
also striving to achieve high value image in the market by providing services to fulfill customer needs
efficiently and effectively.
Following Services are provided.
a) HBL Internet Banking ( e.g. online transfer of money, Mobile easy loads, Utility bill payments,
credit cards payments , Bank statements , cheque book request, personal setting etc.)
b) HBL ATMs
c) HBL Mobile Banking Services
d) Debit Card Services
e) Phone Banking Services
f) User friendly mobile Application for different brands. (Wearehbl.com, 2012)
The information technology group keeps its self aligned with HBL’ strategic goal and left no stone
unturned in assuring speedy and uninterrupted services as well as secure processing environment
and safeguard customer’s assets. Constantly increasing number of branches and ATM’s which
makes HBL different from other bank.
(Hbl.com, 2013)

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(3.5) FINANCIAL ANALYSIS
Financial statements for banks present a different analytical problem than statements for
manufacturing and service companies. Therefore, it was important to differentiate the framework use
for financial sector and non financial sector. For that reason, I had to go through key financial ratios
of financial sector and guidance taken from “Evaluation Committee of the Joint Committee of
ICAP and ICMAP” evaluation criteria 2013.
(www.icap.org.pk, 2012)
Profitability ratios
Profit and Return
Profit before Tax Ratio
Scrutinizing each year individually, following facts revealed from the annual reports of HBL. The
profit before tax ratio increased nominally to 34.82% in 2011 which was 33.25% in 2010. This
increase is mainly due to decline in provisioning expenses of HBL by 14% to Rs. 6.7 billion. Decline
of provision charge was mostly because of higher general provisioning in 2010 against Agri finances
in flood affected area, amounting to Rs. 775 million.
PBT increased by 27% to Rs. 34.3 billion in 2011. Profit before tax ratio decreased by 5% to 29.88%
in 2012, but overall the Profit before tax increases by 1.7% to Rs 34.9 billion as a sluggish growth
from previous year. The above result was affected slightly by admin expense which rose by 5.9%.
Pre- Provision Profit increased by 18% to Rs. 41.0 billion in 2011 and 2.7% to Rs. 42.14 billion in
2012. The group Profit after tax (PAT) Rs. 22.4 billion in 2012 as compared to 22.3 billion in 2011,

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reflecting an increase of 0.1% and Rs. 17.03 billion in 2010 as compared to 2011 reflecting an
increase of 31% in 2011 to all time high (FY 2010 to FY 2012).
Net Interest Income Analysis
Net interest income increased by 20% to Rs. 56.4 billion and 2.4% to Rs. 57.8 billion in 2011 and
2012 respectively, driven by improved yield and volumetric growth in government securities.
[HBL 2012, pg.41]
Also advances increased by 1.65% to Rs 55.66 billion from Rs. 54.76 billion in 2010 which was also
the reason for high profitability in 2011. Although in 2012, interest on advances decreased to Rs.
52.95 billion which is 5.0% from previous year due to decrease in KIBOR (Karachi Interbank Offered
Rate), but the overall gross interest income rose by 18.5% to Rs 116.8 billion.
27%
31%
-12%
18%
20% 20%
% Growth 2011 VS 2010
1.8%
0.4%
8.2%
2.7%
2.4%
6.6%
% Growth 2012 vs 2011

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Gross Yield on Average Earning Assets
Gross yield on earning assets help us to measure the profitability. Better ratio results shows good
utilization of earning assets by a
bank to earn returns.
If we compare or analyze the
utilization of earning assets by HBL
management it clearly reveals that in
2010 GYEA was 11.44 % which
further improved by 3.7% to 11.86% in 2011. The difference depicts minor change in positive
direction. This could be due to reasons that HBL’s growth advance remained under pressure due to
lack of credit demand during 2011 which extended into 2012 due to low credit demand, shrinking
spreads and investment in Government papers ( Government extensive borrowings). HBL’s gross
advances were almost flat during 2011 at Rs. 503 billion. Further in 2012, HBL’s gross advances
rose to Rs. 545.8 billion but HBL reported a decline in GYEA by 12% to 10.43%. This decline may be
attributed interest rate belling slashed to 9.5% in 2012 which also impacted on KIBOR (Karachi inter-
bank offered rate).
[HBL Annual Report (2010-2012)]
-50
0
50
100
150
200
250
300
350
400
2011 Vs 2010 2012 Vs 2011
AmountInbillion
Lendings to
financial
institutions
Investments
Advances
-
100
200
300
400
500
600
700
800
2010 2011 2012
Amountinbillion
Changing in Earning Assets
Lendings to
financial
institutions
Investments
Advances

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Return on Average Equity
After going through the ROE,
there is an upward pattern of
increase in the shareholders
equity. The ROE rose by 15.6%
to 21.82% in 2011 compare to
31.14% of previous year. This
was due to increase of net income by 31.1% in 2011. The reasons behind that top line interest
income increased by 21% to billion 98.5 million and interest income on advances increased only by
1.6% to Rs. 55.7 billion and Interest income on advances reduced by 5.0% to Rs. 52.9 billion in
2012.
In 2012, ROE decreased to 20.4% even though interest income rose by 18.5% to Rs.116.8 billion.
Interest expenses also increased by 39.9% which was all the time high over three years from 2010-
2012. Administrative expense of the Bank rose by 21.4% YOY to Rs. 29.4 billion and 5.6% to Rs.
31.1 billion in 2011 and 2012 respectively. Admin expense slightly worsened in 2012 from 2010 and
2011. In 2011 it is noted that excluding retirement benefit charge, admin expense to income ratio
improved marginally to 39.1% from that of previous year. HBL added 33 new branches in 2012
which also increased the cost, but will be adding value to HBL and profitability will be improved in the
future. Occupancy related expense has been increased in 2012 which consequently affected the
overall return of the Bank. Total non markup income witnessed a growth of 16% to 14.8 billion in
2011 and 8% to 15.9 billion in 2012. In 2011 result of all associates improved which resulted in high
share of profit witnessed in Income statement. Income from dealing in foreign currency also
increased by 17.8% in 2011 but further it declined by 31.6% in 2012. Dividend income rose by 27%
and 12.8% in 2011 and 2012 respectively.

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Return on Average Total Assets
The industry average ROA After tax rates of local privates’ banks were 0.9%, 1.5% and 1.5% in
2010, 2011 and 2012 respectively.
[Statistics of the banking system (State Bank of Pakistan, 2012)]
Overall HBL performance
compared to industry was better
which was driven by higher
profitability in 2011 and 2012
respectively. Although HBL own
performance was disappointing in
2012 compared to 2011. The main reason could be trimming down the discount rate which was
predicted in second quarter of 2011 and the impact goes on since then, which affected the
profitability in 2012 as well. The key investment made was the government borrowings from
commercial banks which helped commercial banks to improve their profitability.
Habib Bank Limited

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Asset Quality and Liquidity Ratios
Advance to Deposit Ratio (ADR) and Investment to Deposit Ratio (IDR)
An analysis of HBL’s advances vis-a-visa investments over three year’s period shows that there is
continues decline in advance-
to-deposit ratio (ADR), while on
the other hand IDR has been
on the rise. This symptomatic
of HBL’s cautious lending.
According to the SBP data the
average ADR were 61.13%,
52.0% and 48.1% in 2010,
2011 and 2012 respectively.
[Statistics of the banking
system (State Bank of
Pakistan, 2012)]
In 2010 ADR was 61.5% which
means higher the ratio the
higher the risk to cover the unforeseen fund requirement to finance profitable investments or to
maintain the liquidity. In 2010, HBL had to arrange finance from “International Finance Corporation
(IFC) amounting to US $ 50 million. The loan is unsecured and subordinated as to payment of
principal and interest to all other indebtness of the group (including deposits). But the ratio was
parallel to industry average.
[HBL, 2012, p. 57].
The urge to earn profits pushing banks to keep on investing in private sector but lack of credit
demand pushed banks to invest in government securities since the risk free rate was given as high
as 14% in 2010. But from Sept 2008 ADR fell to 56.7% in June 2011. Local private banks have been
keen to switch their asset mix from advance to investments mostly placing money in to government
papers. Further, Government heavily relied on Borrowings from the banking sector which further
reduced banks appetite for private sector credit.
[Financial Stability Review (SBP 2011)]
Investment to Deposit Ratio depicts increasing trend since 2010. The investments in government
securities increased, which led to improvement in interest income.
2012 2011 2010
Advances(NET) 499,817,906 457,367,656 459,750,012
TotalDeposits 1,214,963,700 933,631,525 747,374,799
AdvancestodepositsRatio 41.1% 49.0% 61.5%
2012 2011 2010
Totalinvestment 797,094,548 418,604,147 285,248,460
EarningAssets 1,321,740,709 917,552,832 744,998,472
InvestmenttoDepositratio 60% 46% 38%
InvestmenttoDepositratio(IDR)
AdvancestodepositsRatio

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Graphical Representation of IDR and ADR Ratios Over three year’s period
Source: [Company Annual Report]

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INFECTION RATIO
NPLs of a Bank are driven due to number of reasons including economic activities, legal system
unexpected shock and credit evaluation ability of banks etc. NPLs also influence on the banking
spread. In case of Pakistan the
banks are required to provide for the
amount of Nonperforming loans after
adjusting permissible partial benefit
of collateral. NPLs had reached to
14.4% by the end CY10 against
5.7% in CYO6; more than doubled in
just 4 years. Further it has reached to 13.8% and 13.2% in 2011 and 2012 respectively.
[Financial stability review (SBP First half 2011, p.22)]
HBL outperformed the industry in all years from 2010 to 2012. In 2011 it inclined to 11.2% which is
almost 5% increment in the NPLs. This was mainly due to hike in interest rate in 2011. However, a
sizeable drop in infection ratio by 8.3% helped HBL to improve its profitability as the interest rates
slashed to 9.5% in 2012. HBL availed the benefit of FSV (Force Sale Value) against NPLs. HBL had
taken the benefit from this regulation and has maximized the profits which adds value to the
stakeholders wealth.

Syed Tanveer Ali
Interest Spread and Gross Spread Ratio and CASA Analysis
The spread has decreased in 2012 due to
yields on earning assets dropped more than
the fall in cost as deposits has risen
dramatically in 2012 leading to growth in total
interest expense beside the rise in the
minimum return on PLS account.
The decrease in CASA ratio indicates that
bank is moving towards expensive source of
finance. The fixed deposits increased by
36.4% and 38.4% in 2011 and 2012
respectively, whereas CASA declined to 69%
in 2011 from 72% in 2010 and further
decreased to 67% in 2012.
Gross markup income rose by 18.5% to
Rs.116.5 billion in 2012 and 21.2% in 2011.
This increased due to robust investment
which rose by 64% and 90.4% in 2011 and
2012 respectively. Net interest income
increased by 20% to Rs 56.4 in 2011 billion
and by 2.4% in 2012 driven by volumetric
growth in Government securities. Markup
expenses also rose in line with markup
Income (Up 23% in 2011) and it witnessed
higher increase with 39.9% growth in 2012
as compared to gross markup income by
18.5%. This is primarily due to strong
deposits growth and consequently increases in cost of deposits. Gross spread can be controlled in
the future by improving CASA ratio.

Syed Tanveer Ali
Risk Adequacy and Capital Structure Ratio
Capital Adequacy Ratio
The adequacy of capital is tested
with reference to the risk weighted
assets. CAR of a Bank tells that
bank is that much capable of
absorbing loss before any loss
transfer to depositors.
HBL’s CAR stood at 15.81% in
21012 as against the State Bank of Pakistan’s requirement of 10 per cent in 2012. There is a consistent
increase in paid up capital of bank which
helped HBL improved its CAR by issuing
bonus shares to shareholders.
Although Risk weighted assets of HBL
increased by 4.28% and 14.74% in 2011
and 2012 respectively. The paid up
capital of HBL stands at Rs. 12.12 billion
which meet the SBP minimum paid-up capital requirement. The industry average CAR was 13.6 %( FY10),
14.4 %( FY11) and 15.1 %( FY12). Which means HBL has successfully maintained its CAR and above the
industry.
Weighted Average cost ofDeposits
Banks cost of deposits has been
increased from 2010 to 2012.
Since the announcement made
SBP on May 1st
2012 to increase
the interest rate on PLS accounts
from 5% to 6% also impacted the
bank’s profitability, which
increased the interest on deposits. CASA ratio slightly deteriorated to 67% from 69% in 2011.
Consequently, cost of deposits rose to 6.12% in 2011 and 6.46% in 2012. Increasing trend could be
affected upon profitability in the future.
2012 2011 2010
Interestondeposits 51,225,796 37,971,786 30,793,996
WeightedAverageDeposits(Excl.NonRemuneative) 792,369,831 620,722,988 540,530,916
WeightedAveragecostofDeposits 6.46% 6.12% 5.70%
WeightedAveragecostofDeposits

Syed Tanveer Ali
INVESTMENT / MARKET RATIOS
Earnings per Share (EPS)
Earnings per share had been increased by 20% in FY11 and 0.3% in FY2012. The reason of
increase in EPS is the 32% jump in PAT in FY11. Group PAT increased to Rs. 22.4 billion in 2012
compared to Rs. 22.3 billion in 2011, reflecting an increase of 0.1%. The EPS for the three years
were Rs. 15.26 (2010), Rs. 18.30(2011) and Rs. 18.36 (2012).
There was consistent increase In Bank’s Net interest income and Non markup income.
Price Earnings Ratio
The High P/E ratio generally suggests increased demand because investors expect earnings growth.
P/E ratio is calculated as market value of share / EPS. The P/E ratio of HBL over three year’s period
was 6.42 (FY10), 5.80 (FY11) and 6.42 (FY12). Decrease in P/E ratio in 2011 by 27.5%. Reason of
decline may be due to decrease in share value of HBL. Market share price of HBL dropped by 13%
to Rs. 106.08 (closing rate 2011). Further share price increased by 11% to Rs. 117.81 in 2012 which
was Rs 121.94 in 2010.
Dividend Cover Ratio
Divided cover ratio had been increased to 2.61 times in 2011 as compared to 2.35 times in 2010.
Reason for increase is the increase in the Profit after tax which had increased by 31% in 2011.
Further in 2012 there was only a minor increase in PAT by 0.1% in 2012 and cover ratio fell down to
2.45 times as annual dividend per share had been increased on consistent basis.

Syed Tanveer Ali
HORIZONTAL ANALYSIS
Comparing the financial performance of a company over the years does not give a fair view of
company’s financial performance. For better result and comparison we need to compare the
company with its close competitor. In this scenario we will analyze HBL with Muslim Commercial
Bank which has a market share of 23.6% in the banking industry as compare to HBL’s share of
nearly 16%.
A comparison of the Major ratios for 2012 is presented below.
[Annual Reports of HBL & MCB, 2012]

Syed Tanveer Ali
A brief comparison of HBL vs. MCB is presented here under based on above ratios.
Profitability
Despite the fact that HBL’s own performance over the years was constantly improving year on year,
which is a good indicator for the company’s prospect, but MCB clearly shows an impressive
performance as compared to HBL in terms of Profitability ratios. HBL interest earnings growth is
18.5% in 2012 as compare to MCB’s growth of 0.3%. There is minor difference in Gross yield on
earning assets of both Banks. Return on equity of HBL slightly worsened from previous year and
also below to MCB ROE but above the industry average. HBL has outperformed in terms of growth
in deposits which reached to Rs. 1 Trillion in 2012. Comparing cost to income ratio and return on
assets are below to MCB ratios but overall HBL has to manage its cost in the future to get the higher
ratio than this time.
Asset Quality and Liquidity Ratios
Due to several macro economics problems in the country and energy crisis has limit the Banks
abilities to provide credit to private sector due to low demand. Both Banks has same increasing trend
of IDR ratio and decreasing trend of ADR while Banks placing money into Government papers.
Since HBL’s infection ratio has improved by 8.3% whereas MCB’s by 8.7%. Interest spread of HBL is
5.07% compare to 4.75% of MCB, which shows a sign of good profitability over MCB. MCB has been
maintaining its CASA ratio which is 85% in 2012 which helped in obtaining cheaper deposits as
compare to HBL which has 67% in 2012 slightly worsen from previous year. Gross spreads of both
banks down in 2012 over previous year due to slow profitability. Reasons of low MCB spread was
the deposits rates increased to six percent, but lending rates had declined in 2012 which contracted
the spread of MCB.
Risk Adequacy and Capital Structure Ratios
HBL has been maintaining CAR with the statutory requirement which is constantly increasing and
boosting the shareholder’s confidence. MCB’s CAR is higher than HBL but overall HBL performed
above the industry average which was 15.1% in Dec 2012. Risk weighted ratio of HBL has a
declining trend and improved as compared to MCB which has 55.17% in 2012 as against HBL’s
48.25%. This shows that HBL has secured investment e.g. keeping collateral as against loans. Cost
of deposits of HBL is a higher than MCB which is effecting HBL’s profitability.

Syed Tanveer Ali
Investment Ratios
Despite the economic crunch impact the economy in 2011 which had a spillover effect in 2012, HBL
tried maintain its market goodwill gaining increment in share price which rose to Rs. 117.81 helped
improving the P/E ratio which showed a better platform for the investor to invest in. Showing great
profits in the coming years will help HBL further improve its market. MCB has good P/E and EPS
ratio compared to HBL, major reasons is the increase in total number of ordinary shares of HBL and
MCB. MCB has posted outstanding increase in shares price in 2012 which has given an alarming
sign to HBL in terms of competition in market.
(3.6) CONCLUSION AND RECOMMENDATION
Detailed financial and business analysis of HBL concluded that HBL’s own performance has been
improved from previous years and striving to capture market share in the Banking industry. The
Banking industry facing a sluggish growth which is affecting almost every Bank in the industry.HBL
has outperformed the industry in deposits growth and profitability has been consistent as compared
to previous years.
Besides having research on financial strength, performance, and largest market share of HBL, there
is an important factor which is not in terms of numbers. This is what you call reliability and
consistency. HBL justifies it being the first commercial bank to be established in Pakistan in 1947
with consistent results.
I personally think, only those organizations are likely to grow which consider their customers’
satisfaction and betterment. Those who believe that their overall success is nothing but the by-
product of that satisfaction they have created for their customers and that’s it.
On these lines, I consider it being safe as an investor or depositor, as millions of other HBL
customers find it reliable and don’t regret.
HBL has all strength to provide better performance than its competitors by spending money on
training programs to make employees more efficient to deal with derivatives product and efforts put
to recover non performing portfolio by comparing current performance with industry, and improve
profitability by providing secure loans to private sector and update 5 years strategy and keep
maintain its position in TOP 5 Banks.
HBL has all potential to support private sector which have been severely affected by recent
economic crisis, hence HBL need to manage classified portfolio using specialized and complex
relationship skills to support the private sector as engine for growth. HBL has been working on it.

Syed Tanveer Ali
Overall comparison shows that HBL has to perform outstanding in coming years as MCB has been
improving in the market in terms of all factors and to remain competitive, HBL needs to avail the
opportunities in next few years.

Research and Analysis Project New Updated

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