Habib Bank Limited

By sheraz kiani Kiani Current Affairs/Politics , Posted on 8/14/2006 8:23:26 AM Abstract This report focuses on the privatization on Habib Bank Limited (HBL) and its effect on the bank. As at Government of Pakistan (GoP) has privatized HBL on highest bid given by Agha Khan Fund for Economic Development (AKFED) of Rs.22 billion. On the control of management was transferred to AKFED. Privatization of the brought good results on bank so for, Proven by the increase of the main objectives of any company (bank) such as increase in income, efficiency in operations and services to customers, improvement in credit rating etc. Bank declared a dividend of 5% in 2004 ( first year after privatization) for the first time in last few years. In addition the decrease in the Non-Performing-Loans (NPLs) which increased the Advances and Loans in different portfolios of the bank. Increase in Home Remittances

resulted by $ 799 millions through bank?s braches. New management carried out new style of management, divisions in departments and portfolios of investments, such as considered

important the Agriculture segment in the retail banking portfolio. The over all effects of privatization caused positive results. The nature of the research as understood is exploratory, here data is collected by both sources primary and secondary. Using real time and non-real time methods. In real time methods personal and telephone interviews are conducted (see Appendix I). In non-real time annual

reports and internet searches are considered.

Habib Bank Limited (HBL) strategic management has been transferred to Agha Khan Fund for Economic Development (AKFED) as on February 26th, 2004 in response of giving the highest bid in privatization bidding. On December 29th, 2003 government of Pakistan received a dib of Rs. 22 billion from the successful party in this process. HBL with new management has completed its first successful financial year as on December 31st, 2004 by posting net income of Rs. 5.66 billion and announcement of 5.4% dividend1. HBL founded in place in 1941 in Bombay India with the paid up capital of Rs. 25000. In 1945 it extended its operations to Karachi. After independence in 1947 HBL moved its head office in Karachi (where it is situated now). In 1974, with other private enterprises HBL is also taken over by GoP, as per Nationalization Policy2. At the same time bank started its operations successfully and adding value to its customers. In early 1990s GoP announced Deregulation Policy caused by in major the political influence in State Owned Enterprises (SOEs). This

policy started the privatization of many institutions one of which was HBL. Another major reason to HBL was consistently losses made by the bank in 1990s as a result in 1999 State Bank of Pakistan (SBP) injected an amount of Rs.8 Billion as Tier (I) Capital3 to balance its Balance Sheet. Injection of this Capital brought again HBL on the track of profit. 1. Dividend amounted to Rs. 329.7 million. 2. Zulfiqar Ali Bohto Government carried out this policy. 3.Tier (I) Capital is provided by SBP in case when any financial

institution facing huge losses. 1. Methods The methods which are used for this research report includes Sample, measures, design, and procedures. All of them are discussed below one by one: a. Sample

Keeping in view the nature of the research, which is exploratory, the sample size is very small includes Executives of HBL and Officials of SBP (see references). b. Measures

To complete this report questionnaires for telephone and personal interviews are used. For data collection personal interviews are more cosidered (for questionnaire see c. Design appendix II).

The design of this research is exploratory, because HBL has been privatized just before two years (in December 2003). Here we look at on the effects of privatization on HBL. d. Procedures

For the research of ?Effects of Privatization on Habib Bank Limited? the data is gathered using both sources of data. Using primary

sources I conducted real-time interviews with executives of HBL and Officials of SBP. While for secondary data I acquired it for annual reports of HBL, Privatization Commission and SBP Assessments of HBL and internet search. Sample size stated because of the nature of the research is very small. This research report will give likely the complete overview of

history

of

HBL,

Its

performance

and

the

effects of

privatization on HBL. The work is done by a through study of material available on privatization of HBL such as Privatization Commission of Pakistan valuation of HBL, SBP publications and annual reports of HBL. Real-time interviews are conducted to have the understanding of real situation. 2. Bank Profile As any commercial, bank HBL is also performing same functions and providing services to customers and society. Its major banking

services include; Rental banking Corporate banking International banking a. This Retail Banking segment of banking and services includes customers such as

consumers,

agriculture

commercial

customers

(Small Medium Enterprise finance).

In this segment bank improve its

market shares studying secondnd largest commercial bank in Pakistan covering 18%of market with total branches, 1404 of retail banking and 20 corporate banking. Following are the disbursed amount in different portfolios made by the bank; Customer finance Agriculture finance Rs. 22.3 billion Rs. 13.0 billion

 Commercial finance

Rs. 19.0 billion

Since the accounts of the bank are closing as on December 31st each year b. Corporate Banking

This segment serves corporation and other big companies. Through out HBL history this segment has giver much importance proved by

operating 20 corporate branches solely are for corporate services. Major clients are WAPDA, KESC, WARID and PARCO. Overall disbursement of RS71.3billion was made in 2004. c. International Banking

In international banking segment HBL has operation in 24 countries of the world covering five continents. In addition it has subsidiaries, Joint ventures, affiliates and representative offices allover the

world (See Appendix I). A total of $ 799 million Home remittances were done in 2004 through these branches. 3. Post Privatization Scenario As stated on February 26th 2004 management is changed and handed over by GoP to AKFED with 51% of shares including strategic equity. Major changes in HBL Following are the major changes observed after privatization a. Management

In preprivatization period the board of directors was changed by the president of the bank after privatization now it is handed by the chairman of the bank.

b. Bank

Corporate Governor has implemented the concept of corporate governance in the

management in line with requirement of securities and exchange of Pakistan, (SECP) State bank of Pakistan SBP, regulation and the banking ordinance. c. Style of Management

The style of management is changed from traditional to corporate style. Now the board is added by chairman of the bank. Following are

the other main considerations; Except chief Executive Officer (CEO)all other member of the

board (chairman and directors ) are non executives Terms and Conditions or recommendations approved by the board of directors. Board should meet at least once in a period of three months. An effective internal audit department is placed. d. Equity

The equity of the bank is altered after privatization. the have the equity in following manner comparing both post and pre-privatization: Table 1.1 Particulars Authorized capital Issued and paid-up capital Each share @ 2003* 3,000,000 1,210,249.5 Rs.10 690,000 Rs.10 2004** 1,380,000

Above figures in table are in (000) except shares price. *2003 represents Pre-Privatization scenario

**2004 refers to Post-Privatization scenario (For equity details see table I) 4. Performance of Habib Bank Limited To see the performance of HBL after privatization and effects of management comparing to pre-privatization period, let us consider following indicators: a. Total Deposits

Total deposits of any bank translate the performance with respect to trust of customers (account holders) on the bank. HBL total deposits were increased by 12% from 2003 to 2004 (for figures see Appendix IV). This is the evidence of the efficiency of the management. b. Total Assets

HBL improved it total assets with the new management any increase of 12% is posted this year. This indicator reflects to any investor or account holder a clears picture of any bank. Increase in this

indicator means decrease the in the bank risk to liquidate. c. Loans and Advances

Bank?s loans and advances are increased by 41% in total. Which were mainly resulted, by the facts such as increase in agriculture and consumer financing. Banks overall 52% of branches are located in rural areas or near. d. Liquid Assets

Liquid assets of any bank are critical. This indicator is equal to the current ratio of a manufacturing company, which measures the ability to meet short term obligations. HBL liquid assets are

decreased by 13%. The reason is to make investments in different

portfolios and that was resulted by decrease in Non-Performing-Loans (see provision for NPLs). e. An Net Income increase of 10% in net profit was posted in the financial

statements of the bank in 2004. The emphasized on investment (results increase in interest earning) and decrease of expenditures. f. Total Expenditure

This indicator reflects the efficiency of the management to control the expenses and outflows of the cash. The bank has increased

expenditure by 42% resulted by increase in deposits and hence payment of interest charges on that. g. Non-Performing-Loans (NPLs)

NPLs refer the defaults of advance and loans made by the bank to its clients. This happens when management is unable to assess the risk involved in the usage of funds by customer. The failure of which, then bank provides provisions. The provisions provided by HBL to its NPLs are decreased by 56% as compare to last year (2003). h. Number of branches

HBL reduced it branches from 1470 to 1424 in 2004. This states that management is looking for closing the unprofitable branches.

5. Conclusions To conclude we can arrive at the point that ?The privatization of HBL brought in good results on the bank?. This is proved by following

facts: 1. The decision to privatize HBL is fruitful for both macro economy

and HBL. Proved by the losses occurred in past after taking over the management by new team it controlled it losses not only but also posted huge profit amounted to Rs. 5.66 billion. 2. Management carried out the concept of Corporate Governance which

is now mandated by SBP and SECP both. Exercising this brought good control of the management over issues. 3. Corporate culture is brought in the bank, which resulted

decentralization of management and widening the span of management and decreasing the levels of management. 4. After privatization bank has closed its 46 branches in numbers.

Reflects that management is looking for just profitable branches only and in a position to increase efficiency more and reduce losses and risks. Management more divisions in departments such as: Reduction in provisions for NPLs. Well assessment of risks. Looking (Increase at in the trend of economy adding over last more few portfolios. years this

Agriculture

finances

sector improving much). 6. References Following references are used while completing this report: I. a. Real time interviews (primary data): Personal interviews

? ? ?

Vice President BRR, HBL, Mr. Mohammad Hanif Khan Vice President Finance, HBL, Mr. Abdul Qadir Assistant Achickzai. Director BPD, SBP, Mr. Alla-ud-Din

b.

Telephone Interview Mr. Mohammad Asif Kohsa, HBL

II. a. b.

Secondary data: Annual reports of HBL. Privatization commission of Pakistan

assessment of HBL for privatization. c. Other internet search.

7. Tables 7.1 Shareholders of HBL Shareholders

Shareholding

%age

Securities and Exchange Commission of Pakistan 1 0 National Bank Of Pakistan (Trustee Department) 105924 0.015 Investment Corporation of Pakistan 66390 0.01 Pakistan Reinsurance Company Limited 44813 0.007 Privatization Commission of Pakistan 1886 0 State Life Insurance Corporation of Pakistan 952891 0.138 Islamic Republic of Pakistan 5,404,093 0.783 State Bank of Pakistan 504,024,002 73.047 Agha Khan Fund for Economic 179,400,000 26* Development Total 690,000,000 100 *In above 26% were initial strategic shares in addition AKFED owes 51%, the balance is got from SBP. 7.2 Total branches of HBL

Net work Domestic International Subsidiaries Affiliates Joint Ventures Representative offices

Branches 1424 56 3 2 0 1