AS banks prepare to release their financial statements for the first quarter of this calendar year, sector watchers are expecting better performances from those that increased their lending in 2013.

This is mainly because lending rates only recently, with the normal time lag, started reflecting the central bank’s two rate hikes late last year.

Bank Al Habib (BAHL) — a mid-sized bank with over Rs460 billion in assets — is likely to be among these banks, as it curtailed its investments, including in Treasury bills, and used the funds to lend to the private sector.

“Despite the cumulative 100bps hike in the deposit rate since September 2013, banking spreads [remained] downwards. The main reason has been the sluggish pace of loan re-pricing, which [only] started taking effect in January 2014, where overall lending rates rose by 10bps on a monthly basis. Private banks’ lending rates rose by 12bps MoM, but since September, they have risen by a mere 6bps to 11.17pc,” wrote KASB Securities analyst Farid Aliani in an earlier research note.

As such, the 13pc YoY increase in BAHL’s net advances to Rs167.6 billion is likely to have a more formidable impact on its earnings this year. Due to lower interest rates, the bank was unable to shore up its interest income in CY13, which dipped 10pc from CY12 to Rs37.3 billion.

An analysis of the bank’s unconsolidated annual accounts shows that it earned about Rs13.45 billion from loans, down a marginal 3pc from 2012. More pronounced was the 14pc drop in mark-up income from investments, which reached Rs23.6 billion.

Bank Al Habib’s investment book underwent some major changes during the year. Firstly, its net investments shrank by 3.6pc to Rs239.3 billion by end-2013. Notably, the bank reduced its holdings of T-bills to Rs196 billion from Rs213 billion.

In contrast, its equity holdings went from just Rs305.5 million by end-2012 to over Rs2.6 billion by end-2013. The booming stock market also helped BAHL record a significant 600pc growth in capital gains to Rs538.5 million in the year.

The bank’s investment-to-deposit ratio (IDR) for CY13 worked out at almost 62, down from 72.9 in CY12. Meanwhile, its advances-to-deposit ratio (ADR) remained static at 43.4, mainly due to higher growth in deposits.

In fact, the bank’s efforts to target low-cost deposits led to a 19pc YoY jump in non-remunerative current accounts to over Rs124 billion. Savings accounts rose by 177pc to Rs124.3 billion.

In a research note, Fortune Securities remarked that within the industry, BAHL had the highest concentration of its total deposits in non-remunerative accounts (at 40pc).

The higher current accounts, plus a 14pc drop in fixed accounts, allowed the bank to record a sizable 12pc reduction in interest expenses to Rs23 billion.

This, in turn, helped the bank to limit the drop in its net interest income to 7pc from the prior year to Rs14.26 billion.

NPLs down: Bank Al Habib continues to maintain a coverage ratio in excess of 150pc — the highest in the industry. With its non-performing loans (NPLs) on a downward trajectory, it is likely to book further reversals in provisions against toxic debt in the future, boosting its bottom line.

Its NPL portfolio shrank by almost Rs6 million to Rs3.7 billion. Consequently, the bank recorded a reversal of Rs479.8 million in provisions against NPLs. But these provisions still stood at a higher Rs3.5 billion.

Providing details, the bank said the textile sector was responsible for over 69pc of its sour advances. ‘Commerce and trade’ was a distant second, with Rs492 million in classified advances.

Incidentally, textile also comprised 40pc or Rs69.4 billion of the bank’s gross advances in CY13. It was followed by food and allied companies, with Rs26 billion in advances.

Meanwhile, BAHL found itself relying more on non-core income to prop up its bottom line. Led by big improvements in capital gains, income from forex dealings (up 17pc to Rs675.5 million) and other income (up 18pc to Rs546 million), the bank was able to post a healthy 32.5pc improvement in non-interest income to Rs3.9 billion.

Meanwhile, the bank opened over 25 new branches in CY13, to take its network to about 415 branches and sub-branches. But this also led to a 14pc jump in non-interest expenses to Rs10.2 billion.

Besides, the year saw BAHL get the ‘Strongest Bank Balance Sheet in Pakistan 2013’ recognition from the Asian Banker. It was also given the best mid-sized bank of 2012 award by CFA Society Pakistan.

For CY13, the bank posted an after-tax profit of Rs5.15 billion, down 5.7pc from CY12. Its earnings-per-share worked out at Rs5.1, down slightly from Rs5.4. The bank declared a cash dividend of Rs2 per share (20pc), along with bonus shares of 10pc.