Employing an aggressive albeit virtually risk-free investment strategy, Bank Al Habib, the country’s seventh-largest bank, was able to post a sizable increase in third quarter earnings.

Profit-after-tax for the nine months ending September (9MCY14) clocked in at around Rs4.45bn, up 20.6pc from Rs3.69bn in 9MCY13. Its earnings-per-share worked out at Rs4, against Rs3.32 last year. The bank did not announce any dividend.

The rise in earnings was mainly a result of a drastic turnabout in the investment book, which saw a big build-up of high yield Pakistan Investment Bonds at the expense of Treasury bills.

And virtually all of the bank’s PIB holdings at end-September — Rs111.9bn — were in the ‘held till maturity’ category (HTM), with only Rs14.6bn under the ‘available for sale’ (AFS) header. That compares with a mere Rs17.7bn worth of such bonds in HTM and Rs12.4bn in AFS by the end of last December.

As per the bank’s third quarterly report, income from the HTM segment almost doubled to Rs8.4bn in 9MCY14, comparable with Rs4.4bn last year. The increase was more pronounced in the third quarter, with income from this segment tripling to Rs3.2bn over the same quarter last year.

This classification of a majority of PIBs in the HTM portfolio is a plus for the bank, as it is likely to protect the value of its PIB investment from the impact of rising bond yields.

“Bond prices move in opposite direction to yields. When yields are rising, the value of the bonds dips. Banks that have parked a majority of PIBs in their available-for-sale portfolios are more likely to experience a slight drop in the market value of these investments, as opposed to those who will hold onto the bonds until maturity,” explained a sector source.

A huge 94pc of the bank’s investments were parked in virtually risk-free government securities — T-bills and Pakistan Investment Bonds — by September 30

“BAHL had [almost] all of its PIBs in held-for-trading till June, and would report an immaterial loss from rising yields,” expected KASB Securities analyst Farid Aliani in a September report.

Conversely, the bank’s T-bill holdings dropped from Rs196bn to Rs143.6bn. Its total investments reached over Rs287.7bn by end-September, up 20pc from December 2013.

Further analysis of the investment book shows that the bank had at least Rs270bn — or a whopping 94pc of its total investment — in government securities.

The bank’s investment-to-deposit ratio (IDR) worked out at 65.9pc by the end of the third quarter, among the highest in the industry.

Advances: Over the years, Bank Al Habib has established and then cemented its reputation as a cautious lender. Sector analysts rave about its asset quality and the surplus provisions that it has set aside for toxic loans.

Nonetheless, this cautious lending attitude was also responsible for the meagre 3.1pc yearly rise in net advances, which reached Rs172.8bn during 9MCY14. However, the muted growth was partly a result of the almost halving of the Murabaha portfolio, which shrunk from Rs4.7bn to Rs2.2bn in the nine-month period.

Deposits: Not unlike its peers in the mid-tier banking segment, BAHL has been pursuing rapid expansion in its branch network in order to mobilise more customer deposits. During 9MCY14, the bank opened 21 new branches and five sub-branches, taking its network to 341 branches, 101 sub-branches and three representative offices.

This expansion corresponded with a 13pc increase in its deposits to Rs436.4bn. The highest chunk of customer deposits — Rs137bn — were parked in non-remunerative current accounts, followed by Rs129.3bn in savings accounts and Rs95bn in fixed deposits.

Provisions: The bank continues to enjoy one of the highest coverage ratios in the industry, which stood at 145pc by the end of June. This has allowed it to record slight decreases in provisions, without compromising its buffer against non-performing assets. For 9MCY14, it provisioned Rs305.9m against NPLs, down from Rs505m in 9MCY13.

And this is in addition to its ‘general provision’ of Rs2.5bn, which is above the requirement set by the central bank in its prudential regulations.

The reduction in provisions came despite the fact that NPLs actually rose to Rs4.26bn, from Rs3.7bn. However, the entire increase in toxic debt was recorded in the first quarter of the year, and the bank has made some recoveries since then.

Non-core income: The performance of the non-core side of the business during 9MCY14 failed to keep up with that of 9MCY13, with income from the segment dropping 7.3pc to Rs2.8bn. This was mainly a result of the levelling off of capital gains to only Rs302,000, against Rs533.8m booked last year. The bank actually booked a capital loss of Rs3.6m in the third quarter.

Besides that, other income slipped 5.3pc to Rs377.8m. However, the bank recorded healthy increases in income from dividends (up 57.2pc to Rs303.2m) and from forex dealings (up 34.4pc to Rs654.6m).

Meanwhile, non-core expenses were on a rising trajectory, mainly due to the bank’s aggressive branch expansion. They grew 22.8pc to Rs9.36pc during 9MCY14, mainly as a result of the 22.7pc growth in administrative expenses to Rs9.2bn.

Published in Dawn, Economic & Business, November 10th, 2014