A Strategic Analysis of Bank AL Habib Limited

Banking Industry Background1:

The Pakistani financial sector includes banking and non-banking financial institutes (NBFIs). Banking in Pakistan falls within 3 segments, which are as follows: i) Scheduled Commercial Banks: They include National Bank, United Bank and Habib Bank, which are state owned, whereas MCB and Allied Bank were privatized in 1992. They have a significant market share due to the large number of branches. ii) Private Sector Banks: Banks from this category are relatively new to the industry. As a result of the liberalization policies of the Government of Pakistan in 1991, Askari Commercial Bank, Soneri Bank, Union Bank, Bank Al-Habib, Bolan Bank, Metropolitan Bank, Platinum Bank were given permission by the State Bank to commence operations. They are operating on a smaller scale than government banks and are targeting selective markets such as trade finance. Despite low market presence, they account for considerable share of total profitability of Pakistani Banking sector. iii) Foreign Banks: There are 16 foreign banks operating in the country. They cater mostly to high profile corporate clients. The regulatory bodies that monitor the banking sector are the State Bank of Pakistan (SBP), the Corporate Law Authority (CLA), the Ministry of Finance and the Religious Board.

History, Background and Salient Features of Bank AL-Habib

Bank AL Habib was incorporated as a Public Limited Company in October 1991 and started its operations in January 1992. It is a venture of the Habib Group, which owns 50% of the shares - 20 % shares are owned by NIT and 30% are owned by the general public. The bank operates in the private sector, with 30 branches in the major cities of the country, and has its principal office located in Karachi. The Habib group is one of the oldest and most prestigious business groups in Pakistan. They were the founders of Habib Bank Limited, which was nationalized in 1974. The objectives of the Bank were to support local traders and businessmen. Their proficiency with local business practices allows them to pursue this objective successfully. Dealing in a risky market, due to high default rate and political uncertainty, the bank has adopted a conservative approach. Bank Al-Habib offers excellent exposure to the

Banking ~ The Time is Right, June 1997. Pakistan Research ING Barings. 1

A Strategic Analysis of Bank AL Habib Limited

non-supported cottage industry in Pakistan. According to ING Barings, Bank AL-Habib possesses the most compelling fundamentals in our banking industry.

ORGANIZATION STRUCTURE:
Instead of a leaner, more efficient organization, Bank AL Habibs organization structure (annexed) is characterized by many management layers - each general manager has deputy general managers reporting to him - this level is followed by assistant general managers, senior chief managers, chief managers, senior managers, managers and assistant managers, resulting in lack of understanding of each others roles and responsibilities, high administrative overhead, slow communication and policy implementation delays. The Bank should remove few layers to attain a flatter structure so that the communication improves.

External Analysis:
Economic and Political Forces The Pakistani economy is more of a controlled economy, than one where market forces reign supreme. Several key institutions are State owned. Thus, a discussion of the economic forces that influence private organizations such as Bank AL-Habib cannot ignore the substantial role-played by the government in determining the state of the economy. The biggest indicator of the heavy role enjoyed by the Government was evidenced when foreign currency accounts (FCAs) were frozen on the orders of the Ministry of Finance in the wake of the explosion tests on May 31 st 1998. This, and the recent efforts by the State Bank to artificially lower the interest rates by revising the Repo rates downwards and encouraging lower bids for T-Bill, highlights the overwhelming role of the Government in the Economy. Badla rates are a true indication of the market rates at which financial institutions are willing to lend but the Government, under the dictates of the IMF wants to artificially lower the interest rates so as to provide investment liquidity within the economy.

Economic Background A GDP growth rate of 3.1 %, which is roughly equal to the growth in population, is an apt summation of the economic doldrums that Pakistan finds itself in2. Pakistan faces a plethora of problems on the economic
2

The State of the Economy, Overview: 1999-2000 and 1998-99, Journal of the Institute of Bankers, December 1999. 2

A Strategic Analysis of Bank AL Habib Limited

front, which are best highlighted in the Mid-Year economic review by Yousaf Rafiq 3. The categories listed by him cover the relevant macroeconomic indicators of a countrys performance and are listed below: i) ii) iii) iv) Deceleration in Economic activity Stagnating/declining tax-to-GDP ratio Declining Exports Loss in investor Confidence

These were some of most important aspects of the poor macroeconomic prospects faced by Pakistan. An industrial growth of 2.7 % p.a. and a decline in investment of 3.8 % are indications of very poor performance by any standards. These factors have a negative direct bearing on the banking industry. The banking sector depends upon a robust economy for profitable returns as it plays a significant role in providing the investment through its credit activities. Another very significant factor that has created an inhospitable economic scenario has been the lack of growth in exports, which have remained around the $8 billion mark. However, the current fiscal period (1999-2000) has experienced a bumper cotton crop. According to current estimates, the total cotton crop is expected to be around 10 million bales. This is an encouraging figure and promises to bode well for economic prospects in the short run. A bumper cotton crop is likely to lead to an improvement in the industrial sector by providing a boost to the yarn, textile, knitting, dying and garment sectors. The biggest setback, which is being faced by the banking industry in Pakistan, is the government pressure to lower interest rates. Previously, the banks enjoyed a spread of 4-5 percent, (above their 3% service and processing charges) because of the high rates of 14 % that were offered on T-bills. These rates have now come down to 8 % in the latest OMO. (Open Market Operation, Feb. 23 rd, 2000). This does not auger well for lending institutions, who have had mandatory restrictions imposed on them to keep deposit rates of 12%. Political, Legal and Governmental Forces: The events in the last couple of years; the bomb blast of May 28 th 1998 and the subsequent freezing of the FCAs, the declaration that Riba is Un-Islamic, and a volatile political scenario that saw the overthrow of
3

Rafiq, Yousaf. Mid-Year review of Economic Performance, Pakistan & Gulf Economist, February 28March 5, 2000 Vol. XIX, No. 9 3

A Strategic Analysis of Bank AL Habib Limited

the Nawaz Sharif regime, all contributed in highlighting the important role of government in the local economy. The freezing of the FCAs destroyed the confidence of foreign depositors. Also, the declaration that Riba is against the Sharia, is likely to cause tremendous uncertainty in the banking sector. The banks are already operating Profit/Loss Mark-ups for their local deposits. However, this practice has also come under scrutiny. Banks are gearing up to handle the Sharia ruling which comes into effect in 2001. Stability under the new regime is also very important for the economy as a whole. Continuous political change has disrupted the policies and objectives of most organizations as each regime brings with it its own agenda. Organizations need time to adjust to one regime and then work with it towards economic enhancement. Cultural, Demographic and Social Forces: A low savings culture has offset the huge population advantage that is enjoyed by Pakistan. Also, culture is strongly dictated by religion, and in Pakistan, a significant segment of the population is loath to accept interest for their deposits due to the negative religious implications of such an act. About 70% of Pakistans population is based on the rural areas, thus making it harder for banks to mobilize their deposits within these regions. Technological forces: Banks in the developed world have been turning to heavy IT investments, which differentiate their products, provide faster response times, enhance accessibility and improve customer satisfaction. Though investing in state-of-the-art host banking solutions (Fiserv, Kapiti, etc.), ATM and POS (point-of-sale) networks, VISA, MasterCard, and Amex switches, smart cards, telebanking and now internet banking, are common IT investments in the developed world, it is now that these products and services are gaining faster acceptance in Pakistan. Increasingly, Pakistani banks are realizing the importance of better products, faster and more reliable networks, faster transaction turnaround times, smaller lead times for approvals, centralized systems and 24-hour customer service. The foreign banks have always been ahead in implementing state-of-the-art systems, but now local private and to some extent, nationalized banks, are attempting to catch up. Notably Muslim Commercial Bank and Askari Bank, are investing in many electronic banking products, including ATM networks, Point-of-Sale networks, connection to international financial networks like MasterCard, Cirrus, Maestro and VISA, issuing credit and debit cards, etc.

A Strategic Analysis of Bank AL Habib Limited

More recently, the concept of shared networks has emerged in Pakistan. A shared network has been setup by Askari Bank and ABN AMRO. Another shared network is being formed by Muslim Commercial Bank, which gives smaller private and foreign banks an extremely feasible opportunity to utilize its networks, without having to incur the costs of acquiring and running a huge network of 80 ATMs. ANZ Grindlays, Standard Chartered and Union Bank have joined this network. Also automatic inter-bank reconciliation is now possible through the SWIFT network. Such advancements will provide a high level of accessibility, faster and better service to Pakistani consumers and will eventually pressurize banks who serve the vast consumer segment and who lack in these areas to catch up or risk losing their clientele4 5. Competitive forces: There has been a tremendous increase in competition in the banking industry in Pakistan as the number of financial institutions including Banking and Non-Banking financial institutions like PSBIs, LCs, DFIs and Modarbas have increased. An important part of external audit is to identify all the competitors of Bank AL Habib. The competitive analysis is easily done using Porters Five-Force model. 1. Porters Five Forces Analysis: 1. Rivalry Among Competing Firms: Bank AL Habib Limited is facing a strong competition from other private Pakistani Banks like Metropolitan Bank, Soneri Bank and Askari Commercial Bank. The improved performance of the Nationalized Commercial Banks (NCBs) is also a threat to the bank. Foreign banks are also competing with the bank for same small medium sized companies. The bank is overcoming the intensive competition due to its strong reputation as a renowned financial group in Pakistan and a long history of experience in the banking sector. 2. Potential Entry of New Competitors: The entry barriers in this market are high. The new banks need permission from SBP so entry of new banks is restricted. Also the Paid up Capital requirement is likely to be raised from Rs.500 million to Rs. 1 billion. 3. Development of Substitute Products:

Banking on Networks, NetNews, Issue 3 1998 IT and Banking - a lecture by Ashraf Sayani for IBMs payment solutions group, 5th. January 2000 5

A Strategic Analysis of Bank AL Habib Limited

The Non-Banking Financial Institutions including Development Finance Institutions (DFIs), Private Sector Investment Banks (PSIBs), Leasing Corporations (LCs) and Modarbas are almost in the same line of business and can be a threat to the Bank. Other substitutes that compete include the National Saving Certificates, the stock market, its supporting industry and brokerage houses. 4. Bargaining Power of Suppliers: The main suppliers are the depositors. Although the bank is giving higher returns than any other bank (12% per annum) to attract the depositors but the low innovations in the product development and low investment in IT may provide difficulties in coming years. The regulatory bodies could also be the suppliers as they provide guidelines to the Bank from time to time. These include The State Bank of Pakistan (SBP), The Corporate Law Authority (CLA), The Ministry of Finance and The Religious Board. 5. Bargaining Power of Customers: The main customers are small traders and exporters based in Karachi, majority of whom deal in textile related commodities. Since the bank is targeting the short-term trade finance market, the bargaining power of the customer is substantial as other Banks within the same sector like Habib Bank AG Zurich and Metropolitan are fast catching up with the Bank AL Habib in providing services to the traders. External Factor Evaluation Matrix: An external evaluation (annexed) showed that Bank AL Habib is responding in an average manner to existing opportunities and threats in the environment. It scored 2.70, which is slightly above average. The demand for technologically advanced products rendering quick service offer the largest opportunity. BAH fail to take advantage of technology, at the same time it has to face the current economic recession. To further improve the performance, the Bank needs to adopt a more outward looking strategy to compete effectively against foreign banks and NCBs. Some of the external factors affect all the Banks and seem to out of their control.

INTERNAL ANALYSIS:
Risk Management at Bank AL-Habib:

A Strategic Analysis of Bank AL Habib Limited

Due to its conservative banking policies, established presence in the market and detailed experience of its customer needs, Bank AL- Habib has the cleanest portfolio among all the banks. Risk Management is considered to be an important focus in the Bank AL-Habib setup although strong Reserve base provides some space to breathe. Significant risk reduction measures are taken to ensure the ongoing health of the banks financing portfolio. Bank follows a conservative approach in investing its capital and advancing loans to its customers. Most of its customers are there regular old customers, who have some sort of financial connection with Habib Group or they are influenced by the name of Habib, which is Bank ALHabibs core strength. If we analyze from the Risk perspective, the segment Bank AL-Habib targets is the business community. The owner of AL Habib, takes all advancing and investing decisions of Bank AL-Habib, which are purely base on intuition and past experience. So they are playing a safe game by being too conservative but at the same time they use their banking experience and get high returns. The bank has adopted the correct policy of not being too aggressive. This conservative approach has enabled it to obtain high quality loan portfolio at an acceptable degree of risk. The liquidity of BAH is higher than that of the market. In YE99 the percentage of liquid asset per total asset was 10.21%, which is quite low. This has increased the liquidity risk factor. The management of BAH is quite experienced and their approach is very conservative but at the same time there Loan to Deposit percentage is 90.88%, which is high, if we compare to the other local banks. Functional Operations As a retail commercial Bank, AL-Habib offers a range of services to its customers. As the ownership and top-level management has the backing of the house of Habib, the bank has a natural advantage in serving traders and businessmen due to its familiarity with this sector. It has no restriction on deposit size, thus being in a position to mobilize its financial assets on a national level. The services offered by the Bank are as follows: i) ii) iii) iv) Developing accounts for Corporate and individual clients. Trade Finance (through letters of Credit) Issuance of Guarantees, Bid Bonds, Performance Bonds. Remittances, Money Market and Foreign Currency Market Transactions. 7

A Strategic Analysis of Bank AL Habib Limited

v)

Credit facilities for Trade Finance and to the Private sector.

Activities such as accounts opening, settlement of cheques and payorders and cash dealings fall within the category of generic banking services. The Finance department serves as a control on these functional areas and thus acts more as a coordinator. Besides monitoring the various functions, Finance department provides the accounting services that are essential for the internal audit. Bank AL-Habib are as follows: 1) Credit 2) International Banking 3) Treasury 1) Credit Bank AL-Habib deals in both fund based and non-fund based credit. Its decision making for credit applications is based on standard parameters such as customer credit rating, credit duration, amount and interest rate. However, the department is in need of reengineering due to certain inflexible procedures in its credit approval. All credit applications are forwarded to the main branch for final approval. Also, top-level management can only approve applications that exceed Rs. 10 million. Since top-management is mainly composed of the banks owners, a degree of de-centralization is required with this area to avoid a conflict of interest. The State Bank of Pakistan provides guidelines such as credit limits. This is fixed at 15% of total deposits, while Bank AL-Habib maintains an investment of another 15% in overnight bills. Being very conservative in nature, it is satisfied in maintaining this resulting liquidity of 30%; the highest amongst its competitive banks. This is further highlighted in its risk-management, where its credit portfolio displays its low default performance. 2) International Banking: International Banking provides the Bank AL-Habib with one of its most profitable services, i.e., trade finance. It is strongly linked with the credit department, which finances exports. In this regard Bank AlHabib arguably provides the best service in its sector as it has over 200 correspondent Banks to serve the interests of traders. The leading international banks that Al-Habib has correspondent relations with include Therefore the main functional areas at

A Strategic Analysis of Bank AL Habib Limited

American Express Bank, Chase Manhattan, Citibank, Lloyds Credit Suisse First Boston and HSBC amongst others. Due to the background of its owners, Al-Habib has strong links with the trading community and is very competitive in providing adequate country and bank exposure to all its clients. Besides trade finance facilities, Al-Habib has considerable expertise in negotiating export bills, and providing guarantees to its customers. The basis of its strong international expertise lies in its recruitment policy of hiring experienced personnel from once-formidable institutions such as Habib Bank Ltd. and BCCI. 3) Treasury The Treasury function of Bank AL Habib is divided into two offices. Deals are entered into by the Front Office, consisting of a chief treasurer. The settlement and accounting for these is handled by the back office, which consists of other dealers who report to the chief treasurer. Dealing Guidelines are designed to protect the bank from the foreign exchange risk and settlement risks. In keeping with its conservatism, Bank AL-Habib has stringent settlement and outstanding lines for its money market and capital market dealings. In foreign exchange markets, AL-Habib uses its access to easy information to make spot, forward and swap transactions. The degree of speculation is kept strictly in check. In settling their positions due to demand or supply of foreign currency by their traders, the Bank can book its forward position at rates that are advantageous to regarding its money market dealings, Bank AL-Habib is likely to experience shorter margins in the future due to reduction in T-bill auction rates 6. This is an external development that needs to be closely monitored by Bank AL-Habib in the future. HUMAN REOURCE MANAGEMENT Two departments manage the Human Resource at Bank AL Habib. i) Personnel and Administration. ii) Training and Human Resource Development. Training and HR department at Bank AL Habib is responsible for recruiting, training and injecting the needed manpower. The bank employees a total workforce of 600 men in 30 branches all over Pakistan. The bank is highly conservative in its hiring policies and therefore does not employ females. Mr. Mahmood

Refer to interview of Mr. Qasim Lakhani in appendix. 9

A Strategic Analysis of Bank AL Habib Limited

Allarakhia, the Company Secretary said, We believe a lot of educated male force in the country is unemployed so they should be given preference. The employee morale is somewhat low, as the promotions are seniority based. Creativity and suggestions are not welcomed. The bank has not made adequate career path and succession plan so it is facing problem, as currently eleven senior executives of the bank are about to retire. The bank has recently started taking Management trainees from institutes like IBA. A batch of 25 graduates is taken for six months training. Although the bank claims to follow a thorough procedure for hiring including written test, interviews of short listed candidates and final interview by M.D., a significant part of the hiring is based on recommendations. The bank organizes refresher courses for its employees from time to time. The refresher courses are offered in-house and personnel from all levels are encouraged to take classes offered by the banking institutes. The Bank has not as yet conducted a retrenchment and follows a policy of retaining all employees as a reward for their loyalty. INFORMATION TECHNOLOGY DEPARTMENT: The IT departments role is to provide quality system and process automation when and wherever desired by the top management; to train the bank staff on the various systems; and to perform any support and maintenance activities related to the banks systems. The IT department of Bank Al Habib comprises of 2 sub-divisions: the Operations division, which conducts user training sessions on the various applications, including the retail banking package Bank Plus, payroll applications, remittance and demand drafts systems, and personal desktop applications. It is also responsible for the hardware and software maintenance of the various systems of the bank and comprises of 7 employees. The Development division is responsible for software development and maintenance, and comprises of 4 employees.7 However, there are several drawbacks in the banks IT division: the top management makes all IT investment decisions and it is not educated in IT to understand the investment or infrastructure required for the bank to remain competitive - as yet they have been far behind the developments taking place in other

Appendix: Mr. Aziz Wastis interview 10

A Strategic Analysis of Bank AL Habib Limited

banks.8 Informal discussion with the developers in this department revealed that they are not satisfied with their jobs -- their is too much control exerted on them and their creativity is stifled - moreover, their suggestions, which do carry weight as they are qualified computer scientists, are not given any importance. Observation has shown that the IT is completely cut-off from the other departments, and is just following the orders of the top management in acquiring systems and packages. Better co-ordination between the IT, the management and the other departments, will result in the IT staff understanding the business needs and proposing the appropriate systems, and the management understanding the investment needs and making the right investments. All branches of the bank have their own LANs with Bank Plus. However, the bank does not have an interbranch network, which is a major disadvantage - even if Bank Al Habib went for sophisticated consumer banking products, the IT infrastructure is too weak to provide any service to the customers of other branches. Moreover, the bank cannot connect to financial networks with their current setup. The duplication of the retail banking environment in all branches has also resulted in unnnecessary duplication costs, which could have been avoided in a centralized banking application environment. Also, an adequate IT network and supporting applications can result in a great reduction in paper use; a great reduction in processing time for credit and loan approvals, and an automated inter-branch reconciliation, a process which is being done manually currently.9 Minor Problems: 1. Weak HR Policies: The policies for remuneration are not up to par with competing banks, especially at lower management levels10. Also hiring is not completely on merit and is influenced by

recommendations on behalf of directors. 2. The CAR Factor: The Capital Adequacy Ratio (CAR) is much higher than the competing banks of the similar sector. This has a negative impact on earnings, which in turns lowers the Return on equity (ROE).

8 9

Appendix: Mr. Ashraf Sayanis interview Appendix: Mr. Ashraf Sayanis interview 10 Refer to interview minutes with Mr. Farooq Batviya. 11

A Strategic Analysis of Bank AL Habib Limited

3.

Lack of Coherence: The organizational structure has not been clearly delineated. There is confusion regarding duties and responsibilities within various departments. This was clearly observed during interviews with employees and was evident from their low morale.

4.

Resistance to Technological Change: The primary symptom of this is the inadequate usage of IT resources, which can be evidenced by the weak IT infrastructure of Bank AL-Habib, and the usage of obsolete applications. They have not utilized IT technology which is available to them and which has been implemented by their competitors. They do not have any linkage between their branches, so there every branch is a stand-alone branch. The latest available IT technology is not availed by the BAH.

5.

Non-Existent Marketing Department: Bank AL-Habib does not possess a marketing department at the functional level. Their view that all members of Bank AL-Habib are marketers for the organization is a redundant approach. A formal marketing department is the need of any competitive organization, which wishes to excel in the current dynamic environment. The low product innovation in Bank ALHabib is a direct result of not having a marketing department.

Major Problem: The malaise of the Seth Organization is evident in Bank AL-Habib. All the problems listed earlier stem from this mind-set, which in strategic management parlance is referred to as Managing by Subjectives. Management believes in doing their best without taking feedback from middle and lower levels and without having clearly defined goals for the future. Organizational goals and objectives are based on the whims of the owners and middle and lower level managers have no role in this process, leading to low empowerment and ultimately low morale and satisfaction among personnel. The Seth mentality has minimized authority delegation and discouraged the organization from availing the external opportunities. Internal Factors Evaluation Matrix: The internal evaluation (annexed) of the Bank was done. The Bank scored an average of 2.64. It means that it is taking advantage of its internal strengths but can further improve by overcoming its weaknesses. The bank needs to be aggressive in innovation, automation and promotion. Furthermore the traditional approach of HR management should be shed off. The Bank should treat the people as valued individuals and not as

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A Strategic Analysis of Bank AL Habib Limited

generic members of a group or class; this will maximize their satisfaction and give them sense of ownership.

STRATEGIC ALTERNATIVES AND CHOICES

The Strategy-Formulation Analytical Framework is used for the evaluation of the strategic alternatives and to arrive at a possible choice of strategy for the Bank AL Habib. In the Input stage the EFE and IFE matrixes were constructed. In the matching stage we have performed the TOWS analysis and identified the possible strategies that the Bank can pursue. In the decision stage the strategies selected were analyzed using QSPM matrix. THE THREAT-OPPORTUNITIES-WEAKNESSES-STRENGTH (TOWS) ANALYSIS: Using EFE and IFE analysis, several important external and internal factors were discussed and analyzed. Based on the resources and structure of organization, we feel that it could either implement the market development, market penetration or the product development strategy as the most likely strategy (annexed). THE QUANTITATIVE STRATEGIC PLANNING MATRIX (QSPM): In the decision stage we performed the QSPM analysis (annexed). We have evaluated three strategies that are the Market Development, Market Penetration and Product Development by comparing it to the strengths, weaknesses, opportunities and threats of the Bank AL Habib Limited. The weights and the rating were assigned in the EFE and IFE analysis. Attracted scores are determined by examining each external or internal critical success factor and asking the question, Does this factor affect our choice of strategy in each case? We arrive at an attractiveness score (AS) for each strategy and by multiplying it with the factor rating we arrive at the total attractiveness score (TAS). Cumulative of this shows that for Bank AL Habib Limited, Product development is the best option as it received the highest score of 118 points. The Market Development strategy scored 117 points. Since both the strategies received almost equal scores, analyzing the Bank AL Habib we suggest that it should go for a combination of these two strategies. FINANCIAL ANALYSIS: Management

13

A Strategic Analysis of Bank AL Habib Limited

BAHs asset portfolio comprises mainly of advances to the textile sector (63%), followed by the financial sector (4.75%) and the sugar industry (2.3%). 96% of the advances are to the private sector and 4% to the public sector. Loans and advances increased by 44% to offset the reduction in profit caused by the decreased T-bill rates. However, this resulted in an increase of 12% (the industry average is a around 22%) in the banks nonperforming loans, a figure which has traditionally been less than 3%. Though the banks risk exposure has increased, it is still extremely better off than the NCBs and quite better off than the other private sector banks. Liquidity: Both the liquidity ratio and the ratio of liquid assets as a percentage of total assets have been sufficiently stable since 1995 - a dip by 10% nevertheless occurred in 99, increasing the banks liquidity risk factor. This is a mainly due to the decrease in the rates of T-bills, which form a major chunk of the banks investment and caused the banks investment value to decrease by 34% - its investment as a percentage of total deposits decreased to 33% from a 53% high in `98. However, BAH took steps to offset this decrease by increasing its advances and strengthening its liquidity position thorough an increase in its balances with other banks by nearly 250%. The Capital Adequacy Ratio (CAR) is much higher than the competing banks of the similar sector. This can have a negative impact on earnings, which in turns lowers the Return on equity (ROE). Earnings : The makeup of the business has generally fluctuated between 60:40 and 70:30 (funded to nonfunded). The ratio of funded to non-funded income has been rising over time. Pre-tax profits had been increasing since `95 at a decreasing rate, but suffered a 16% loss in `99 over `98s profits as a result of a 24% decrease in interest income. The most significant growth has been in `96 (35%). As compared to the other private sectors banks, BAHs operating profits have been better than most of the other private sector banks, with BAH consistently ranking in the top 5. Growth in Total Operating Revenue (Interest Revenue and NonInterest Revenue) has declined slightly since `97 (0.32% in 98 and 7% in 99), owing to the deteriorating economic scenario post-May 1998 and the interest rate slash in 1999. Growth in Operating Expenses has been relatively controlled. 1997 showed a relatively big increase of 47 % caused by the increased 14

A Strategic Analysis of Bank AL Habib Limited

management salaries of BAH. BAH has remained in the top 5 private sector banks with regard to the operating cost. Its Net Interest Margin(NIM) is around the industry average and declined after 1997 mainly because the interest income has not kept pace with the interest expense due to cost increases following the FCA freeze. Efficiency: BAHs efficiency (Operating Expenses/Operating Revenue) has been gradually decreasing, with the higher operating expenditure of 1999 making the ratio 46%. However, the bank measures very favorably against the private sector banks in this aspect, and ranks in the top 5. Its ROA has remained in line with the private sector average, while its ROE is among the best in its group. Both the ROA and ROE declined relatively more in 1999 owing to the reasons stated previously. Deposits: Deposits grew significantly in 97 (by 56%). They have remained more or less the same since then. A very stable deposit base is necessary to be a player in the banking sector. The bank needs to tap the vast consumer segment and improve its deposit mobilization by coming up with aggressive and innovative deposit products in line with competing products (e.g. Rozana Munafa Plus of FBL or the Khushali Bachat Scheme of MCB). All in all, BAH has performed relatively better than most of the other private sector banks despite the grim economic scenario.

Tentative Table of Contents for Final Report

1. 2. 3. 4. 5. 6. 7. 8. 9. BAH Existing Operations Playing it safe - Conservatism at its Best Managing by Subjectives Financial Analysis Marketing : the Need of the Times The Human Factor The IT Challenge The Road Ahead Appendix 15

A Strategic Analysis of Bank AL Habib Limited

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